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Fri 14th Sep 2018 - JD Wetherspoon: Prices, pizza, product swaps, social media and strikes
JD Wetherspoon: Prices, pizza, product swaps, social media and strikes

Propel reports on JD Wetherspoon founder Tim Martin’s comments following today’s full-year results:

Current trading: Like-for-like sales for the six weeks to 9 September were up 5.5%, with the company making a “reasonable start” to the financial year. Martin said the company estimated like-for-like sales of about 4% would be required to match this year’s record profits. He added: “I think we can achieve that – but we have to make sure we continue providing good food, drink and service. In this business you have to be clever every day and you have to get the ideas flowing to stay competitive. In the pub and restaurant world, if someone says they’ve got a ‘brand’ – in terms of exactly the same thing – you can tick a box that says they’re finished. Because you haven’t really got a brand, you’ve got a reputation, which is a lot more fragile.” Like-for-like bar sales increased 5.1% compared with 3.1% the year before, while food like-for-like sales were down to 5.1% compared with 5.7% the previous year. Fruit machine like-for-likes returned to full-year growth for the first time since 2013 – up 2.9% compared with minus 1.2% the year before. Martin said: “Since 2009, (total) sales are not far off nearly double. There was a lot of anxiety then about the smoking ban and wondering if pubs could survive in a non-smoking environment. You didn’t know for sure back then how it was going to turn out.”

Pricing: Martin was coy about any forthcoming potential price rises. He said: “All we can say is if they are going up we will keep increases as low as we can. It’s obviously not good business to go out to your customers and say: ‘We are putting up prices’ and the reality is we don’t plan them much in advance. However, if tariffs are dropped in March (following Brexit) then we will drop prices. We calculated that could work out at 3.5 pence a meal. As I have previously said, parliament has the power not to impose import taxes on food coming in from the EU. The effect of that, which 90% of economists appear not to understand, is that import taxes from the rest of the world also become import tax-free because under World Trade Organisation rules you are not allowed to discriminate. That is what Singapore has done and Australia and New Zealand have gone down that route of slashing import taxes so it’s not some ideological, weird concept. Prices will go down.”

Average weekly total sales per pub more than £44,000: Average weekly total sales per pub are now at the record level of £44,400 including VAT, compared with £41,700 the previous year. Martin said: “Our sales per pub look to be the highest of any substantial company (in the UK). However, I looked at an analyst’s report of Darden in the US and had a glance at one of its presentations. One of its companies called Olive Garden has about the same number of outlets we have and that has double the sales per outlet than we do. So we think there’s scope to grow that further.” Before the smoking ban, Martin said average sales per pub were about £30,000.

Pizza roll-out: Wetherspoon has started rolling out pizza menus in its pubs. Having introduced the menu at The Windmill at Stansted airport in June 2016 and following further trials, pizza ovens have now been installed at 500 pubs. It continues to invest in its remaining sites and expects to have the menu in 90% of pubs by Christmas. The menu features seven choices, including margherita, ham and mushroom, and pepperoni. Extra toppings can be added and a children’s selection is also available. Martin told Propel about £40,000 was being invested per pub. He added: “I wasn’t sure it was the right thing for us to do but our pub managers said it would work and it has been really successful.”  

Product swaps: Martin said it “made sense” to use the opportunity of Brexit and the uncertainty of trade deals to look at what other products were available. He said six or seven years ago when Red Bull was “all the rage” it was putting up its prices so he made the decision to switch to Monster in the US. It was a lower price and Martin said customers didn’t really notice a difference. He added: “We have been looking at a few other products and seeing where it leads us. We’re getting lower prices, good-quality products and passing that pricing change on to the customer.” Martin added: “Up to now we’ve just done what we always do and you tend to plough along in your own furrow. I guess I’ve got (EU president) Jean-Claude Juncker to thank for this. I’ll have to buy him a pint if I see him!” Martin said he was confident the swaps would work out but if customers did not like them he was prepared to go back. He added: “There is a danger, which is why you have to do it carefully. You have to make sure the products you’ve got are good. And if it doesn’t, well I’ll just say it was someone else’s idea!” 

Social media: Martin told Propel the company had not seen “any real effect” on its communication with customers, having decided to curtail its social media accounts. He pointed out customers were still able to contact the company through its website and was able to garner feedback through reviews on TripAdvisor and Google. Martin said one of its most productive methods of getting feedback continued to be from customers talking to its pub managers, which was discussed as part of weekly meetings with board members and area managers. Martin said one of the reasons for the decision was staff efficiency as it would save a pub one hour per week. That meant a more efficient company and savings could be passed on to the customer.

