Greg Feehely: The current pub market
Greg Feehely of Altium Securities casts his expert eye over the pub sector for The Publican Newspaper's 30th Birthday.
The UK pub sector has undergone substantial ownership change in recent years with significant debt leverage (particularly via securitisation) replacing much of the equity capital in the sector. By all accounts this process has quite a bit further to run, with bids imminently set to fly for major and smaller operators alike.
Because of such developments, it is likely that ownership of the sector will remain in both public and private hands.
However, given what seems like a relentless increase across the board in operating costs over recent years (with no clear end in sight) the smaller players are going to find it harder to survive. Further consolidation and cost extraction is necessary. Standing still is not an option.
At the larger company end, the trend among tenanted/leased operators to securitise cash-flows from their freehold assets (historically cash-flows have been very stable) has spread to the managed pub sector (where we know income streams can be more cyclical). Mitchells & Butlers was the first managed operator to go down this route. This could be storing up problems for the future. However, for now, as long as there is sufficient asset support, it is likely this process will continue. Equity owners should be aware though that, should things begin to deteriorate, it is they who are most at risk.
As the consolidation process continues, it is likely a number of existing brands will slowly disappear, particularly on the high street.
So what of the macro factors that will be affecting the sector? The outlook for consumer spending does not look encouraging and we suspect there will be no let up in the trend for the take-home market to continue to take share from the on-trade, as supermarkets in particular tactically price alcohol to drive footfall.
Next, the new licensing regulations. There is potential to see a shift here in consumer behaviour and preference.
Hopefully such a move will help with the industry's poor image - otherwise we fear further (policing and NHS) costs will also fall on the sector.
Last but by no means least, the smoking ban is potentially the biggest threat to the industry's profitability in recent memory. We believe that the current White Paper proposals to permit pubs that do not serve food to continue to allow smoking will not find their way in to the final Act. Operators need to prepare for a total ban, and to invest and position their estates accordingly.
Continued investment in the food offer is a must given it is the only real growth opportunity available. However, we suspect it could take two to four years to fully recover to pre-ban levels of business - hopefully we are wrong.
