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Tue 13th Jun 2017 - Managed restaurant brands grow as sector costs mount, CMA raises concerns over Punch/Heineken deal
Managed restaurant brands grow as sector costs mount: Rising input costs are putting the brakes on pub and restaurant openings – but many managed and branded casual dining operators are continuing to expand, the latest Market Growth Monitor from AlixPartners and CGA Peach has revealed. The report, which provides authoritative data and extensive insights into Britain’s supply of pubs, bars and restaurants, showed the number of licensed premises fell by 1.2% in the 12 months to March 2017 to 122,205. The fall is the result of continued closures in the community drink-led pub and independent restaurant sectors. The report said that like all operators in the eating and drinking out markets, they had been hit by a triple whammy of increased property, food and people costs in the past few years, exacerbated by uncertainty over Brexit negotiations. But the Market Growth Monitor also highlighted the success of multi-site managed pub and restaurant businesses, especially in the casual dining sector. The number of managed licensed venues – including cafes and hotels as well as restaurants, pubs and bars – rose by 2.5% to 20,132 in the year to March, while the number of managed restaurants has increased even more sharply, by 6.0%, since March 2016 to 5,625 sites – with 316 net new restaurants opening in the past year. The report said the figures confirmed a long-term trend away from independently run restaurants and pubs towards trusted, well-managed brands, especially in casual dining. Many of these – especially new and emerging concepts that started life in London – have been growing fast around Britain in the past year. The report showed how regional UK cities have led the revolution in eating out. Manchester has increased its number of food-led licensed premises by two-fifths in the past five years, while Newcastle, Leeds, Cardiff, York, Bath and Liverpool have all increased their supply by more than a quarter. CGA Peach vice-president Peter Martin said: “Our latest Market Growth Monitor shows that while the eating and drinking out markets face some unprecedented challenges – the vast majority not of their own making – managed groups remain very much on the front foot. Tired or complacent operators are struggling to stand still but distinctive brands with great people, consistent delivery and the right price points continue to roll-out. It is a timely reminder that ours is a resourceful, ambitious and economically vital sector.” AlixPartners managing director Paul Hemming added: “There is no getting away from the fact the eating out and drinking out sector is being challenged as never before. But despite these challenges, the AlixPartners CGA Peach Market Growth Monitor shows many multi-site operators continue to expand, albeit in a more careful and considered manner than earlier in the cycle.” Association of Licensed Multiple Retailers (ALMR) chief executive Kate Nicholls said: “This report highlights the impact of the unprecedented cost pressures the sector is having to bear at this current time in the areas of labour, property, and food and drink costs. Added to the continuing uncertainty over Brexit negotiations, it acutely demonstrates a sector that needs targeted support to continue to play its part in the country’s economic and social well-being. Pubs, restaurants, bars and clubs are vital social hubs and significant employers – but they need an environment in which to continue to fulfil their enormous potential. The towns and cities showing growth in the report are the very same ones that are seeing the biggest increases in business rates. This year’s rates hike could kill off the growth that the industry is delivering. The new government must quickly conclude its negotiations with other parties and shift its focus to supporting businesses in the eating and drinking out sector, which are driving growth and creating jobs but are being hit by the biggest cost hikes. The Conservatives identified reform of the rates system as a key priority in its election manifesto – something for which we have long been calling. Despite the small wins on rates in the spring Budget, it is absolutely vital more fundamental reform gets under way to ensure jobs are protected and to secure the ongoing competitiveness of pub, restaurants and other hospitality venues. The ALMR’s manifesto included many other sensible and pragmatic measures that can further unlock the potential of our sector. We stand ready to play a positive role and work closely with the government to improve the economic fortunes and social life of the UK.”
