What's happening at Marston's?

Food-cost rises of 8% on horizon

Marston's has sounded

a warning about unprecedented food-cost inflation of around 8% on the way. The increased cost of buying food is likely to add about £5m per annum to company costs. Inns & Taverns boss Derek Andrew said red-meat prices are set to experience the highest level of inflation, accounting for between £3m and £3.25m of the increase. He said: "Everybody has got this issue to wrestle with. We might use less red meat or different size cuts, or aggregate the costs over a wide range of menu items. This is a blip we're going to have to deal with."

Electricity and wage bills to grow

Other cost increases on the way include electricity prices, which are expected to rise by 35% to £3m per annum when contracts are renegotiated next month. The 3.8% increase in the minimum wage in October this year will add £2m to the labour bill, while an extra four days' holiday

pay for part-timers starting in October will add £1m

per annum.

Asset-swap idea is a non-starter

Marston's chief executive Ralph Findlay was distinctly cool on a suggestion from one analyst that the company might undertake an asset swop with Greene King. The idea arose in the wake of Enterprise's go-ahead to convert into a tax-efficient real estate investment trust (Reit). Findlay said:

"It (the prospect of Reit conversion) has been great for stimulating

crazy thought."

Andrew's anger at cut-price deals

Marston's Inns & Taverns boss Derek Andrew has little time for the cut-price booze deals that still prevail at many a supermarket. He reports the Government has been incandescent about some of the deals. "Indicative," says Andrew, "of the fact that supermarkets feel they're untouchable." Marston's Beer Company boss Alistair Darby received a text message during Marston's results meeting with journalists last Friday, which told him Morrisons were offering 24 cans of lager for £10.48, which works out at 56p a pint.

Food sales just keep on rising

Food sales in Marston's managed division are now up by 20% in two years, and account for 35% of all turnover. Spend per head has gone up a bit and is now £6.01. Division boss Derek Andrew said that the company had focused on selling more starters, in particular. "Customers are more likely to order when empty than when they're full," he said. Strongest growth has been in the mid-range price point of £6 to £7 per main meal. Starters sales are up 8%, side orders 6%, desserts 15% and coffee 9%.

4% rent increase for tenants

Marston's tenants are seeing an average 4% rent increase on review. However, the company insists its average rent of around £26,000 per pub is set at a more sustainable level than in some pub companies. Marston's

own income per pub, including beer income, is down 0.6% in the first half. Not a single rent review — there were 79 in total — went to arbitration.

Rent concessions go up by 30%

Rent concessions have increased by around 30% in the tenanted estate — they have gone from 1.2% of the rent roll to 1.6%. A total of 26 of its pubs are currently closed. The company has also begun a "tactical" discount scheme in the price-sensitive area of south Wales. A total of 26 tenants are being offered the chance to sell one beer product for 50p less a pint, bringing the price down to £2.20.

Freehold estate has big benefits

Marston's was stressing the clear benefits of

owning a 98% freehold estate last week. Lease costs always increase over time, typically by 2.5% per annum, and prove more onerous than debt where costs are fixed. "There are very few examples of entirely leasehold pub estates that are successful," said chief executive

Ralph Findlay.

Challenge of unstable trading

Marston's senior executives reported that trading had been difficult and volatile in recent months. Finance director Paul Inglett reported it had been "as tough a time as I can remember in my 20 years in the industry". The company admitted April had been "weak" while May had shown "significant improvement". "Trends since March have been quite volatile," said Findlay. "There's been

no consistent theme

in trading in the past

six months."

Rollout of new turnover leases continues

Ten pubs in the Marston's Pub Company tenanted division now operate with turnover rents. The new type of lease, introduced last summer, offers licensees a lower level of rent on a sliding scale linked to increasing turnover. Division boss Stephen Oliver said: "It's already taken off quite well." About half of the 47 pubs currently being converted to lease from the managed division are expected to trade on turnover leases.

New-build investment pays off

Opening new-build pubs — Marston's programme stands at 20-plus — is providing exceptional returns. The company spends about £2m per site and averages turnover around the £20,000-per-week mark. Ebitda per site averages £300,000, which means Marston's is paying an average 6.7 times Ebitda to build a new pub. The company's pipeline of new sites now stands at 48. Eight of the sites are for Pitcher & Piano, with the rest being food-led pubs.