The pub industry is struggling but there is one company still moving forward.
The greatest Briton of all time, Winston Churchill, once said to "always remember that I have taken more out of alcohol than alcohol has taken out of me". Two of the most recognisable symbols that define Britain are photographs of Churchill during the wartime years and the traditional British pub.
Today one of these great symbols is under attack as large numbers of pubs are closing all over the country in record numbers under the triple blow of the recession, dubious legislation and competition from supermarkets' off-licence sales.
One firm is still opening pubs
Whilst pubs nationwide have been shutting at an alarming rate JD Wetherspoon (LSE: JDW) is bucking the trend by continuing to open new pubs throughout the British Isles. As of March 2009 Wetherspoon owned 714 pubs and in the last three months has opened 16 more.
Wetherspoon's pubs concentrate on providing customers with a good selection of real ales and reasonably priced meals in a quiet environment. Contrast this with the many wannabe nightclub pubs which bang out music so loudly that people have difficulty hearing themselves think! If you pop into one of Wetherspoon's pubs in the late afternoon you'll usually see quite a few people sitting down to fish and chips and a pint whilst surrounded by their shopping.
Significantly Wetherspoon is the only pub chain which opens for breakfast and morning coffee, so it is also in competition with coffee houses such as Caffè Nero, Coffee Republic (LSE: CFE) and Starbucks.
Like many firms, Wetherspoon's shares were savaged in 2008 but have performed strongly in 2009, rising by over 25%. Many of its competitors have fared badly due to the different nature of their businesses with one, Mitchells & Butlers (LSE: MAB), having been badly hit with large losses on derivatives contracts. Wetherspoon is not paying dividends in 2009 in order to pay down debt, but its business remains profitable with reported interim earnings per share last March of 12.5p in comparison with 12.9p for the previous period. This indicates that Wetherspoon has not been badly hit by the recession.
Full-year forecasts of around 29p put the shares on a PE ratio of about 13.5 which is fairly high in today's market but reflects the prospects for further expansion at the expense of its competitors such as Enterprise Inns (LSE: ETI), which saw its earnings per share fall from 20.5p to nothing for the same period to March 2009. A lot of commercial property is going to be sold cheaply in the next few years and a large part of Wetherspoon's business is converting properties into its distinctive pubs. Wetherspoon's debts are lower than its competitors; in their 2009 interim reports Enterprise's liabilities were 85% of the balance sheet valuation of its pubs whilst the equivalent figure for Wetherspoon was 63%.
The smoking ban
The smoking ban has driven customers away from pubs, with many choosing instead to drink at home where they can smoke (home smoking is unlikely to ever be banned in my opinion as the modern state is addicted to the taxation revenue from tobacco). However, Wetherspoon's sales actually rose in 2008 thanks to its having had several years' experience of operating some non-smoking pubs and having non-smoking areas in most of its other pubs.
Of course, MPs, having passed the smoking ban, acted hypocritically by exempting themselves for the ban and they continue to smoke in the Houses of Parliament's numerous heavily subsidised bars and restaurants thus lording it over the rest of us. As George Orwell put it; "all animals are equal but some animals are more equal than others."
The rise of the pubcos
The pub business has gone through many changes in the last two decades thanks to the Acts of Parliament which were colloquially known as "beer orders." These Acts were repealed in 2003 but their combined effect had completely changed the pub ownership market away from the brewers with their tied estates towards today's market which is dominated by the commercial property companies known as "pubcos." A pubco operates by leasing its pubs to tenants, rather than run the pub itself, thus putting the financial risks of operation onto the tenant.
Wetherspoon's major competitors are the tenanted pubs owned by pubcos such as Enterprise Inns and Punch Taverns (LSE: PUB), but it also faces considerable competition from numerous owner-operated pubs and those breweries which still own pub chains such as Greene King (LSE: GNK) and Marstons (LSE: MARS).
The well-documented troubles of some of the pubcos are primarily the result of their large borrowings and the poorly performing UK commercial property market. The share prices of both Enterprise and Punch have fallen by more than 80% from their peaks mostly due to concerns over their debts, the fall in commercial property prices and the difficulties many tenants have with their leases. The privately owned pubco Admiral Taverns has recently featured in the news with Bank of Scotland reportedly facing write-offs of over £600 million against £1 billion worth of loans made to Admiral to buy pubs.
A closure that is not a closure
The House of Commons Business and Enterprise Committee recently reported that the number of reported pub closures is being exaggerated for two main reasons. The report stated that "…figures for pub closures do not adequately cover cases where individual lessees go out of business without the pub itself actually closing." Thus many "closures" turn out to be cases where the tenant stops paying the lease but the pubco either lets the pub to a new tenant or takes over its operations.
The committee also remarked that some pubcos have been selling pubs with restrictive covenants which prevent any future use of the building as a pub in order to reduce the level of competition in that locale. The committee has recommended that imposing these covenants is made illegal.
Furthermore the report also noted that "…the supply ties operated by pubcos may well be anti-competitive and may have a detrimental effect on the public house market"; it is likely that many lease failures are due to the "beer tie" and the very strict terms imposed on some tenants.
The future
The pub business, like many others, is under pressure due to the recession. However, the peculiarities of the pub market mean that Wetherspoon is far better placed than its bigger competitors to take advantage of current market conditions.
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