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Morning Briefing for pub, restaurant and food wervice operators

Fri 14th Feb 2020 - Friday Opinion
Subjects: The party’s over, ends and means, and what to expect from the leisure sector in 2020
Authors: Glynn Davis, Paul Chase and Paul Ruddy

The party’s over by Glynn Davis

Not that long ago, labels on smaller brewers’ bottles looked pretty much the same – dated imagery such as heraldry, dragons and other nonsense. The rationale for investing little effort into making products look more differentiated and professional was it gave the impression the brewer was more interested in superfluous marketing than producing beer.

There was little appreciation a differentiated look and greater professionalism might help small brewers stand out and ultimately sell more beer – but this was viewed as the land of the big guys, who were regarded with contempt.

Then craft came along. A new crop of young brewers entered the market with radically different ideas in terms of beer styles and an appreciation of the power of marketing, many of them employing skilled graphic designers and artists to give their products shelf appeal.

The craft revolution has carried on for about a decade but sadly the boom times are over. It has certainly made the past decade fresh and interesting but all good things come to an end. The days when the big brands largely left small craft owners alone has well and truly passed and it will become increasingly tough for brewers, distillers, cheese-makers, chocolatiers and craft brand owners of all types to carve out a position in the market place. 

Things have been getting harder in the past couple of years as evidenced by big-gun buy-outs of a number of craft brewers including Beavertown, Four Pure, Magic Rock, London Fields and Brixton Brewery. We’ve also seen craft brewers increasingly sell packaged products into major supermarkets despite many of them espousing negative views of big grocers in the early days with such moves regarded as “selling out”.

While such moves reflect greater competition among the smaller guys, the major brewers have also realised craft is eating into their market share. This has been partly driven by a benign market place for food and drink and other FMCG categories. 

The rise of craft arguably started following the massive acquisition of Anheuser-Busch InBev (AB InBev) in 2009, which created a global beer-making goliath. AB InBev owner 3G introduced seriously aggressive cost controls and zero-based budgeting, as it did exactly with its other business Kraft Heinz. The strategy proved hugely successful and many other big brand owners followed.

While they all played around to boost short-term profits, little investment was being made in developing new products for long-term sustainable growth, while advertising and marketing was also cut dramatically. This provided a gloriously free environment for craft brands to grow and flourish with relatively little hindrance or threat from the big boys. It also coincided with the availability of cheap capital through questionable crowdfunding campaigns. 

Times have changed, however. After the cost-cutting regimes proved ultimately flawed – Kraft Heinz, for example, took a $15bn write-down last year – the big brand owners are now back in the game. They have been much more serious about investing in their brands of late and developing new lines – especially in areas such as vegan, plant-based, and low and no-alcohol, which all appeal to younger craft buyers. In addition, they have recently cranked up their levels of advertising, with all the major brands upping their spend in the past year.

This will place even more pressure on craft brands, which will find themselves swamped by marketing budgets and new craft-style brands hitting the shelves. It will make it tougher for them to gain listings in the major supermarkets. There’s more hardship for craft brewers on the cards as those acquired craft beer brands will play increasingly heavier roles in the on-trade, with many bar taps that were delivering genuine craft brews gradually being turned over to “craft” brands acquired by the big brewers.

There’s no doubt craft has had a tremendous ten years but from now on it will be increasingly tough for smaller operators to get a decent foothold in the market. Clever, arty, stand-out labels won’t be enough.
Glynn Davis is a leading commentator on retail trends

Ends and means by Paul Chase

Lobby group Action On Sugar has said ready to drink (RTD) pre-mixed spirits sold in UK supermarkets are “unnecessarily high in hidden sugar and calories and should be forced to reformulate immediately to soft drink industry levy standards”.

The call came as Queen Mary University Of London published a product survey to mark Sugar Awareness Week, which ran from 20 to 26 January, as I’m sure you all noticed.

