JD Wetherspoon profits have dropped by 20% in its first six months. But the company is determined to push ahead with its smoking ban widely predicted to hit profits further. So what is happening at JDW? The PMA Team reports
There's no doubting that JD Wetherspoon's maverick founder Tim Martin still dominates at Britain's best-known pub chain. The extraordinary rise of JD Wetherspoon from asingle site in Muswell Hill 25 years ago owes itself to Martin's willingness to back his hunches and take a few risks.
Famously, Martin has talked about the need to ignore received wisdom to ensure medium-term gain regardless of short-term pain and City nay-sayers. Occasionally, Martin would drop a mighty and quite expensive clanger introducing oversized glasses, for example. But his entrepreneurial spirit has pulsed through this company's lifeblood for 25 years now, the key to its distinctness.
Two strategic decisions in the past 12 months bear all the hallmarks of Martin's willingness to take a risk for the long-term benefit of the company the end of a range of drinks offers and the introduction of a smoke ban. The first decision is still costing sales, while many regard the latter move as the greatest gamble in the history of JD Wetherspoon, as heedless of common-sense caution as climbing out of a World War I battle trench first. It's even more remarkable when the company is already looking a little shell-shocked and battle weary.
As one industry figure asks: "Why introduce a smoke ban three years ahead of national legislation? Why put shareholders through this sort of pain now?"
Propping discounted doubles and two-for-one bottle offers last April was a unilateral response to the binge-drinking debate. Finance director Jim Clarke claimed the move was a necessary step to preserve the "long-term sustainability" of the high-street bar sector. The only problem is that no other operator has followed suit. Giving up these powerful sales mechanisms has seen the top line stagnate and the consequential introduction of lower prices aimed at increasing volumes. However, prices have been up and down since like the proverbial landlady's drawers a sure sign of a misjudgement.
Prices were slashed in September but then increased again in November as it became clear the policy would not shift sufficient extra booze to pay for the labour required to sell it. Last month, prices were still lower than a year before, although gross profit margins had been restored. Crucially, like-for-like sales fell 1.9%. Sales woes are compounded by an avalanche of margin-hitting costs licensing reform alone will cost an extra £1.5m. Operationally, there seems to be two major options going forward if the company is to restore its bottom line reducing costs and increasing prices.
"The past six months should have provided a salutary lesson," says one observer. "Slashing prices in September brought in very few new customers. The company simply has all the customers for whom extreme cheapness really matters." Another observer, who runs a substantial high-street business, says: "There is still a 30% price gap between JD Wetherspoon and its competitors. If I was running the company I'd move prices up by 5% over the rate of inflation for each of the next three years. There has to be a change in overall philosophy at JD Wetherspoon it hasn't got its head around the fact that it's now a mature company."
A virtual mantra for one well-known City analyst is: "You can't discount your way to glory." But for JD Wetherspoon, discounted booze has been the fuel in the tanks for two-and-a-half decades and it's hard to imagine it changing tack, even though this strategy no longer provides much thrust.
On the issue of costs, management has admitted that it is reviewing its head-office overhead, which according to Oriel Securities, stands at £58,000 per pub compared to M&B's £27,000 per pub. The property department of a company now opening 15 pubs a year rather than 100 is the obvious place to start. Pubs still employ 5.5 managers per site, another overhang from the days when it was crucial to have a pipeline of trained staff to run new venues. If chopping out costs is a sensible move, given mounting cost pressures and stagnant sales, steaming ahead to ban smoking smacks of Martin's penchant for edgy and industry-confounding decisions.
Ten per cent of the estate is set for a switch to non-smoking by May this year, with the rest to follow a year later. Martin, supposedly taking a less active role in the company as non-executive chairman, has also been setting policy in this crucial area. He has little respect for the intellectual coherence of the Government's approach.
Try to please everyone
"It's hard to believe what a mess politicians can make when they have no conviction and try to please everyone," he says. "Smoking is inevitably going to be banned in British pubs, as it has already been in California, Ireland, New Zealand and Norway.
"Thanks to the powers that be, the dotty solution in Britain is to ban smoking from 2008, unless a pub sells no food. Great idea, Tony: so we can stop selling food, allow smoking, and this will improve the health of the nation?" Martin pins particular importance on the Californian experience, where sales recovered strongly in bars and restaurants after a two-year post-ban dip.
He believes that the pub industry will drive into a strategic cul-de-sac if it fails to put the needs of non-smokers first. Smokers, after all, now account for just 25% of the total population. Implicitly, though, Martin is envisaging a wash-through of his customer base and a fundamental change to his sales mix. He clearly sees the need to attract more females, non-smokers and families and fewer smokers as the way forward.
By banning smoking early, the logic goes, there's a greater chance of JD Wetherspoon's achieving its desired positioning first. Even chief executive John Hutson, indulging in a spot of understatement, regards the strategy as "risky". The decision by Laurel to convert its Casa in Nottingham into a non-smoking venue has been an abject failure. Its core customer base is not dissimilar to Wetherspoon's 70-strong Lloyds No 1 chain.
There's a multitude of less gung-ho options Wetherspoon's could have chosen, of course. Greene King is testing the water with a modest non-smoking experiment at 30 or so sites. The early introduction of a ban in Scotland in 2006 would have provided the company with a lot of learnings a full two years before a full ban in England and Wales.
Button has been pushed
But the button has been pushed. Two non-smoking pubs George's Meeting House in Exeter (a Wertherspoon) and the Waterend Barn, St Albans (a Lloyds No 1) have been open for a month. Sales are above the new openings average of £34,000 per week. Food sales are riding at 40% of total sales compared to the company average of 25% and wine sales are hitting a company best. (Machine sales predicted to be a major victim of a smoking ban are in line with company averages at 5% of sales).
In these two venues, at least, Wetherspoon's customer base appears to have been re-engineered or at least re-trained. The Lloyds site is licensed until 2am and its young customers, given a heated external patio, seem happy enough. "It's a unique experience at 1am," says Hutson. "It's a completely smoke-free environment it has to be seen to be believed."
Opening a virgin smoke-free site is, of course, a different kettle of fish to converting a long-standing site where the regulars have happily smoked for years. Last week, the company produced a list of the 65 pubs that will become non-smoking in May. It's drawn up to be representative of the entire estate big pubs, smaller pubs, high food sales and lowish food sales. "We think it's a fair sample," says Hutson. "Pubs need to appeal to a broad cross-section of people. The alternative is to wait for 2008 when the Government might bodge things up with a con