The high streets are turning into mean streets for the pub companies as tough competition, saturation and price discounting continue to make their mark. With the exception of a few operators, notably Greene King, the City's lack of confidence in the sector has seen share prices tumble in recent weeks.
Things were already looking bad when JD Wetherspoon issued a profits warning in mid-July, its second in three months. Other operators have also rung alarm bells this year, including Inventive Leisure, owner of the Revolution Vodka Bar chain, and Regent Inns, owner of the Walkabout chain, whose share price tumbled this month after it announced it was cutting its final dividend as a result of poor sales.
"If you look at it from a macro perspective, there's just too much supply in the high street and it needs to be cut," said John Lake, director of corporate finance, Deloitte. "What is currently going on is long overdue. What you need is one or two of the big players with critical mass to start consolidating the market."
Likely candidates to lead the consolidation process include Yates Group and Laurel. Barracuda is another contender, although the majority of its estate is not on the high street. And while Slug & Lettuce chain owner, the SFI Group, has the critical mass, Lake expects the company to "keep quiet for a few years" following its recent refinancing.
Lake believes that, while low organic growth prospects and undervalued publicly-listed operators point to consolidation, what the high-street operators are concerned about is selling up at too low a price. The latest saga at Yates Group, where major shareholders were unwilling to back the initial 140p-a-share management buyout bid, was indicative of this emerging trend, he added.
But competition and saturation aside, reports of the death of the high-street pub may be exaggerated. Lake reckoned most of Regent Inns' problems were wrapped up in its chain of Walkabout outlets, while its refurbished and new outlets were trading well.
Even JD Wetherspoon, with its recent run of poor sales after years of strong growth, is not doing as badly as is often reported, having curbed its capital expenditure and increased prices about 18 months ago. "It is just not benefiting from this as it's not very appealing to the City," said Lake.
One company that has continued to shine throughout is brewer and pub operator Greene King, which quietly moved off the high street when it was at the top of the market in favour of community pubs, which have performed well. When the company splashed out £654m on Laurel's 432-strong community pubs portfolio earlier this month, the City reacted favourably and the share price rocketed through the £11 barrier for the first time.
Interestingly, Laurel is moving in exactly the opposite direction to Greene King, and, with cash to spend, it intends to add to its 177-strong portfolio of high-street pubs and bars, which includes the Hog's Head chain. While this might sound like folly, Laurel's approach is exactly what it should be doing, said Lake. "When you have oversupply, prices are low and you can buy at the bottom of the market. The key is to buy good locations and not from the oversupply bit."
The tough environment on the high street is likely to remain for some time. The system of tied pubs is under fire from MPs, licensing reform is around the corner, and the impact of Government-backed attempts to curb binge-drinking is yet to be seen. Upwards-only rent reviews and business rates are also still under the spotlight. But the biggest issue is the likely smoking ban.
Lake believes that, following an initial kneejerk reaction, when he expects sales to be hit markedly, the situation will settle down and result in only a slight downturn in sales. The impact will largely depend on how the ban is implemented; if it were done regionally, for example, it would be "a complete disaster", he added.
According to analyst Panmure Gordon, the key to success for high-street operators lies in repositioning and differentiating their offer - not just offering vertical drinking - and this requires financial resources. "There will be winners and losers - and to the winner the spoils," said Lake. n
Summary of the UK High Street
Licensed Retail Market
The threat of new entrants is falling:
- Local authorities to gain control of licensing
- Difficult conditions, encouraging less expansion
- More refurbishment from current operators
Industry rivalry remains high:
- Over-capacity in some market segments
- Increasing price war activity
- Margins under pressure
- War for market share favours the quoted operators
Substitutes are becoming stronger:
- Home entertainment has improved
- Grocers are passing buying benefits on to consumers
- Restaurants are competing well for lunch trade
Customers are all-powerful:
- Increasing price sensitivity during early week period
- Variable brand loyalty
- 25- to 34-year-old age range well supplied, yet falling in size
Source: Lazard