Tunnel vision

How long will we need our tin hats this time? Back in 2009, the talk was of for the short-term, medium-term at worst. This time the headwinds facing the industry seem more set, more a case of changing the landscape of the sector in a more fundamental way.

Fulham Shore and Greene King were the two latest companies to pour cold water on recent trading prospects and you expect they won’t be the last. At present the comforting shores of a good Christmas trading period look a long way off. More than one or two operators have said to me over the last month or so: “We have seen our sales soften but they’re not as bad as…(insert name of rival)” or “we are trading ahead of the Coffer Peach Tracker (practically flat in August, up 0.2%). That comfort blanket is riddled with holes.

It was interesting reading analyst Jack Brumby’s recent note on the casual dining sector situation. He touched on oversupply in the market versus cash-strapped consumers. Now they are two perfectly good points, however hardy revelatory. In terms of the former, the sector has been setting itself on the path of over supply for a number of years. What is surprising is how slowly some in the sector have been to acknowledge it and then do something about it, whether that is landlords, developers, investors or suppliers. The former certainly needs to come to the negotiating table sooner rather than later before holes start to appear in high street/mixed-used schemes.

Ten years ago the talk, on the back of the introduction of the smoking ban, was of the UK having c10,000 too many pubs. Could we soon be having a similar conversation in regards to restaurants? The cull in pub numbers led to a rise in the quality of the sector and it can be argued that for some restaurant brands – the days of living on past glories could be numbered. Our own research shows that Net Promotor Scores (NPS) have been rising steadily across the sector, highlighting that the consumer is at least appreciating the efforts and recognising the improvement operators are providing. In a market where the temptation to cut corners must be strong, there is no room to if that trend is to continue or if your brand wants to remain in that conversation.

It has already been flagged up that many operators have cut or placed on hold their expansion plans, and now is the time for skilled operators to drive sales growth through their existing mature sites.

If the fight for top line growth has become intense, it is increasingly looking like a bloodbath when it comes to recruiting staff, from head office to shop floor. There will be more chairman/private equity investors looking to make changes to stop any sign of trading going backwards, adding a further level of instability to the market.

And what of those pub groups that went full-tilt down the food route and left their wet-led cousins behind in the last downturn? They now find themselves increasingly pulled into the maelstrom that the casual-dining market finds itself combating with, as margins and the supply chain come further under pressure. A good purchasing director has never been more key.

M&A experts predict that in the absence of top-line growth, many companies will come together in the next 12 months in order to keep growing profits. As I have touched on before, some groups may have already begun modelling such outcomes, but realised that the grass is not always greener on the other side of the fence. Sometimes it is better to work with the hand you are already given.

So with that all in mind, I wouldn’t begrudge the tenanted pub sector’s current moment in the sun. As Sapient Corporate Finance’s Peter Hansen points out in his recent piece for MCA, the death of the sector has been exaggerated for too long. Whilst everyone was focusing on the like-for-like sales decline across Greene King’s managed estate in the group’s update last week, its tenanted arm continued its upward trajectory with like-for-like net profit up 1.4%. The managed, high street focused triumverate of JD Wetherspoon, Amber Taverns and Stonegate Pub Company continued to grow in the face of the storm - the latter picking up acquisition opportunities along the way, the latest the five high-profile Sports Bar and Grill sites. That’s before we touch on the deals that have seen Punch and Admiral Taverns find new homes and impetus.

At the same time, a good old-fashioned bidding war could be around the corner in the late-night sector, thanks to Deltic’s refusal to let Stonegate have its own way when it comes to acquiring Revolutions Bars Group.

Nigel Parson, analyst at Canaccord Genuity, has said an enlarged group of Deltic and Revoultion could become a potent force. “A stock market listing would potentially give Deltic the currency to roll up other interesting bar operators such as Be At One, New World Trading Company, the Alchemist and Novus, for example.” At least it has changed the narrative for another sector that has constantly been told it is drinking in the last chance saloon.

And there are others swimming against the tide. Space and time permitting, I haven’t even mentioned the renaissance of YO! Sushi; the continued growth of Loungers (a good example that a change in private equity ownership doesn’t always have to lead to a lull in performance); or Leon; and the sector pace-setting of Wagamama; or the success stories building further momentum at the likes of Honest Burgers, Bistrot Pierre, The Alchemist or New World Trading; or giants like Nando’s and Pret still leading from the front. But perhaps these are more expected bright lights. The tunnel the industry finds itself in looks like it could turn out be a long one, and the drive it needs to push on through will be fuelled by all parts of the sector. Make sure you stay on board.

For better or for worse

A niche early 1990s music reference for you now from this journalist’s youth: in 1992, the US funk-metal band Extreme, released its third album III Sides To Every Story which was a play on the notion of different sides to a story, with the twist being there is “yours”, “mine” and the “truth”. I was reminded of that when examining the noise that has been surrounding and coming out from the Hutton Collins-backed better burger chain Byron over the last few months.

Over the weekend, the Sunday Times picked up our own story from July, that KPMG had been appointed by Hutton Collins to help the c70-strong group look at further “growth opportunities”. I was told that KPMG was not, I repeat not, to aid in some restructuring of the business. But there in the newspaper piece was the restructuring word and that KPMG was working on a “cash management” plan for the brand, including shedding unprofitable sites. Four have already come to the market, with one in the Metrocentre, Gateshead, already closed. More could, and probably will, follow.

The company again confirmed it had hired KPMG and said the chain was “trading ahead of budget for the first two months of the [financial] year”. It also again added that Byron would look at “growth opportunities” and buying new sites (in July a spokesman told MCA that the company was looking at some possible Handmade Burger Co sites), as it prepared to move out of unprofitable locations.

Of course, the company is better to cut loss-making sites now and save the critical mass, but there is a sense that Hutton Collins doesn’t yet want to face up to how deep that cut needs to be. Speculation persists that the group’s trading had declined to such an extent that it is now valued at under half the c£100m the private equity firm paid for it back in October 2013. Any further decline and you would think it would enter the “interesting opportunity” space for would-be suitors. You expect that the next couple of months will be critical to the brand’s ongoing storyline – I wouldn’t rule out another significant bump in the road.