Pubs price war looms in wake of trade slowdown

Tough economic conditions could trigger a price war among the managed operators, industry observers warn. Tony Halstead and The PMA Team report

With the credit and mortgage crunch and dipping consumer confidence set to reduce pub visits, and with customers spending less when they do, one weapon in the armoury of managed operators in tough times is to ramp up the offers.

Food price rises and a feared slowdown in on-trade eating and drinking could present major problems for the big managed pubcos, many of which are very operationally geared. One prediction from the Nationwide Building Society warns that consumer confidence is now at its lowest point for nearly a year and recovery is unlikely to come for several months at the earliest. Early January "sales offers" across a number of pub estates could set the trend for a period of heavily discounted deals designed to tempt customers back to the high street - or trade down from more expensive restaurants.

Already big operators such as JD Wetherspoon and Laurel Pub Company have kicked off the new year with a range of drinks and meal-deal offers, and predictions are that other pub groups will follow suit. Trade observers believe the customary January and February discount offers will be heavier and extend over a longer period this year.

City analyst Douglas Jack, of Panmure Gordon, said: "It seems a number of pubcos are now prepared to sacrifice some gross margin to enable them to cut prices. Operators are quick to see food as a big sector growth area, but at the slightest sniff of a downturn they are lowering their prices.

"There seems to be a gradual move to link food and drink deals to competition and the consumer downturn. Everything is currently moving in the wrong direction for the pub sector and it's all looking pretty messy."

Complicating the equation for the managed sector (and others) are steep rises in food prices. Some managed companies are protected from food inflation as they are locked into long-term supply contracts, but smaller companies are set to be hit hard.

One operator, The Restaurant Group, expects to pay 20% and 12% more for dairy and poultry products respectively, when its contracts expire in the spring.

City analysts at Landsbanki said last week: "Many of their contracts are fixed for three years and have another two years to run, so price rises will not occur across all food inputs. However, the company has flagged that, to cover the cost rises it currently expects in 2008, it needs to achieve like-for-like growth of +3% compared with the +1% it used to need to match annual cost rises.

"Pubcos have attempted to court non-smokers by improving their food offering. While this is a natural evolution for the pub sector we have been concerned that it makes the business more volatile and switches the product mix to lower-margined goods. Lately, our concerns have been aggravated by food price inflation."

Some believe that Mitchells & Butlers fired the first shot in a renewed price war when it revealed its plan to improve quality and peg prices in November.

Analyst Mark Brumby, of Blue Oar Securities, noted wryly at the time: "So when is a price war not a price war? Well, arguably, when it's called a 'targeted reinvestment' of circa 2% of food margin in quality and value."

Major managed pub operators are reluctant to discuss the discounting issue, although deals running in some chains through January indicates the depth to which price cutting could go.

A number of big companies are offering combined food and drink deals, cut-price lunches and even two-for-one voucher drink offers. Mark Jones, chairman of Premium Bars & Restaurants, said: "Discounting looks inevitable on the sites that target the mass market. More will start to reduce prices to gain market share, but while I understand how tough 2008 is going to be, our company will not be going down the discount road.

"We have worked hard to invest in the growth of our brands to establish a position at the top end of the market," he stressed. "But I think you will see more people starting to discount over the first part of this year."

The Barracuda Group said it was not in the business of "blanket heavy discounting" and did not anticipate changing its policy in 2008. "Instead we will continue to focus on retail propositions that will enhance our overall high quality offer in niche markets, such as students and secondary towns, using levers such as loyalty cards, high-quality coffee, morning goods and free Wi-Fi," said head of marketing Myles Doran.

Nevertheless, it's worth remembering that managed chains enjoy one big win not available to tenanted operators when they drive volumes by cutting prices - their gross profit margins on extra drinks sales are much higher than those enjoyed by tenants.

January Deals

JD Wetherspoon: A burger, fries and a drink for £3.49 or £3.99 (depending on area) up to 15 January.

Slug & Lettuce: Buy one, get one free on selected pints, bottles and main meals.

Ha! Ha! Bars: £5 lunch menu throughout January.

Litten Tree: Any meal for £3.50, bottle

of wine £4.95, Strongbow/Foster's £1.70

a pint.

Feeling the pressure

Tenanted and leased pub businesses could be squeezed if managed pub chains cut prices and supermarkets continue loss-leader selling. Federation of Licensed Victuallers Associations chief executive Tony Payne warned that many licensees will find it impossible to compete with these dual pressures. Payne warned that price wars devalued the market and did nothing for the image of the trade. "Tied-trade licensees will find they are now being squeezed from both ends and it puts them in a very difficult situation. We have had these price wars in managed houses before and it has hit tied pubs very hard," he said. The FLVA will shortly publish a new 34-page "survival" booklet for its members with a range of tips on fighting the trade slowdown.

"Pubs are no longer simply places which sell food and drink, they are retail units and every possible revenue stream has to be explored," he explained. "Tenants and lessees face a very difficult year and if rock-bottom supermarket prices were not enough the last thing they need is a price war between managed houses."

The past year has seen many more tenanted pubs offering food; 250 extra pubs in the Marston's estate alone according to tenanted boss Stephen Oliver. The net result is a marketplace that is seeing extra supply anyway. Keener prices from managed operations would pile additional pressure on the profitability of tenanted food operations.