Do pubs face a greater threat than ever before?

If pubs had warning sirens they would be fired up any moment now, ready to urge operators to batten down the hatches and remain cautious, as experts make dire predictions about the on-trade’s future.

Many stalwarts of the trade will remember the struggles of the 2008 financial crash and the smoking ban, however, it has now been forecast the pub trade is “under a greater threat than ever before”.

The smoking ban has been blamed for the decimation of a large number of Britain’s pubs, acting as a “clear acceleration” in their closure. This was then followed only a year later by the 2008 financial crash – considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

Pub operators’ earnings are being curtailed by changes in consumer demand away from beer consumption as well as macroeconomic factors including a rising national living wage, inflation and sterling depreciation​

– Thomas Rahman, assistant vice-president and analyst, Moody’s Investors Service​

Only in the past two years have the number of pub closures begun to stabilise, with the surviving operators ravaged by the last decade’s troubles only just fully getting back on their feet.

However, current headwinds such as Brexit, business rates, inflation, the deprecation of sterling, changes in consumer demand and the rise of labour costs are now coming together to create the ultimate cocktail of panic within the industry.

In the past few weeks, Moody’s Investors Service has released a report, warning debt-laden pubs will suffer over the next 12 to 18 months. At the same time, the Campaign for Real Ale (CAMRA) has called for more support for British pubs after it described the new business rates revaluation, introduced in April, as the latest “ticking time bomb” set to devastate the sector.

And, at the end of August, global banking giant HSBC warned increased costs faced by the pub sector​ put the trade at risk of “serious damage” if another financial crisis were to occur.

Moody's assistant vice-president and analyst Thomas Rahman says in his report released this month: “Pub operators’ earnings are being curtailed by changes in consumer demand away from beer consumption as well as macroeconomic factors including a rising national living wage, inflation and sterling depreciation.”

The report shows that, since 2016, earnings before interest, tax, depreciation and amortisation (EBITDA) per pub has been declining, amid rising employee costs and inflation. The rise in the national living wage to £7.50 per hour in April 2017 from £7.20 per hour in April 2016 has negatively affected underlying profits as well – not to mention what the further increase to £9 planned for April 2020 could do.

Rising inflation

The report continues: “Rising inflation, too, has increased operating costs among pub operators. A significant portion of the goods sold at pubs are sourced from overseas and any further declines in sterling and/or subsequent rises in inflation will further erode EBITDA.”

The report also looked at the changes in consumer behaviour, as a declining number of beer sales has coincided with a reduction in the number of pubs, which has fallen to fewer than 50,000 this year, compared with 60,600 in 1997. In total, according to the Campaign for Real Ale, the nation has lost 28,000 pubs since the early 1970s​.

However, according to the British Beer & Pub Association’s (BBPA) The Statistical Handbook 2017​, beer is remaining strong among Brits, accounting for more than half (54.3%) of alcohol sales in the on-trade last year, down slightly from 55% in 2015.

“The trend of declining beer sales does not appear to be dissipating and we expect both beer sales and the number of pubs across the UK to continue falling,” says the Moody’s report.

“Such changes in consumer behaviour are largely explained by individuals becoming more health conscious, relatively cheap alcohol that is easily available at supermarkets, lower disposable income, especially after the financial crisis and the smoking ban legislation”.

Clever operators looking to counter declining wet sales – caused in part by the smoking ban and now compounded by the youth’s lacking desire to consume alcohol – turned up their food offering – however, HSBC claims food will not save the pub in difficult times. If the UK’s financial stability is rocked, a third of consumers would stop eating out, the bank claims.

Consumer downturn​

HSBC’s opinion mirrors Moody’s, claiming pubs face twin risks from consumer weakness and rising input costs, leading it to downgrade its ratings for JD Wetherspoon and Greene King.

“We can’t be sure of a consumer downturn, but do worry about the continued increase in costs and the ease with which this can be mitigated,” it said in a financial analysis.