Researchers with nothing better to do surveyed 202 RTDs sold in-store and online. Of the 154 products collected in-store, nutrition information on the packaging was described as “shockingly low” – these people live in a perpetual state of shock and horror, which can’t be good for them – thus making it difficult for consumers to know exactly what they were drinking. Only 63 out of 202 in-store products had nutritional information on their packaging, only 14 had “sugar” information, and 90% had no sugar information at all. Some 250ml drinks – shock horror – contain nine teaspoons of sugar. 

Because of the lack of information on packs, Action On Sugar commissioned independent laboratory analysis of 21 products and warned RTDs were contributing to obesity, type 2 diabetes, various cancers, liver damage and tooth decay as drinkers unknowingly consumed large amounts of sugar. They pointed out the soft drinks industry levy had been successful in reducing sugar in soft drinks such as lemonade, yet drinks that contain alcohol such as a vodka and lemonade were exempt. This, the critics said, was “absurd”. 

Action On Sugar is now urging the government to prove its commitment to prevention and reducing inequalities by taking control of the situation and preventing alcohol producers from “exploiting vulnerable young adults”. Do these people ever stop hyperventilating?

One key demand is RTD producers should engage in product reformulation that would make them undrinkable or face a sugar levy-induced price rise. The sugar levy has been successful in reducing the sugar content of fizzy drinks but this was never meant to be an end in itself but the means to an end – namely reduction of sugar consumption would lead to a reduction in population obesity levels. This, of course, hasn’t happened in the UK or any country where similar measures have been introduced because consumers simply substitute calories from other products. While I’m not opposed to nutritional information on product labels, those calling for sugar and calorie counts also support plain packaging for any product containing alcohol. What we’ll end up with if these crackpots get their way is a label containing nothing other than nutritional information and a health warning!

The truth is the sugar levy hasn’t succeeded in reducing population levels of obesity so its supporters now behave as if reducing sugar consumption for its own sake was always their real goal. If the means don’t achieve the end, pretend the means always were the end!

Which brings me to that other policy where ends and means are getting confused. Yes, you guessed it, minimum unit pricing (MUP), which has been running in Scotland since May 2018. It’s so symbolically important to the anti-alcohol zealots of Scottish government – and activist academics whose livelihoods depend on their modelling predictions being validated – the policy can’t be allowed to fail.

A small-scale study into the drinking habits of Scottish teenagers since the introduction of MUP found no change in their consumption because many of the beverages favoured by young people were already being sold above the MUP baseline of 50p per unit of alcohol.

The survey carried out by Iconic Consulting asked 50 people aged between 13 and 17 about any changes in price or availability of what they drink; any changes in their acquisition and consumption of alcohol; and their experiences of harm after drinking.

Iconic Consulting director Ian Clark said: “Overall, our findings suggest the introduction of MUP has had limited impact on the alcohol consumption of the children and young people participating in this study, and no reported impact on their related behaviour. 

“While several of the alcoholic drinks popular with young people were already being sold above 50p per unit before the introduction of MUP, where they did observe the price of their favoured drink rise after May 2018 the young people reported being able to fund the additional cost.” Quelle surprise!

In response to the study, Scotland’s public health minister Joe FitzPatrick said: “Initial national sales data for 2018 have already shown an overall 3% drop in sales of pure alcohol per adult. We want to go further to protect our children and young people from alcohol harms and that is why I intend this year to consult on potential mandatory restrictions on alcohol marketing and advertising.”

“Further measures” – no slippery slope then? A 3% drop in sales of pure alcohol? That depends on whose data you believe, Mr FitzPatrick. The data he was quoting was Nielsen sales data, but IRI sales data shows an increase of 2.5 million units of pure alcohol in the year after MUP was introduced compared with the year before. Let’s go with what confirms our cognitive bias shall we?

Dr Peter Rice, consultant psychiatrist at the Royal College of Physicians in Scotland and chairman of the Scottish Health Action On Alcohol Problems, said: “Young people were never a target for minimum pricing, this is because we knew young people’s drinking habits had been in decline for a number of years. Our concerns were more about rising rates of harm in middle-aged and older adults.”