CMA tells Heineken to address competition concerns or face in-depth investigation into Punch takeover: The Competition and Markets Authority has found Heineken’s proposed purchase of part of the Punch estate could reduce competition in 33 local areas across Britain. Heineken must now offer proposals to address these concerns by next Tuesday (20 June) or face an in-depth investigation into the merger. As part of an initial investigation, the CMA has looked in detail at areas where pubs operated by Heineken and Punch currently compete. It has identified 33 local areas where their pubs would not face sufficient competition after the merger, which could lead to price increases or a deterioration in the quality of the service on offer. Concerns were also raised with the CMA the merger would close off an important route to market for brewers that compete with Heineken. However, the CMA found the pubs being acquired are only a very small part (4%) of the British market and are therefore not a major route to market for brewers, which was backed by evidence from brewers showing these Punch pubs typically account for only a small proportion of all of their sales to pubs. The CMA also looked closely at whether the acquisition by Heineken could lead to a reduction in the choice of beer and cider on offer in the Punch pubs. The CMA found any potential reduction would be limited, taking into account the drinks Punch currently stocks and the range of drinks available in Heineken-owned pubs. It also found Heineken would not have a strong incentive to reduce the range of beer and cider, in part because doing so would risk losing business in pubs where this is important to customers. Andrea Coscelli, CMA acting chief executive and decision-maker in the case, said: “We have listened very carefully to a range of concerns about this merger. The companies will own less than 10% of all British pubs after any deal, but we are concerned about the loss of competition for pub goers in a number of local areas. Without sufficient competition from rivals, pubs in these areas might be able to raise prices or worsen the service they offer customers. Heineken will now have the chance to offer proposals to address these concerns otherwise we will carry out an in-depth investigation.” The merger will be referred for an in-depth phase 2 investigation by an independent group of CMA panel members, unless Heineken is able to offer undertakings that sufficiently address the CMA’s competition concerns. Heineken UK managing director David Forde said: “We welcome this positive step towards completing our acquisition of Punch A. This decision by the CMA acknowledges that there are only a small number of local areas where competition may be diminished due to our acquisition of the pubs in Punch A. We are confident we can offer the CMA suitable undertakings to satisfy its concerns.” Punch said it was confident the takeover would go ahead without the need of a phase 2 investigation and the deal would be completed by the end of August.
Numis Securities – Whitbread has no margin for error over £150m efficiency programme: Numis Securities leisure analyst Tim Barrett has said Whitbread has no margin for error over its £150m efficiency programme. Issuing a ‘Hold’ note on the shares with a target price of 4,100p, Barrett said: “Hospitality companies are struggling against unprecedented headwinds, including wages, rates and cost of goods. Against this backdrop, Whitbread has performed well, protecting margins (-30 basis points in FY17) while still investing in growth. However, in FY18 our model suggests cost inflation will pick up to 4.3%. Management has launched a £150m efficiency programme that it aims to deliver over the next five years, but the details of which (timing, source) are opaque. In this note we assess costs in more detail – for Whitbread to meet consensus estimates will require £60m or 40% of the targeted savings to be delivered in FY18, we believe. The UK hotel cycle is possibly reaching an inflection point – regional revpar is now 20% above peak, with supply growth reaching 3.2% (the fastest since 2009). In the near term, weaker demand in London (revpar fell by 10% after terrorist attacks in 2005) may impact the sector although Whitbread’s domestic customer base should make it more defensive. Of more concern is the outlook for pub restaurants and Costa, the most labour intensive parts of Whitbread but with the least pricing power currently. In the fourth quarter of its 2017 financial year, Costa reported the first fall in like-for-like sales in more than ten years as weak conditions on the high street predominated. We currently forecast 1% like-for-like sales growth from Costa (guidance 0% to 2%) which would be insufficient to protect margins. In pub restaurants we forecast like-for-like sales of 0.5% and 50 basis points margin downside. The 2017 annual report discloses the base target for profit before tax last year was £562.5m, which required growth of just 3%. In the event profit before tax grew by 6%, although the group missed bonus targets for like-for-like sales (1.6% versus 3.3%) and Costa store openings (110 versus 131). Long-term incentive payment targets are still based on earnings per share growth but, surprisingly, the Retail Price Index linkage here has been removed meaning that these vest in full at 4% to 10% earnings per share growth. Whitbread has outperformed the FT Allshare by 4% in the past three months and in price-to-earnings ratio terms it is now trading on 15.9 times CY18, a premium of 13% to the FT Allshare (average premium of 30% and peak premium of 71%). In our sum of parts we continue to value hotels at ten times Ebitda, Costa at 12 times (20% discount to Starbucks) but reduce our pub restaurants multiple to eight times in line with the derating of peers. Overall, we view Whitbread’s structural growth potential as attractive but as we have little visibility on either the £150m efficiency programme or revpar we retain a ‘Hold’ recommendation.”