“Operators have already struggled with this even in a benign consumer environment,” it continued. “We don’t see obvious valuation support and think downgrades will drive share price weakness.”

The market goes through a period of consolidation from time to time, but the strong businesses will remain strong. Pubs that offer customers a genuine, good-quality experience have stuck around​

– Jonathan Neame, chief executive, Shepherd Neame​

Business rates have already started to have a devastating affect​ on the industry, the Association of Licensed Multiple Retailers (ALMR) says, with a wave of pub closures in July attributed to rate changes in April this year.

And, despite a rates relief scheme of £1,000 promised by Government to pubs with a rateable value of under £100,000, rates specialist CVS says there would be a “tsunami of pub closures”​ if this was not extended.

Published last week, the Good Beer Guide​ reports that, while there are a number of contributing factors to the decline of pubs over the years, new business rates revaluation introduced this year is set to devastate the sector.

In a bid to help avoid a pub trade catastrophe, CAMRA has launched a campaign calling for an annual £5,000 reduction in business rates​ for every pub across England, something that the BBPA also called for in its manifesto ahead of the general election this year.

Optimists in the trade

However, there are optimists in the trade. Speaking to The Morning Advertiser​ on at the launch of his pub company’s glowing full-year financial results​, Shepherd Neame chief executive Jonathan Neame maintained the only thing affecting his business was poor summer weather this year.

It is obvious Neame believes pubs can survive almost anything, but only if they have the right proposition. He explains: “Everyone needs to have a point of difference [in today’s market], there is no room for the mediocre.

“The market goes through a period of consolidation from time to time, but the strong businesses will remain strong. Pubs that offer customers a genuine, good-quality experience have stuck around”.

He adds: “I can historically say that [the weather] is the only major impact on our business”.

Commenting on predictions of a troubled future for pubs, Kate Nicholls, chief executive of the ALMR, says: “Operators have found themselves in challenging commercial environments before and have a great track record of innovating and adapting to try to overcome adversity.

“However, the Moody’s report this week is certainly a timely pre-Budget reminder of the unique and unprecedented pressures that the sector faces.”

Recent financial results do point towards more challenging times ahead. Pubs will need to work harder in a competitive marketplace to attract customers, and it is all the more important that Government gets its tax policy right​

– Brigid Simmonds, chief executive, British Beer & Pub Association ​

Nicholls adds there are “considerable commercial challenges” operators are having to now work through to make sure they beat the “stress test” – a scenario Moody’s created that factored in a 5% year-on-year increase in both wages and inflation until 2019.

“The pubs will doubtless be looking at productivity improvements, automation or new services as well as consolidation,” Nicholls continues.

“What is clear is that if they are to weather the perfect storm of rising costs, and seize Brexit opportunities, they need a period of calm. That means no new taxes or costs, and support where costs are pinching the most, such as business rates.

“The eating and drinking-out sector is a significant economic generator and employer – we hope that the Chancellor recognises that and acts accordingly in his Budget.”

BBPA chief executive Brigid Simmonds agrees with Nichols and says: “Recent financial results do point towards more challenging times ahead. Pubs will need to work harder in a competitive marketplace to attract customers, and it is all the more important that Government gets its tax policy right.   

“Help on beer duty and business rates, in particular, is needed in the Budget.

“On a positive note, the exchange rate means we need to make the most of tourist visitors, which are up 11% since the start of the year.”

Though things look dire now, we have yet to see the Autumn Budget, to be revealed on 22 November, which could offer pubs hope or be the final tipping point for the trade.

In the Spring Budget in March​, alcohol duty rose for beer, cider wine and spirits. This meant that beer duty has risen by 43% over the past 10 years, with Simmonds predicting the rises add £125m to the cost base of pubs.

Things look grim and it is questionable how much more pubs can take. Some, rightly, remain positive. Others, however, are less optimistic and are preparing to weather the pub trade’s very own storm.