Smoking ban the catalyst as pub market diversifies

Consolidation, disposals, sales and acquisitions have come to define the pub and bar market as the sector prepares for the reality of a UK-wide smoking ban and reaps the rewards of growing property values. Christopher Walton reports

At the end of last month the make-up of the pub market altered significantly. The traditional "big five" - Enterprise Inns, Punch Taverns, Mitchells & Butlers (M&B), Marston's and Greene King - turned into six, after privately backed Admiral Inns grew its portfolio to 2,700 with the £326m purchase of 869 pubs from Punch Taverns.

The sale left Punch with 8,387 pubs, a figure not a million miles away from the number owned last year by rival Enterprise Inns (8,522). Seven months ago Enterprise also embarked on an eerily similar process to the Punch activity by selling 769 pubs to Admiral for £318m. That meant the Enterprise estate now stands at 7,809 pubs.

Enterprise's policy towards churn matches that of Punch, disposing of pubs with profits less than the group average. Enterprise has an average profit per pub of £67,000, Punch has an average of £55,000, while the pubs sold to Admiral by Punch average just £29,000, suggesting that the big six might not be competing on an equal footing.

Profitability crucial

Profitability is crucial as the pub industry diversifies its business model. The introduction of the smoking ban in Scotland, Wales and Northern Ireland and its impending introduction in England on 1 July has been the catalyst for food to be the growing and prominent trading line, with drinks choices being aimed more at families, females and fifty-somethings.

Marston's commercial and communications director Colin Sadler terms the changing customer base "the F-plan", playing to a 21st-century social structure where fifty-somethings have huge amounts of disposable income and time. There's also the knock-on effect that a pub full of single women attracts single men who buy plenty of drinks.

The smoking ban has also forced investment in menu recreation and site redevelopment. Punch is moving to UK-only meat on its managed estate menus, eschewing dependency on cheaper meat from South America and South Africa, and playing the green card to attract environmentally concerned customers.

Making pubs appeal to the section of the population that's not male, doesn't drink beer and doesn't like watching football has attracted private equity money into the mid to small operation end of the market. Barracuda now has 201 sites after launching in 2000 with private-equity purchases from two of the big five. London Town reinvented itself from a residential property firm into a pub company with 225 leases after splashing out £122.1m during the past 12 months on pubs, and smaller groups from Heartstone to Wadworth are looking to grow.

On top of this the sale and churn of the big six pub estates is also set to continue. Marston's has about 300 pubs up for sale and is seeking buyers. Pubs not prepared for the smoking ban are high on the list for sale or conversion into alternative properties. Yet the attractiveness of rising property prices in tandem with the long-term security behind a pub leasing contract is becoming harder to ignore.

Astronomical rise

As a result City investors have recognised that pub operators are worth more than the profits their estates generate because they sit on tremendous property assets. The astronomical rise in property values since the turn of the decade has been one of the drivers behind Enterprise, Punch and M&B all becoming FTSE-100 companies.

M&B continues to endure speculation about its future, particularly with property magnate Robert Tchenguiz, who owns 15% of the shares, pressing for a REIT (real estate investment trust) conversion after he launched a failed bid to buy the company last year.

However, Giles Thorley, chief executive at Punch Taverns, questioned the value of this financial model at the company's recent interim results. "REITs are taking a business and saying the sum of the parts is better than the whole," he said. "Is that really the case? There's no evidence to say that is true. Everybody is waiting to see what M&B is going to do on 22 May when its interim results are published]. If REITs were an absolute panacea, then the likes of Tchenguiz would be looking at us."

Although M&B wouldn't comment in advance of its results, a spokeswoman for the company admitted REITs were a "very successful means of getting returns on capital" but there were questions behind an effective "demerger" of any pub company into an operating business and a property business.

The future ownership structure and delivery model for pub businesses will be crucial to catering as a whole. Never before have pubs sold the volume of food they do today, and the smoking ban has forced the sector to make itself as appealing as possible. Even the expected revenue dip after 1 July is not deterring investment and growth.

By Chris Walton

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