Pubs dine out on growing food trend

When the history of the pub industry in the past decade is written, observers will probably note two distinct phases. In the first few years the

dominant feature was the restructuring that had initially been driven by the Beer Orders a few years earlier, and then by regulatory bans on further brewing consolidation.

In just a few years this led to the end of large-scale vertical integration, with Bass, Whitbread and Allied exiting brewing. Today the four largest UK brewers operate on a global stage, with just one - Scottish & Newcastle - being British-owned.

At the same time, within on-trade retailing we have witnessed no less of a structural revolution, with five of the six largest owners of pubs - Grand Met, Whitbread, Allied, Scottish & Newcastle and Greenalls - selling their pubs, and the rise of companies focused solely on owning and operating pubs. This liberation of pubs into dedicated retail operations has meant an important transfer of power from producer to retailer. This has ensured much greater consumer choice and the end of artificially-inflated producer margins.

If the first phase could be seen as a supply-side phenomenon that established a new industrial structure, and with it new business models, the second has been about deep consumer-facing change. This shift has driven revolutionary change to the benefit of retailers and their customers.

Ten years ago draught beer sales dominated the sales mix of most pubs. While the range of beers had been growing, it remained limited. Food was the preserve of a small number of specialist pubs and pub restaurants, while the provision of wine and soft drinks was unimaginative, at best. Pub usage was mostly confined to a relatively narrow group of high-volume beer drinkers.

Creating inclusive appeal

Fast forward to 2006 and we get a different picture. The on-trade beer market remains in long-term decline, but the rate of decay has accelerated and now stands at 3% to 4% pa. One cause has been the ever-widening price differential between the on and off-trades. Twenty years ago there was broad price parity between the two; now beer in a supermarket is often sold at one third of the pub price.

Today supermarkets relentlessly use canned beer as a traffic builder, with lager (net of VAT and duty) being retailed, in some cases, below the price of mainstream bottled water and well below the price of milk.

Alongside the decline in overall sales of beer, we are seeing buoyant demand for premium imported and quality regional ales. How can this be? The answer is that it is just one outcome of a far-reaching change in pub usage. We have seen an inexorable decline in visits by the frequent regulars of the past, a market undermined by manufacturing decline, social change and supermarket prices. Meanwhile, usage is rising strongly among casual, less-

frequent users. Vastly more women, families,

professionals and retired people now visit pubs than they did a decade ago.

Successful pub operators have stimulated this sea change, widening the inclusive appeal of pubs. This has entailed innovation in repositioning their offers and providing higher-quality amenities. But above all else, they have brought about a revolution in eating out, with the pub capturing a disproportionate share of the overall growth in the dining-out market, which is itself outstripping GDP growth.

Mintel has estimated that pub catering grew by 31% in nominal terms in the five years to 2005, to some £6.4bn. Pub food now represents a staggering 25% of eating-out sales. It is not hyperbole to describe this as a revolution.

Three factors have driven this. More women are now working, and lack the time or inclination to shop for and prepare food. There are more single households, occupied by busy, time-poor individuals. Lastly, the growing ranks of the retired include many who have the time, cash and desire to eat out regularly.

The burgeoning demand for eating out is not

confined to one particular social group, let alone the well-off. Indeed, while growth has been seen across the spectrum, it has been most evident among lower-income groups.

According to the Office for National Statis-tics (ONS), in the 15 years to 2004 the percentage of total food expenditure spent out of the home has grown 2.3 fold in the third income decile - broadly, where income is just above the minimum wage.

Equivalent figures for social classes C1 and B are 1.6 and 1.3 times higher. What is true of the total eating-out market is particularly true of pub food. The informal, democratic atmosphere of the British pub and its quality food at great value has very wide appeal.

Sustaining the success story

To illustrate the scale of the change, I will just give some examples from M&Bs' experience. Ten or so years ago food represented about 10% of total sales. Now the proportion has risen to 32%, symbolically surpassing beer sales over the past year. We now serve some 80 million meals per annum, 1.3 meals for every UK inhabitant. Our pub restaurants are serving an average of 1,925 meals a week. In Toby Carvery, this figure is 2,500.

Consumers do not visit our pubs solely to eat, but rather, they are looking for a combined food and drink offer. So much so that strong sales of food have enabled us to accelerate the growth of our drinks sales and even buck the negative trend in beer sales. Our wine sales are growing at 10%, our soft drinks sales by 5% and even our beer sales are growing at 1%.

Alongside quality and amenity, value is crucial. For example, in the Sizzling Pub Company, the price of an 8oz rump steak, with chips and tomatoes, is £3.99. You can buy the ingredients in a supermarket for £2.13, but if one adds a notional cost for half an hour's effort in shopping and preparation at the rate of the national minimum wage, the cost rises to £4.65. We make very good profits, even at this price, due to the power of our global purchasing chain.

The most compelling way to appreciate the impact of these changes is to visit a successful pub, to witness the wide-ranging consumer profile and the sheer variety of the products on offer, to say nothing of the professionalism of management. This consumer transformation is at least as profound as the structural change that took place earlier.

What of the future? Operators and pubs that best meet changing consumer needs and tastes will capitalise on the unique consumer franchise of the informality and accessibility of the pub - and be prepared to make the necessary investment in training, service and quality, while driving productivity to overcome external cost pressures.

Pubs surrounded by housing, and with good trading space, car parks and gardens, are uniquely positioned to gain from the growth in neighbourhood casual dining. We can expect skilful operators to cope with whatever the regulators throw at them, in the same way they have dealt with licensing reform, and will shortly manage the smoking ban.

A decade ago. it was argued that the decline in industrial employment, and with it the high-volume consumption of beer, spelt doom. The pub was being outpaced by more nimble competition and lacked proper management. Instead, pubs have changed for the better and are now more popular than ever. Here's to the next 10 years.

This article first appeared in the July issue of M&C Report. To subscribe call Helen Law on 01293 846578.