Geoff Newton: Give my regards to Broadway…
Having just returned from a short break to New York it was refreshing to get my hands on a proper pint of English ale again.
While in Manhattan, I took it upon myself (in the name of research, of course) to try to discover if any pubcos or branded operators exist in New York City. It soon became fairly apparent that everything else in the Big Apple is branded but beer, and there are more Starbucks, TGI Fridays, Applebees and Charley O's per square mile than I've ever seen.
Traditional quality pubs, however, were more difficult to find. Never one to shirk a challenge I set about finding some. They do exist, you'll be pleased to learn, and most of them were excellent value. Oak panelling, warm, friendly service and some decent ales. But nothing compares to the great British boozer - a unique experience unrivalled anywhere else in the world and one that we should all be justifiably proud of.
Back in the UK we are now in the middle of more acquisitions - Punch's purchase of Mill House Inns looks like an excellent fit - and the results season is upon us.
JD Wetherspoon (JDW) has kicked things off with a fairly impressive performance across the food, liquor, machine and smoking arenas. These reflect where the sector is at the moment, with machine income down, food sales up and liquor sales fairly steady. Next year's smoking ban will throw up some difficult challenges and probably some good acquisition opportunities on the high street, an interesting and very valid point made by JDW's finance director, Jim Clarke.
With Punch, Enterprise, Wolverhampton & Dudley Breweries (W&DB) and others due to report in the next few months, we should get a very good steer on trading this year. I don't expect any real shocks and the trend will surely be some good growth in like-for-likes, a general downturn in machine income, fairly static growth in liquor sales but good growth in food. The split on drinks sales and margins will be interesting. Many expect draught beer and lager to be down, but we may see a marked increase in sales of bottled beers, wines and soft drinks, which generally have a high gross profit margin. The theory behind this goes something like…
More food is being eaten in pubs and more families and women are eating/drinking out. So sales of wine and soft drinks have grown strongly along with a massive increase in cider sales. Less draught beer is being purchased, which is reflected in the growth in off sales - the supermarkets continue to discount beer and we have seen very aggressive pricing this summer on the back of the World Cup.
What does this mean for the investors and shareholders as we head for 2007? With the big pubcos trading at all time highs (I remember Punch floating at £2.52 in May 2002) in 2006 - Punch at over £9.50, W&DB at £14, Enterprise at £10, Greene King at £8.50 and Mitchells & Butlers at £5.50, some might ask if they still represent good investment value. Inevitably some might decide to take some impressive profits built up over the last few years in a very flat stock market, but EPS growth and attractive dividends mean for many that they still remain excellent investments. Expect this to continue during 2007 when the smoking ban looms large. Personally I think the industry will be well prepared to tackle this challenge, which brings me back to New York. The clean air in all bars across the city was a delight. The publicans I spoke to were very pleased with trade and felt the UK would easily cope with the ban. We shall see.
Geoff Newton is head of Barclays' Licensed Trade business