Still the place to eat and drink: A total of 17.2 million Brits have visited Wetherspoon in the past six months. Wetherspoon remains the most-used brand for sit-down meals, according to data from CGA Peach, with more than one-third (37%) of consumers eating out at one of its pubs in the past six months. Pizza Hut was second (22%) and Nando’s third (20%). Wetherspoon also remains the top choice for drinking-out occasions, with more than two-fifths (42%) of consumers having drunk at one of its pubs in the past six months. Mitchells & Butlers’ All Bar One and Greene King were joint second with 13%. Wetherspoon remains the fifth most-used eating brand in Britain (37%), behind quick-service outlets McDonald’s, Costa Coffee, Greggs and KFC, and the fourth most-visited for breakfast. A total of 15% of consumers who have eaten out for breakfast in the past six months have done so at Wetherspoon. The company has an average food hygiene rating of 4.97 out of five, while the number of pubs achieving the maximum score has risen to 97.1%. Martin said: “The Scores On The Doors scheme really helped. There was a lot of people who didn’t go to our pubs and didn’t have a good impression and when Scores On The Doors published the two companies that were top it was Pret A Manger and Wetherspoon. Most people could understand Pret but ‘surely Wetherspoon can’t have the highest hygiene standards’ but the answer was ‘yes we do’. It is fraught, though, we had a pub in Bedford a couple of years ago that had the top score then in the summer when we opened the doors a rat ran in and all the customers ran out!” Drinks still make up the majority of the sales mix (61%), with average weekly sales of £27,000 per pub. A total of 237 of its pubs are in the 2019 CAMRA Good Beer Guide and 99% are Cask Marque approved. The biggest-selling brand in Wetherspoon venues is still Lavazza coffee, while its biggest-selling draught drink is Pepsi, which sells double the amount of any of its other draughts.

Costs continue to climb: The company continues to face a number of cost increases. Wages have increased 7.5% (up £34.8m), while during the period there had been a 9% rise (up £7m) in depreciation and 5% (£3m) in business rates. The company also saw repair costs increase 10% (£6m). Martin said: “We realised a few years ago a big failing in the pub business was our competitors in the 1960s and 1970s – obviously we didn’t start trading until the late-1970s – didn’t spend enough on repairs or cut back on them to try to hit a profit target, which is one of the dangers of targets. We’re spending a lot on repairs – about 4% of our sales. I saw a report from an analyst a couple of months ago that said our competitors were spending about 1% to 2% of their sales, so we’re definitely spending more in that area.” Wetherspoon paid tax of £728.8m in the period, up from £694.6m the previous year. This worked out at £825,000 per pub – £16,000 a week. Its tax as a percentage of sales has increased to 43%, compared with 41.8% the previous year. Alcohol duty rose to £175.9m, compared with £167.2m the previous year. Martin also estimated the sugar tax would be about £3m a year. He added: “We held our tax equality day yesterday (Thursday, 13 September) and one thing to say is we’re in favour of taxes. The country needs taxes and it’s stupid not to pay them when your social function as a business is to support that system. The supermarkets are now saying there should be a level playing field with online businesses but there should also be a level playing field for pubs, restaurants and supermarkets. Pubs pay 20% VAT on food and supermarkets pay nothing. Pubs pay about 20p a pint in business rates and supermarkets pay about 2p. So the question for the country is should there be tax equality between supermarkets and pubs or, as a chap called Luke Johnson said, a sensible rebalancing. I’m biased – I think there should be. I think where tax inequality bites is in poorer areas – it may not matter in places such as Notting Hill. Pubs have lost 50% of their beer trade to supermarkets in the past 35 years but that’s an aside for what I think is a proper case for tax equality. I think the question for the public is do you want pubs in small towns or would you prefer to just have them in the bigger conurbations? If you want them where they’ve historically been in the UK, I say to the public you’re going to have to equalise taxes or go some way to doing so. The differential between the pub and the local Tesco is too great at the moment because it comes from tax. If you reduce VAT on food in pubs, did something with business rates and gave a ten-year certainty you wouldn’t reverse that decision, I think the government would be better off in two or three years.”

Hotels – proceeding cautiously: The company has 57 hotels, having opened four more during the period. Martin said the company had enough properties with available space, which meant it could become a national chain, but each would have a limited number of rooms. He said: “It’s something we’ve agonised about quite a lot. Temptingly, we’ve got spaces in pubs across the country where you could get seven, eight, nine, ten or 11 hotel rooms and we’ve done some of those and it’s been quite successful. But I know there are a tremendous number of hotels being built now and Premier Inn won’t do anything under 50 rooms so we’re pausing a bit because do they know something we don’t? I think people like our hotels and like them being associated with our pubs. We’re proceeding cautiously. They’re also expensive to build – £70,000 to £80,000 a room – so you’re looking at £1m-plus and a bit more if you have to reconfigure the pub.” Martin said the company had added flats above some pubs over the years but besides London there was not really a market. Hotel like-for-like sales growth slowed to 2.3% in the period compared with 9.9% the previous year.