“Never a target for minimum pricing?” What was all that faux outrage about the need to eliminate “pocket-money pricing” if it wasn’t about stopping kids from enjoying a wee tipple?

Wait a minute – the object of MUP was never to reduce alcohol consumption for its own sake but so alcohol harms would decrease as a consequence. Alcohol deaths, for example, were supposed to fall in year one of the policy – but they went up 1%. Pretend the means are the ends and carry on!
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

What to expect from the leisure sector in 2020 by Paul Ruddy 

There’s no doubt 2019 was a challenging year for the leisure sector. The weak macro-economic backdrop had a negative impact on consumer spending, while companies across the sector saw cost-inflation above their revenue growth.

There are early signs increased political and macro certainty, low unemployment, and healthy wage growth may be painting a brighter picture for the consumer but the central question for 2020 is whether leisure companies can capitalise on this or whether cost headwinds will continue to hamper their potential?

The pub sector was hailed as one of the most reliable in 2019 as share prices soared throughout the year. This was largely driven by takeover deals. Stand-out examples include CKA’s acquisition of Greene King, TDR/Stonegate’s purchase of Ei Group, and Asahi’s acquisition of Fuller’s beer business. In an exciting part of the market, further takeovers and consolidation appear likely in 2020.

Cost inflation will largely continue to outstrip top-line growth in 2020, which could prove difficult for pub companies’ margins. The further increase in the National Living Wage announced at the start of this year will only add to cost pressures. This could be a concern, especially if compounded by stagnant consumer confidence and demand. 

Despite this, some in the market are making real progress. At Mitchells & Butlers, a combination of investment and de-leveraging has created real and tangible shareholder value. Meanwhile, a myriad of successful initiatives and clear differentiation at JD Wetherspoon led to sales growth far in excess of most of its competitors.

The restaurant sector is a crowded market. Chronic oversupply in recent years has meant businesses must innovate just to stand still if they want to remain relevant to consumers.

Although the market saw a drop in restaurant numbers in 2019 it remains oversupplied and, with increasing competition from delivery services such as Just Eat, UberEats and Deliveroo, this competitive pressure shows no signs of easing in 2020. Those in the market that rely heavily on the National Minimum Wage are also likely to be hit by April’s increase. 

Despite this, strong management teams have shown they can still make progress. For example, the most recent trading update by Domino’s Pizza revealed an increase in its like-for-like sales in the UK while expanding through store openings. Meanwhile, the company’s international story was like chalk and cheese as losses continued to widen. Early progress on disposing of these businesses should be well received by the market but investors should track the mounting cash losses.   

The hotel sector was weighed down by macro concerns in 2019, with businesses reporting a fall in bookings across the business and leisure categories. The two hotel groups in our coverage endured the early signs of a turn in the revpar cycle in 2019. This was partly due to macro concerns but new room supply is becoming more of an issue in the UK and Dublin.

Out of the groups in our coverage, Dalata shows the most promise. It is encouraging to see its pipeline growing in the UK. A stabilisation in the Irish market coupled with the UK growth opportunity could make Dalata look extremely attractive as we move into FY21 and FY22. 

Like the pub and restaurant sectors, a solid macro backdrop will be required to bolster the sector this year.

The leisure sector’s fortunes in 2020 remain uncertain. Macro concerns and economic conditions in the sector will continue to set the tone and, while there have been signs of improvement, we have yet to see this have a meaningful impact on forecasts. 

Perhaps the most important question is one of confidence, which can be demonstrated by the rise in National Living Wage. If consumers lack confidence, the increase presents only a cost rise to the leisure sector, further hampering profit. However, if consumer confidence returns and some of this wage growth feeds into an increase in discretionary spending it has the potential to give revenues across the sector a much-needed boost.
Paul Ruddy is leisure analyst at Goodbody

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