Prepared to be pragmatic
When JD Wetherspoon (JDW) revealed its annual results recently - and the impact of the Scottish smoking ban - shares in the chain fell four per cent or 17p.
Trading in the face of the ban was always bound to be tough, especially in a market like Scotland where a higher proportion of pub-goers smoke. JDW's push there on lower margin food at the expense of liquor business was going only one way, for the time being at least.
Other issues, such as the sluggish margin growth across the group, and financing - a depreciation charge of just shy of five per cent, one of the lowest in the licensed retail sector, according to one City analyst - added to the numbers mix.
Yet even its harshest critics would concede that JDW's fundamentals shine through, and after a bit of profit taking shares bounced back, nudging its record high of 454.25p within days.
As a barometer for the pub trade few operators offer a better sense of where things are. Though its customer base might not be reflective of the trade as a whole, across the staples of food, liquor, machines and smoking the chain presents a revealing insight into the effects of legislation and industry trends.
Back to smoking, that JDW's Scottish drinks sales fell 3.4 per cent, far less than the 11 per cent reported by the Scottish Licensed Trade Association, is cause for optimism.
But pro-smokers will not have had their concerns assuaged. Total fourth quarter sales dipped marginally but the impact on like-for-like pub profits for the period was a chunky 11 per cent. An upturn in lower margin food sales to the tune of nearly eight per cent was outweighed by the decline in liquor sales, and machine income down nearly eight per cent.
Chief executive John Hutson says the group is "working hard" to recruit new customers in the light of the ban, and presumably he means the non-smoking, food-downing variety.
A ban looms large for England and Wales, but he's confident the group can cope and deliver growth in the new environment. Plus JDW is not about to dump its 'cheap and cheerful' approach to pricing in the face of tougher times: "No-one ever gets the better of us when it comes to price," Hutson warns.
Smoking and pricing aside, JDW's headline figures were positive enough: group turnover rose five per cent for a 53 week-year to July 30 to £847.5m, with pre-tax profits up 24 per cent at £58.4m. The fly in the ointment is the group's operating margin, which edged up a meagre 1.1 percentage points to 9.9 per cent, figures that left analysts muttering into their Blackberrys.
Costs, particularly utilities and the minimum wage, are likely to continue to impinge on the group, but investment - between £14m and £21m on initiatives such as its cold beer system and smoke ban preparation - is expected to reap benefits.
At the bar, sales of cask ale are up across the estate, with 640 out of 657 JDW pubs Cask Marque accredited, and coffee is doing well. The philosophy is simple, says Hutson: "If you sell stuff people like, you sell lots of it."
JDW claims it has 25 per cent of Starbucks' coffee sales and breakfasts sales, currently numbering 200,000 sales per week, are rising. "These areas are still quite small in our overall business but have become an integral part of our offer," he adds.
TV screens, installed over the summer, will stay, enabling morning customers to catch up with TV news bulletins. "It was never about football," , says Hutson. "If it's on BBC or ITV, fair enough, but BSkyB and the Champions League are not for us."
Meanwhile share buyback activity - 15.3 million shares at a cost of £59m since January this year - has been higher than the group anticipated, but will continue. Elsewhere a further £100m has been added to the group's coffers via a bank facility re-jig. What will it do with this cash? New site openings are likely to number 15 this year, says finance director Jim Clarke, but it's his suggestion that the new smoking rules could lead to a High Street shakeout that attracts interest.
"People will have issues in the run up to the ban and that might throw up some opportunities. There are some highly leveraged businesses out there, so who knows what will happen."
From possible dinner to potential diner; who'da thought it?
