The ‘W’ factor

Two of the biggest names in the pub business reported last week. Whitbread and Wetherspoon may be at different ends of the licensed retail market, but both face big challenges. The question is whether these two big beasts can win through and retain the market leadership they both profess? Judged purely on the tone of their financial statements, Wetherspoon appears the more optimistic. Whitbread chief executive Alan Parker offered little encouragement, either to investors or the new team trying to turn around the pub portfolio, saying that his pub restaurant division “continued to disappoint”. The Brewers’ Fayre and Beefeater estate saw like-for-like sales fall by 2%, although total sales were up 1.2%. Whitbread proves that simply being in food doesn’t guarantee success. It is not that its pubs are a bad business; Whitbread operates some big turnover sites and profitable ones too. But it has failed to develop its brands sufficiently, slipping behind its main competitor Mitchells & Butlers and finding sales growth difficult. Its challenge is to realign its pricing – it is seen as too expensive – and to bring some trading innovation into its nationwide estate. The bright spot, said Parker, was the consistent year-on-year covers growth that had come on the back of a new pricing strategy in Beefeater. A new menu is being rolled across the Brewers Fayre estate offering what are described as “better value meal deals”, and which Parker hopes will bring quick returns. But Whitbread faces a long haul in its pub business, and there is always the sense that it is just as likely to put its pub business up for sale as follow through with the tough measures to bring the estate up to scratch. It knows there would be no shortage of bidders. There is no suggestion that Wetherspoon is thinking of a tactical exit, however. The senior team appears all too eager to meet the big challenge in its part of the bar market – the coming ban on smoking. Chairman Tim Martin is cautious but firmly in the “opportunity” rather than “threat” camp. That hasn’t stopped brokers marking down the JDW stock. Like Whitbread, it has a big estate that will take time and effort to change. Wetherspoon reported flat sales over the past half year, but through tighter controls and cost cutting delivered a 21% profit growth. Its estate will be as exposed as any to the expected downturn in pub business that will come with the ban, and critics have pointed unfavourably to the sales drop in the pubs that it has already converted to smoke free. However, the company appears not too worried. It has effectively ring-fenced those pubs and is more interested in what it can learn from the changing sales patterns and customer profiles than any financial down-turn. It has also done its homework in Ireland, New York and California on the effects of banning smoke, and understands that running no-smoking pubs now is very different to operating when the prohibition is universal. It believes it is as well equipped and informed as any competitor to make the most of post-ban pub-life, in terms of how it operates as much as what it offers. Only time will tell. Whitbread, of course, can live without pubs. In fact, no new pub restaurants are being built currently unless they form part of a budget hotel development. Premier Travel Inn is Whitbread’s star performer, followed closely by the Costa Coffee chain. Both are showing positive growth. It is perhaps no coincidence that both Premier Travel Inn and Costa are essentially “products of their time”, innovative, offering value, style and modernity. Those are the factors that set businesses apart whether in the ever more crowded food pub market or in the post-ban bar environment to come. It’s probably unwise to underestimate either Whitbread or Wetherspoon, but if you had to pick one to stay the course, it would have to be Wetherspoon.