Bold investors can still do well on the high street

It seems a bid odd on the face of it. The high street is supposed to be in terminal decline for pub operators. A series of big companies have given up on it in the past decade, with Mitchells & Butlers (M&B) the most recent to call time. Yet a private equity company, TDR Capital, has acquired not one, but two large groups of high-street pubs within a year.

First it picked up M&B's 333 wet-led pubs and last week merged its estate with Town & City Pubs, the operator of Yates's and Slug & Lettuce, to create a block of 560 pubs operating under the Stonegate Pub Company banner, second now only to JD Wetherspoon in terms of presence. How can this make any sense when so many other companies have packed up their tents and left the woods?

The boss of Revolution vodka operator Inventive Leisure, Roy Ellis, offered clues a few weeks back. He reported that his company was enjoying very benign conditions on the high street with handsome like-for-like sales growth. There are very low levels of investment from surviving competitors and relatively few new arrivals investing in new sites.

Furthermore, the barriers to entry have been raised by the need to invest in the range of items that many local authorities require of a high-street venue, such as expensive CCTV and door security.

The overall investment environment is in direct contrast to a decade ago when the high street was in the middle of a gold rush. Investors get better returns when their money is not battling in a fiercely competitive landscape — now is such a moment. But it's not for the faint-hearted. Investors like TDR Capital still face a market as challenging as any in the pub sector.

It occupies many more high-street segments than its rival JD Wetherspoon, but has the same freehold/leasehold property mix (45% freehold/55% leasehold).

There are late-night venues (former Flares and Reflex), student bars (former Scream), Irish bars (the bottom end of O'Neill's) and a "premium" offer (Slug & Lettuce) under the Stonegate banner. Getting all these plates spinning won't be easy — but it is possible.

Town & City Pub Company, for example, has enjoyed 20% sales growth in the past couple of years. Most noticeable has been the decision with Yates's to compete head to head with JD Wetherspoon on price, with meal deals a particularly important part of its armoury.

I remember a former Yates's chief executive a few years back telling me he simply didn't want JD Wetherspoon customers (writing a lot of us off in the process).

Margins at Yates's are likely to be similar now to those at Wetherspoon at around 10%, but will be plumper at other segments if Stonegate gets it right — chairman Ian Payne reports the company has been in growth all this year.

Meanwhile, JD Wetherspoon seems a bit of a slumbering giant. Although back in expansion mode, the company has been a relative under-performer in the recession.

What's still surprising is the unwillingness, given its £1bn of annual revenue, to do any national advertising.