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Sat 13th Sep 2014 - JDW results: menu strategy, brand equity, small towns, freeholds
Propel Info managing director Paul Charity attended yesterday’s JD Wetherspoon results briefing hosted by chief executive John Hutson and finance director Kirk Davis. Below are the key areas covered.

Food sales leading JD Wetherspoon growth: JD Wetherspoon has grown sales by £2,000 per week to an average £36,000 per week per site (including VAT) in the past year. Food sales have led the way with a 12% like-for-like rise although bar sales are up by 2.7%. Finance director Kirk Davis reported a year of two halves on machine income which was 9.5% down in the first half of the year but rose by 3.8% in the second half after the introduction of the £100 jackpot machines. Chief executive John Hutson reported that food sales have grown from 23.2% of sales in 2003 to 35.3% currently, with bar sales down from 71.6% of sales in 2003 to 60.8% currently. Hutson said: “Lots more of our sales are coming from food – bar sales are up too (since 2003) but not in the same proportion.” Ebitda per pub climbed by 5.5% (or £10,100) to £210,000, the biggest rise since 2006-2007 when Ebitda per pub rose from £205,600 to £219,000 before falling to a low point of £194,900 in 2012. Hutson said: “The key focus for management is how we grow sales in the long-term.”

Property costs: The company revealed that it has paid an average of £559,000 per new freehold pub in the past year, with 67% of its 46 new openings in the year being freehold properties. The freehold costs are the lowest in ten years, with 2008 the highest when it paid an average of £958,000 per freehold – the average freehold price for the previous nine years is £744,000. Although freehold acquisition costs are at a ten-year low, development costs are at an all-time high as the company invests more in beer gardens, hotels bedrooms and kitchen equipment as food sales increase. The average development cost for a pub in the past year was £1,640,000 compared to £851,000 in 2008 – the nine-year average is £1,275,000. 

More freehold pubs in the estate: The Wetherspoon expansion into smaller towns, where freeholds are often more readily available, means that 47% of the estate is currently freehold, a rise from 41% in 2005. The freehold mix has been helped by buying in eight freeholds where the company is the tenant. Additionally, it has bought three pub freeholds as investment properties with sitting tenants. Two of these are good quality freehold pubs in “good parts of London” where there is an existing tenant paying a good return in rent, but on a short lease where JD Wetherspoon expects to take over the pub in a few years. The third investment property is in Bury St Edmunds and is a property where Wetherspoon assigned the lease – and has been acquired to give the company “flexibility”. A total of £24m was spent buying in the freeholds and the three investment properties. A total of 75% of rent reviews had been settled at nil increase and the rent to turnover percentage in the 53% of pubs that are leasehold is currently 4.5%. 

Moving into smaller catchments: The expansion of JD Wetherspoon into smaller towns is shown by a record low in the number of people living within two miles of new pubs – 27,000 people. The figure in 2005 was 64,000 and the previous nine-year average is 49,500. The average population within two miles of a new opening has dropped for five consecutive years – 67,000 in 2010, 54,000 in 2011, 39,000 in 2012, 30,000 in 2013. Nevertheless, John Hutson said returns on pubs opened in recent years are “slightly ahead” of company average. 

Wetherspoon is the ‘UK’s favourite big brand’: John Hutson reported that the Peach BrandTrack found that 13% of UK consumers would choose JD Wetherspoon as their first choice if 16 big brands were available in the same location – the JD Wetherspoon lead has increased from 11% in May 2012. Second was Nando’s, chosen by 8% of those surveyed, then Toby Carvery (7%), PizzaExpress (7%), Wagamama (7%) and Harvester (6%). Hutson also stated that the Peach BrandTrack found JD Wetherspoon had the most claimed usage in the last six month when consumers were asked where they had visited in the previous half-year. A total of 42% of those asked claimed they had visited a JD Wetherspoon sites followed by Harvester (24%), Pizza Hut (23%, Nando’s (20%), Toby Carvery (20%0 and Frankie & Benny’s (18%). “We are, by far, the most-used casual dining brand,” said Hutson.

Menu strategy: John Hutson said JD Wetherspoon’s menu strategy is to become “really good at a few core items”, which included burgers, steaks and fish and chips. He conceded that pubs tended to offer a bit “of a variety menu”, but added: “We want to get better and better at the core items.” However, the company is mindful of key trends and had, for example, added pulled pork to it menu. If sales of pulled pork are as strong in ten years’ time as they are now, pulled pork would have become a core menu item, Hutson said. Food sales growth had been driven by its club offers, a “good year on breakfast” and serving food until 11pm as of last October. “There’s not been an onslaught of trade (in the extra hour) but a little bit extra,” said Hutson. “We could do better on coffee – it’s a big market.” Wetherspoon currently has a 4.91 average scores on the door figure out of a maximum of five, with 82% of pubs achieving the maximum of five. “It’s by far the highest score of any sizeable pub chain,” said Hutson.

Tax paid to the government: JD Wetherspoon increased pre-tax profit by £2.5m in the 2013-2014 financial year to £79.4m, a rise of 3.1%. Meanwhile, the company’s tax bill increased to £600.2m, a rise of £48.7m. Its tax bill per pub rose to £662,000 compared to £632,000 the year before. Kirk Davis reported that if JD Wetherspoon paid VAT like Tesco did, its tax bill would be £98.5m lower. “Because we are a pub company we pay 20% VAT on all food and those guts pay zero,” said Hutson.

M40 Beaconsfield opening “disappointing”: John Hutson said the company’s controversial opening at the M40 Extra Services at Beaconsfield was trading in line with company averages although this “is less (business) than I’d like to have seen there”. Hutson made it clear to journalists he thought trade would continue to build in Beaconsfield Services, but that his colleague Kirk Davis is less sure.

Wetherspoon taking more pro-active approach to opening bedrooms: John Hutson confirmed that Wetherspoon is taking a more pro-active approach to opening hotel bedrooms to make use of void space. He said: “Hotels bedrooms have been quite stable in terms of trade and it’s not too difficult to run them.” He gave the example of a pub in Newbury where Wetherspoon had added two bedrooms in a listed building in the pub’s grounds before adding 14 bedrooms above the pub. “Adding a few more bedrooms seems like an opportunistic thing to do. There are a lot of properties with void space and we thought putting in a few bedrooms is a good use of space.”

Ireland expansion: The company’s first pub in Blackrock, Ireland is selling cask at a rate “just a little bit below the company average”, said Hutson with food sales 50% of total turnover. The company expects to have four more pubs open in the coming year. “We’re pleased with the way the first pub has started off,” he said. 

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