MARKET COMMENT
Support Your Local Pub

By David Kuo (TMFDragon)
December 9, 2002

The good old British pub is not in the best of health at the moment. This is partly due to the economic slowdown which has dented, to some extent, the spending power of consumers. There are also systemic changes to the behaviour of the regular pub goers. There are concerns that some consumers may be more inclined to sit in front of their television sets at home than to venture down to their local watering hole. This change in behaviour even prompted Prince Charles, last year, to speak out of on behalf of the British pub as a focus of community life.

Little has changed, it would seem, since last year. Just recently, both SFI Group (LSE: SUF), the owner of the Slug & Lettuce chain, and Old Monk paid the ultimate for failing to attract enough customers into their establishments. Even J D Wetherspoon (LSE: JDW), the long-time darling of the pub sector, has not escaped unscathed. The company, run by Tim Martin, recently warned that the slowdown in sales growth would affect its profitability. The revelations of hard times for the licenced retailers was further underlined by news that Po Na Na (LSE: POA), the specialist night club owner, was finding the market tough.

This morning Wolverhampton & Dudley Breweries (LSE: WOLV) also warned of worsening conditions in the licenced retail market. The regional brewer and pub owner said like-for-like sales at its managed pubs had deteriorated in the last two months. Full year profit before exceptionals at the company slipped to £74m from £76m last year.

Turnover at W&D was down from £565m to £505m largely due to the disposal of some licenced outlets. This was a result of the company's strategic focus on community pubs. Interestingly cash flow was strong with free cash flow up over 3% to £84m although net debt increased from £450m to £497m. W&D also improved its operating profit margin and expects further improvements to margins despite significant cost pressures.

The performance at W&D has highlighted the problem and also the possible solution facing the pub sector. There are just too many pubs in the UK chasing too few customers. That could be a recipe for disaster. Players that are positioned for sales growth are likely to fare much worse in a market where demand is shrinking. On the other hand companies such as W&D, which has prudently retreated, could fare much better. This is likely to find favour with those investors who have warmed to the idea of solid cash generation rather than hoped-for revenue growth.