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Thu 16th Apr 2015 - Jamie Rollo – why aren’t UK pubs enjoying the recovery?
Jamie Rollo – why aren’t UK pubs enjoying the recovery?: Morgan Stanley leisure analyst Jamie Rollo has questioned why the UK pub sector is not posting stronger figures, as evidenced by the Peach Coffer Tracker, given the economic recovery. In a note published this morning, he sets out a number of possible explanations for what might be short-team weakness or a long-term trend, citing an opinion piece written by Elliotts chief executive Ann Elliott published by Propel. He said: “Another weak month for pub like-for-like sales (March -0.3%, Coffer Peach) brings Q1 like-for-likes to 0.9%, a slowdown on the second half of 2014’s 2.2%, and at odds with strong UK economic data. Possible explanations include an acceleration in new supply (casual dining and coffee shops), trading up, and supermarket discounting. March like-for-like sales for the largest UK Pub and Restaurant groups fell by 0.3%, according to the Coffer Peach Business Tracker, which tracks 30 leading groups (including Mitchells & Butlers, Whitbread, Spirit and Marston’s). This brings to an end 23 consecutive months of growth since the recession, and is the fourth consecutive month where like-for-like sales have been under 2%. Indeed, the trailing three month growth rate has slowed from 2.6% at November 2014 to 0.9% currently. While Coffer Peach does not track all companies (with Greene King, Wetherspoon and The Restaurant Group being significant omissions), let alone the leased and tenanted pub operators or individual freehouses, a fairly weak trading environment also appears evident from comments made by other companies recently such as Wetherspoon, Stonegate and Eclectic. It also matches the bottom-up data we track from the largest public operators. How can this be given the robust UK economy and other encouraging indicators? UK GDP rose an estimated 2.7% in Q1, according to the British Chambers of Commerce. ASDA’s income tracker showed UK household income up 9% in January and February, the highest growth rate since 2009 with disposable income per household at a new all-time high of £184. Households are being helped by lower energy, fuel and food costs. Visa spend in Hotels, Restaurants & Bars rose 7% in March and has been running at this sort of pace for over a year. Greene King’s Leisure Tracker showed that eating out and drinking out increased by 7% and 2% year on year respectively in February. What is going on? We think there are a number of possible explanations on the weakness: Consumers disposable incomes aren’t actually rising as fast as everyone thinks: This may be because the savings rate is rising, as the official savings rate has crept up over recent quarters, household bank deposits have been increasing; consumers are spending their money on other things: Perhaps consumers are trading up to larger ticket items such as holidays, cars and white goods. The data here is supportive. Office of National Statistics Quarter Four data showed strong year-on-year growth in UK tourist expenditure abroad (+11%), tools and equipment for house and garden (+18%), ‘Other major durables for recreation and culture’ (+16%), recreational and cultural services (+14%), Education (+8%), Accommodation services (+17%), Personal effects (+14%), and Insurance (+24%); supermarket discounting. A heightened level of discounting amongst the major UK supermarkets makes eating at home relatively better value than eating out. Wetherspoon and others believe the tax anomaly between supermarkets (where not all food is subject to VAT) and pubs (fully subject to VAT) is an ongoing problem, and supermarket discounting would only exacerbate this; Scottish drink driving laws: In December, Scotland reduced the legal alcohol limit for drivers, and a survey conducted in February by Beacon suggested that Scottish businesses saw bar sales drop by up to 60% in the two months after the introduction of the new limit. Around 10% of the UK’s pubs are in Scotland, and some of the operators in Coffee Peach tracker survey have outlets there; more competition at home: Multiple household electronic devices, on-demand TV, social media, and multi-screen viewing have all been accelerating, meaning pubs and restaurants face alternative entertainment. The upside from this is that when consumers do go out for special occasions, they have been spending more, with the recent few Christmases all in strong year-on-year growth, and this Easter’s like-for-like sales +5% according to Coffer Peach; more pub and restaurant competition: If we look at the total sales growth reported by Coffer Peach, which has been running at 4-6% for the last nine months, and deduct LfL sales, we can see the impact of new supply. This figure suggests these companies are adding around 4% more sales growth from openings, nearly double the level of one to two years ago. CGA recently said that 8,600 food-focused outlets have opened in the past decade, and around 1,000 new sites are expected to open this year, mostly casual dining formats, with less than 20% of these being pubs. Given there are 50,000-55,000 pubs in the UK according to CGA/BBPA, a number that has been shrinking for decades, and given the new food-focused outlets are bigger than the average pub, this capacity growth is not immaterial; the supply-side challenges faced by the pub sector look set to remain: So far this year, restaurant groups have in general been outperforming pubs, according to Coffer Peach, with March LfLs +0.7% for restaurants but -0.7% for pubs, with pub restaurants particularly having a tougher time. Casual dining continues to increase its share of the total eating out and pub market. These concepts tend to be more accessible and arguably more relevant than the traditional pub. Or as Elliotts recently put it, (in a Propel Friday Opinion) “as a broad generalisation the cuisine profile of casual dining restaurants is more aligned to contemporary, younger tastes: less deep-fried, gluten-free, less “tabloid”/huge-portioned, tastier and more aromatic, healthy/feminine and so on. They are also more future-proofed as a result”. There are currently around 19,000 coffee shops, and over 2009-2013, 3,800 coffee shops opened, and 4,500 pubs closed, according to Allegra and CGA. There are currently 50000 pubs in the UK. If current trends do continue, the number of coffee shops could overtake pubs in the UK in just over a decade. Indeed, the lines are blurring between pubs, restaurants and coffee shops, with Wetherspoon aiming to triple its breakfast and coffee revenue, and Starbucks and Pret A Manger both trialing sites serving alcohol in the evenings; there are demand-side challenges too: While the stronger UK economy must be helping, long-term structural trends are negative. Young people are going out less than previous generations (particularly students it seems), reflecting a generation brought up to socialise online, and this cohort is only going to grow. At the same time, alcohol consumption will likely continue to decline, reflecting better health education, alternative entertainment, and stricter regulations; it is not all negative: Costs are under control, so LfL sales do not need to be particularly strong to maintain margins (we estimate c. 2%). Most companies have strong property backing, balance sheets are stronger than they have been in a while, and some companies are buying back shares. Valuations are relatively cheap compared to other areas of the Leisure sector. There is an ongoing lobby to argue for a VAT cut. The coming months will tell whether this sub-par runrate of LfL sales is a new trend or just a temporary weakness: Easter was more encouraging, with LfL sales +5.1% on last Easter, and the current unusually warm weather should help. We currently assume 1% LfL sales growth in our FY2015 forecasts for Mitchells & Butlers, 2.5% for Whitbread, 3.5% for Wetherspoon (2.5% in H2), and +0.5% for Enterprise Inns.”

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