Merlin Entertainments reports Manchester and London terror attacks impact on trading: Merlin Entertainments has reported the terror attacks in Manchester and London in the past month have impacted on trading. The company stated: “In our Midway London division, trading in the early part of the year benefited from stronger foreign visitation to the UK reflecting the more favourable foreign exchange rates. This continued in the immediate aftermath of the Westminster attack on 22 March, although the incident did result in a softer domestic, day-trip market. However, the subsequent attacks in Manchester and London over the past month have resulted in a further deterioration in domestic demand and, given the typical lag between holiday bookings and visitation, we are also cautious on trends in foreign visitation over the coming months. Trading in the Legoland parks and resort theme parks operating groups has been in line with expectations, although a number of our UK parks have been adversely affected in recent weeks by the terror attacks and subsequent heightened security measures.” The company said it continued to make good progress towards its 2020 new business development milestones. About 250 rooms have been opened so far in 2017, in Legoland Florida and Legoland Billund, with further rooms scheduled to be opened in the balance of the year. Three Midway attractions have been opened to date, comprising Legoland Discovery Centres in Melbourne and Philadelphia, and Madame Tussauds Nashville. Its Sea Life Centre Chongqing will open on Thursday (15 June) and, as previously announced, its new brand “Little Big City” will open in Berlin in July. Legoland Japan opened on 1 April, ahead of schedule and on budget. Chief executive Nick Varney said: “I am pleased that we are making good progress towards our 2020 new business development milestones. That said, the impact of recent terror attacks on our London attractions is unclear at this stage. What is clear however is that London has bounced back before, and will do again. I have every confidence in the longer term resilience and growth trajectory of the market. London is very much open for business, welcoming visitors from the UK and from around the world to this exciting and vibrant city. Merlin has a diverse portfolio of global brands with more than 70% of 2016 profits from outside the UK and this proportion will only grow over time as we continue to invest internationally. I remain confident in the company’s underlying growth prospects.” Merlin will report 2017 interim results on Friday, 4 August.

Richoux Group raises £4m through share subscription: Richoux Group, the owner and operator of 18 restaurants under the Richoux, Dean’s Diner, Villagio, and Friendly Phil’s brands, has raised £4 million by way of a subscription of 25,277,488 new ordinary shares at a price of 16p per share. The proceeds of the subscription will be used for general working capital purposes. The company stated: “Following admission, the company will have 124,879,072 ordinary shares in issue and a market capitalisation of approximately £20m at the subscription price. The subscription shares represent 20.2% of the issued ordinary share capital of the company immediately following admission. The subscription price is at a discount of 16% to the closing mid-market price per ordinary share on 12 June, being the last dealing day prior to the announcement of the subscription. Application has been made to the London Stock Exchange for the subscription shares to be admitted to trading on AIM and it is expected admission will occur on Friday (16 June). The subscription shares are being allotted using the directors’ authority to allot ordinary shares for cash on a non-pre-emptive basis, as granted at the Company’s annual general meeting on 9 June. The subscription is neither a rights issue nor an open offer and the subscription shares will not be offered generally to shareholders on a pre-emptive basis. The directors believe the considerable extra cost and delay involved in a rights issue or open offer would not be in the best interests of the company in the circumstances, and accordingly, the board considers that it is in the best interests of the company and shareholders as a whole for the funds to be raised through the subscription. The subscription has not been underwritten.”
The Restaurant Group appoints Patisserie Valerie CEO as non-executive director: The Restaurant Group has appointed Paul May as a non-executive director. May, who has extensive current experience of managing public and private companies in the retail and hospitality sectors, will join the board on Monday, 3 July. He is currently chief executive of Patisserie Valerie having been appointed in 2006. During his tenure, he has overseen the profitable expansion of the company and its successful initial public offering. May is also a non-executive director at GRA, a privately-owned sports facilities and hospitality group. Meanwhile, The Restaurant Group said non-executive director Sally Cowdry would retire from the board on Thursday, 31 August. The company said as part of the board’s succession planning, the it intends to recruit one further non-executive director in due course.
Just Eat and Hungryhouse criticise merger inquiry: Online food ordering business Just Eat and Hungryhouse have challenged the Competition and Markets Authority’s (CMA) decision to launch an in-depth investigation into the proposed merger. Submissions from the two companies have been published on the CMA’s website criticise the watchdog’s decision last month to subject the proposed deal to further scrutiny. Hungryhouse said the CMA had adopted an “unduly narrow frame of reference” in terms of which type of businesses the government department considered to be rivals and claimed this was “driven by an overly cautious approach”. Just Eat and Hungryhouse allow customers to order food from local takeaways but orders are delivered by staff from the individual restaurants, unlike rivals including Deliveroo and UberEats whose drivers ferry food to consumers. The CMA considered this a key distinction and therefore ruled in its initial assessment of the proposed deal that Just Eat and Hungryhouse could not be considered rivals to the delivery businesses and so referred the merger for what is known as a Phase 2 investigation. But Hungryhouse has said this “dramatically underestimates” the competition it and Just Eat face from Deliveroo, UberEats and Amazon Restaurants, which it claimed had “already materially affected the dynamics of competition in relation to the provision of takeaway”. The CMA had also been concerned the two companies, once merged, would not be as competitive as they might be now in terms of the amount they charge restaurants for being on their respective websites. But Just Eat said the merged entity would be “compelled” to offer the widest possible range of restaurants to attract consumers meaning it would “ensure it provides attractive terms to restaurants”, reports the Daily Telegraph. The CMA has until 2 November to make a decision about whether to permit the proposed merger.

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