Martin: the billion-pound bar man
The PMA Team takes a looks at JD Wetherspoon's past and future as founder Tim Martin starts to ramp up openings again.
As milestones go, it's impressive. This is the year that JD Wetherspoon turnover passes the billion pound mark. In 1979, founder Tim Martin bought the eight years left on a 500-square free-of-tie lease, Marler's in London's Muswell Hill.
The estate has now passed the 750-pub mark. It's taken three decades for Martin to reach this stage. Last week, an analyst, Paul Hickman of KBC Peel Hunt, suggested that adding another 750 pubs to reach Martin's oft-repeated target size of 1,500 pubs is likely to take just 12 years more.
Should Wetherspoon reach the 1,500-pub goal it will occupy a unique position (assuming McDonalds doesn't grow much beyond its current size of 1,200 units) — the biggest single food-service brand in the UK. What's striking is how Wetherspoon's growth spurts from a kind of double cycle.
In the late 1980s, as Conservative chancellor Nigel Lawson pumped up the economy, buoyant property prices made expansion difficult. Life became easier as a recession took hold in the 1990s and property prices were depressed.
The 1990s saw rapid expansion for Wetherspoon, peaking at just under 100 sites in a single year around the millennium — 22 pubs were opened in a single month at one stage. Wariness was the watchword on the property front from 2003 until last year as Martin rightly sensed that the economy and, therefore, property prices were over-heating. (Exercising real self-discipline in line with this view, openings were limited to an average of 17 a year for seven whole years.)
Once a recession arrived in 2008, property prices (and rents) soon began to deflate and once more the time was right to resume an aggressive opening strategy. The plan now is to open 50 pubs a year for five years.
The plan is not without challenges of course, but it is worth reflecting on the greater dangers that have now passed. The 1990s expansion occurred against an array of competitors now removed. Gone are the national players like Whitbread and Grand Metropolitan. Also back in the changing rooms are the start-ups rivals such as Regent Inns and SFI Group.
Even Luminar, opening lots of Chicago Rock Cafes in the 1990s, is no longer in a position to open sites. What is left by way of high-street competition, are the reduced rumps of the competitor brands with no great plans for expansion. Wetherspoon has emerged the hands-down winner.
The other issue worth considering is the profit constraints it carries as a legacy of having to compete for the best high-street property in the 1990s. It's a tricky one. The freehold element of the estate is good at 42% and it was always savvy enough to limit landlords prospects of rental growth with its aversion to RPI and open-market rent reviews.
Nevertheless, intense competition creates rental inflation — this has now passed. The other profit constraint is the one created by the fraudulent activity of its own property advisor, Van de Berg.
Last week, Martin, talking to members of the Morning Advertiser's 200 club for multiple retailers, put the absolute cost to Wetherspoon of the property fraud perpetrated by the advisor at between £50m and £100m. Van de Berg diverted freeholds to third parties, who were enriched because Van de Berg persuaded Wetherspoon to sign leases with inflated rents.
Martin still fumes when he reflects on how these artificially inflated rents were then used as comparables in rent reviews at other sites. The irony here is that Van de Berg was a supremely talented pub property finder, while also stitching up Wetherspoon on rents.
All we really need to know is that Wetherspoon survived the grievous rent-ramping blows being dealt by its own well-paid advisor. Now in 2010, with competition for sites much-reduced and property abundant, the company is in an enviable position. It's able to use the strength of its covenant to drive hard deals on rent and other terms with property landlords — Martin referred to 30% to 40% reductions in rent at some of the second-hand pub sites the company is now taking over.
One more piece of news this year that will hearten Martin is the outcome of the Mitchells & Butlers (M&B) strategy review.
M&B, the last great scale pub rival on the high street, has signalled that it no longer wishes to compete against Wetherspoon in the price-sensitive, wet-led part of the market. Wetherspoon's will have targeted the next range of competitors from whom to steal market share — they will range across quick-service restaurants like McDonald's, medium to low-price restaurant chains, coffee shops and mom-and-pop eateries.
The challenges it's setting itself now are framed in terms of this wider group's competitive position — such as opening at 7am to capture more of the fragmented breakfast market.
The next stage of the rollout involves penetrating suburbs of large towns and cities, second-siting in larger cities and continuing to spread out across the smaller towns. It has probably decided that if a town can support a supermarket it can support a JD Wetherspoon.
One more thought worth considering derives from the way Domino's Pizza, which has 150 fewer outlets than Wetherspoon, but also plans to open 50 sites a year, is using its brand scale to undertake effective national advertising. It's something that Wetherspoon has never tried. But as it gets bigger, it becomes more and more cost-effective.
After all, Toby Carvery is currently advertising on television despite being around a quarter of Wetherspoon's current size.
The road ahead for Wetherspoon looks far less full of debris than the road it's arrived on. And there are levers that Wetherspoon hasn't even begun to pull yet.
'Wetherspoon is a winner'
City analyst Paul Hickman of KBC Peel Hunt:
It has a clear strategy to increase the size of the estate to 1,500 pubs, twice its present size. This company saw dramatic growth in the 1990s, and has the will to achieve that again. Wetherspoon (JDW) has played
a leading part in the transformation of the British pub, following licensing deregulation, local authority licensing, the smoking ban and the recession.
As a result, its business model has moved from the periphery of the market to its centre. Following refinancing, JDW is well equipped to press ahead on physical expansion.
Fundamentally we believe the company is a winner in a sector that has serious casualties, and where there will be numerous site-consolidation opportunities.
We fully expect our forecasts, which are close to consensus, to be upgraded over the next two or three years. We have modelled the roll-out from the current 746 pubs to 1,500. We project this size being reached in 2022, equivalent to profits before tax (PBT) of more than £200m and earnings per share (EPS) of 100p. The 1,000th pub would open in 2015, when PBT would be £116m and EPS 56p.
If JDW made a block acquisition of sites, these time frames would obviously be shorter. On the basis of a 12x PE (average for the peer group), the shares would be valued at 1200p at maturity. On a yield basis, the share price would be at least 1400p.
Prioritising the pub-opening pipeline
The JD Wetherspoon pub-opening programme has prompted prioritisation challenges. The company is focusing on opening the pubs where costs are lowest — often second-hand pubs.
And its site pipeline is currently getting replenished with regular batches of these sites. Other sites are being pushed to the back of the queue. A good example is a planned pub in Shotton, Deeside, which was bought in 2008, but has hit serious delays.
The company has said work to convert the derelict Central Hotel building near Shotton railway station would start in August, but the builders have yet to move in on the £1m-plus project.
JD Wetherspoon spokesman Eddie Gershon said: "We purchased the site in June 2008 and have owned it since then. We are going to open a pub on the site, of that there is no do
