Larger pub groups better placed for Covid recovery, managed conversion trend to ‘gather pace’

12-Apr-2021 - Last updated on 12-Apr-2021 at 10:02 GMT

Financial outlook: 'Among rated pub operators, which comprise large corporate and securitization issuers, pub estate reductions were much lower than the industry average,' S&P’s report explains.

Large pub companies are better placed to bounce back from Covid-19 than smaller operators and independents – and could even gain market share – according to a report by global credit ratings agency S&P Global.

Titled UK Pubs, Shaken And Stirred, Look To Recover After A Cocktail Of Headwinds, S&P’s study on the economic impact of the UK’s vaccine rollout and the lockdown roadmap on the on-trade suggests that it will take up to three years for many operators to rebuild their financial standing to pre-pandemic levels.

What’s more, while “pent-up demand” is forecast to drive footfall after months of enforced closure, S&P expects prospects will remain tough for the medium term and operators will need to be nimble to stay abreast of fast-changing consumer behaviour.

Larger operators ‘withstanding’ the pandemic better

Amid Covid symptoms including accelerated site closures – according to CGA and AlixPartners, almost 10,000 licensed premises, including pubs, clubs, and restaurants, shut their doors permanently last year – and many smaller businesses exiting the sector, S&P forecasts that larger operators will gain market share.

The report adds that while there was a “strong uptick” in July and August due to the clamour to return to pubs over the summer and Government incentives such as the Eat Out to Help Out discount scheme, the bounce was all too brief to offset losses over the rest of the year.

“Among rated pub operators, which comprise large corporate and securitization issuers, pub estate reductions were much lower than the industry average,” S&P’s report explains.

“In our opinion, this points to the larger rated players – with breadth of footprint and format diversity and better access to capital markets – withstanding the pandemic better and supporting their pub tenants.

“Post-pandemic, following the spate of closures, especially from smaller and independent operators, we expect the larger players to gain market share in the face of decreased supply in the market.”

‘Better handle’ on liquidity

What’s more, S&P predicts that the flexibility and direct control the managed model offers will allow larger and better-funded operators to react more swiftly to new trading conditions.

As such, the ratings agency expects the trend of gradually converting leased and tenanted sites to managed operations to gather pace.

“While managed operators who directly run their pubs have had to bear higher costs during no-trading periods, limited rent outlays (from vast property ownership, furloughs, and business rates holiday) and prudent cash management have allowed them to get a better handle on their liquidity,” S&P’s report states.

“Historically, managed operators also generated greater earnings and cash flow per pub,” it continues. “We attribute this to their brand awareness and greater vertical integration, consistency of offering, and better logistics across sites.

“These factors allowed managed chains to have greater control over all aspects of operations, including staff, menus, inventory, repairs, and capital investment.”

‘Greater percentage’

Though figures from pub property website, Findmypub.com, revealed the number of applications it received to operate pubs increased by 47% during 2020, operators such as Hawthorn expect the proportion of operator managed sites to increase.

Speaking to The Morning Advertiser in December, after increasing its operator managed pub business from 10% to 20% of its estate in 2020 through acquisitions and tenanted and leased conversions – Hawthorn CEO Mark Davies explained that he expects the managed march to continue in 2021.

Davies who says he “likes” operator managed pubs, believes they offer better control, more transparency, and many levers to drive Hawthorn’s earnings growth.

“I think you'll see operator managed as a greater percentage of the portfolio at some point in the future,” he added. “Whether that be through further acquisitions or further conversions from leased and tenanted.

"The other thing that we like very much about operator managed is that we don't employ the staff in the operator managed model – it's the operator themselves who we put into the pub who employs the staff. Again, not having to manage a huge head count and the cost that comes with that. So when the national living wage gets increased, it just doesn't really have an impact on our company and the bottom lines.”