THE leisure sector tends to evolve quickly as today’s in-vogue venues are inevitably overtaken by newer, more vibrant venues.
This is quickly illustrated when one considers how Newcastle’s night life scene has evolved over the past 10 years, with the quayside now a less important location than the Collingwood Street area, for instance.
The past decade has also seen the highly-competitive pub sector face other factors that have forced change, most notably the smoking ban, introduced in England in July 2007, together with falling property values and the longest recession in living memory. Excise duty has also been increased at levels above inflation.
Times have been tough: six months after the smoking ban was imposed in Wales in April 2007, the country’s Licensed Victuallers’ Association claimed that its pubs had lost up to 20% of their trade.
The industry also suffered badly when property prices fell as many pub companies had borrowed against the value of their properties. When property prices fell, companies’ balance sheets weakened and the difficulties caused by this were compounded by the weak economic environment, with customers choosing to stay at home rather than go to the pub.
This forced pub operators to look closely at their business models and the product that they offered customers. Many opted to provide smokers with heated, covered outdoor areas in the immediate vicinity, while food became a more important source of revenue too. The straightened financial times also led to bargain-priced operators growing their share of the market.
The UK’s eating and drinking out market is worth around £70bn, of which the pub market accounts for about £20bn, making it a serious sub-sector for potential investors to consider.
Although none of the UK’s pub companies are constituents of the FTSE 100 Index, many are recognisable names such as Greene King, based in Bury St Edmonds; Marston’s, the brewer of Pedigree; Mitchells and Butlers, owners of the O’Neill’s chain and the more price- conscious JD Wetherspoon.
What are the points of interest for potential investors in the sector to consider?
Debt levels remain an important concern for investors in any industrial sector. However, in the pub trade, in which most of the listed companies’ estates are predominantly freehold, it could also pay to look at the proportion of managed pubs relative to leased pubs, as managed pubs tend to be larger with higher average weekly sales.
Investors may prefer a pub group that still actually brews beer, which of the UK’s larger companies would focus attention on Greene King and Marston’s. Equally speaking, as beer sales have fallen over the last couple of years, potential investors might prefer to examine companies with a more competitive food offering.
With England likely to qualify for the Euro 2012 football tournament and the London Olympics taking place, prospective investors might also believe that trade could be brisk in the country’s pubs next year. Individual circumstances should be considered and advice sought.
:: Fergus Westwood Fergus.westwood@brewin.co.uk
