Business Opinion
Marston's has survived flood pain
No one in the quoted arena has had a darker cloud hanging over them this summer than Marston's. Proportionately, no one was harder hit by the floods. A total of 150 pubs were affected, 50 of them on the managed side.
Even now, five are still closed. In the managed division, there was an average of one month of trade lost or impaired for each affected pub. One analyst estimated earlier this summer that repairs would cost £10m. In the event, the profit-and-loss hit from repairs is put at £2m and profits are only a shade below expectations. Marston's shares bounced up 7% on the day of its trading update as investors regained their appetite for the stock.
All parts of the business proved remarkably resilient. The managed division was down only 2% in like-for-like terms in June and July and bounced back to be up 9.6% when half-decent weather arrived in August. September saw the return of what might be called normal trading patterns, a continuation of the trend seen before the smoke ban. Chief executive Ralph Findlay linked this resilience to its foodier underpinnings, with 34% of sales at the 550 managed pubs now coming from meal sales. He raised the prospect of food sales moving to 40% of all managed sales within three years.
One reason is that, at the 20 or so new-build managed pubs being opened each year, the food mix is typically 50-60%, similar to the levels achieved at other operators' large-scale pub restaurants. He was keen to stress the company's intensive work on menu development and improved targetting of promotions aimed at mature customers. Findlay was pretty bullish on prospects of a slowdown clipping food sales growth, a contrast with the more bearish outlook at Mitchells & Butlers of late. He suggested that pub restaurants are more resilient than
out-and-out restaurants. Dining in pubs is
a "lot less cyclical" than a few years ago
and more part and parcel of a pattern of "habitual behaviour".
The major managed acquisition of the year, Eldridge Pope, seems to be performing in line with forecasts. The Eldridge Pope tail, 18 unwanted leasehold sites, is two thirds sold with the rest in legals. Like JD Wetherspoon, the outlook on costs is neutral with tough contract talks on lager supply yielding more margin and, for the first time, estate-wide supply of Carling (it was only available in parts of the tenanted business previously).
As the passage of the years have proven over and over, tenanted pub companies seem to be pretty immune from any distress their licensees may be feeling. But finance director Paul Inglett assures me there has been no material worsening in the key indicators of distress among its tenants, no spike in surrenders.
Marston's chipped in with rent concessions for licensees with lakes in their main bar. If anything, given the shocking summer weather, the sale of 279 bottom-end pubs before the smoke ban is looking like an even more adroit move. Encouragingly, Findlay reports that his Celtic Inns acquisition - tenanted pubs mostly in Wales - was in good growth during the summer despite the earlier arrival of the smoke ban.
The increase in average Marston's tenanted pub quality is shown by a 13% rise in earnings per pub. At least one analyst noted, though, that performance still lags Marston's peer group. Winter is on the way and that will be the real test of whether the company has sold all those tenanted sites ill-equipped to provide a decent return for licensees and landlord. The summer was an almost biblical trial for a sizeable chunk of the estate - and the company seems to have come through surprisingly unscathed.