Pub investment and freeholds – swapping rent for interest: The company increased reinvestment in its existing pubs to £68.9m, compared with £58.6m the year before. This included £46.2m (2017: £25.3m) on kitchen and bar equipment, which includes new pizza ovens and coffee machines; £17.5m (2017: £19.8m) on refurbishments, and £5.2m (2017: £13.5m) on business and IT projects. The company also spent £32.2m on repairs compared with £29.2m the previous year. A “modest” number of freehold reversions took the percentage of freehold sites in the estate to 58.7% from 57% the year before. In 2009, it was 41.7%. The company spent £16.3m on freehold reversions and investment properties during the period, down from £88.6m the year before. Martin said: “We purchased quite a few freeholds in recent years and it has pushed up our debt and in effect we’ve swapped rent for interest. Our debt would be a lot lower if we hadn’t spent quarter of a billion on freeholds in the past six or seven years. Instinctively, it feels the right thing to do but debt is always dangerous. Our net debt has gone up from £390m in 2010 to £693m but all that is share buybacks and freehold reversions. Net debt/Ebitda since 2009 has gone up but been around three to three-and-a-half times for 15 years or so. While that would be high by many people’s judgements, it’s not compared with some of our competitors. With debt it’s ‘how long is a piece of string?’ If you trade very well it’s normally not a problem. If you don’t trade well that’s when things start to get a bit more difficult. The governor of the Bank of England is now warning about a property crash when interest rates are so low. So my question is: ‘Why haven’t you put interest rates up when you have the loosest monetary policy in the history of mankind?’ That would push property prices up a bit! The company opened six pubs in the period (all freehold) and closed or disposed of 18 sites. Martin told Propel the company expected to open five top ten pubs in the next year and there would be “very few” closures. He still expects the company to have between 1,000 and 1,100 sites in total. The average cost of development is now £2.77m, compared with £2.30m the previous year. The average size of new openings during the year was 5,201 square feet, compared with 4,379 square feet the year before.

Staff and strikes: The company now has 40,000 employees – a “frightening statistic”, Martin said – and had record levels of staff retention, with the average length of service for pub managers now 12 years and kitchen managers eight years and six months. Staff in the shift system are going down to a 40-hour week and Martin said reductions in hours over the years had helped the retention rate. A total of £43m was paid in bonuses and free shares, of which 82% was paid to staff working in its pubs. The company continues to develop employees through its professional diploma in leisure and retail management, BA (Hons) business management, lifetime training and its “Women at Wetherspoon” initiative. The company said it made a £20m investment in hourly paid staff this year and, as reported in its full-year results, is planning a further £27m investment from November. Martin said: “Pubs are an incredibly labour-intensive business, which is why I think they are good for the economy. You generate a lot more jobs per meal than the supermarket. It’s not a job you stay in forever but it gives good experience. David Cameron and George Osborne would have been so much better off if they’d worked in one of our pubs. It would have more than doubled their education. They’re overeducated in certain areas but undereducated in others.” He added: “It’s a tightening labour market but I think that’s a good thing. If we can make a bit more profit and pay a bit more as well then I think that’s the way forward. We’re paying above the minimum rate as well as bonus and free shares so that’s our pitch. It’s not a huge bonus because we have so many employees but I think it gives us a competitive advantage.” Speaking about the proposed strike by staff at two of its pubs in Brighton, the first in the company’s history, Martin said: “I think it’s a minority of staff. It’s happened to a few others – McDonald’s and TGI Friday’s. It’s new for me.”

Analysts view: Goodbody leisure analyst Paul Ruddy said: “Wetherspoon reported full-year revenue growth of 2% to £1,693m. Revenue growth for 52 weeks (2017 was a 53-week year) was up 4.2%, and the group already reported total sales growth of 4.2% for the first 49 weeks at its pre-close update, so this comes as no surprise. Like-for-like sales were up 5% in the period. Trading continues to be strong with like-for-likes up 5.5% for the six weeks to 9 September. This continues a long period of outperformance versus the overall pubs sector. Ebit estimates were up 3% year-on-year to £133m, in line when adjusted for trading weeks. The group has had a reasonable start to the financial year. This is a solid start given a difficult comparative in the first quarter of the last financial year. On outlook, it again highlighted taxes, labour and interest are higher than last year, so it will need like-for-like growth of 4.0% to keep profits flat (last year this was 3% to 4%). We continue to favour Wetherspoon in the sector as it is delivering good like-for-like growth, which helps mitigate the considerable cost inflation; it generates actual cash flow; its leverage is manageable and it has a differentiated offer (value). Trading on 9.3 times EV/Ebitda it remains at a premium to the sector, which we believe is appropriate. The good start to the new financial year would give us confidence it can advance profits this year. We retain our ‘Buy’ recommendation and 1,400p target price.”

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