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Discounters winning bar wars

Created:
25 February 2009
Written by:
Algy Hall

A newly established survey of several leading UK pub and restaurant companies - the Peach Business Tracker - has helped quash fears of a new year trading meltdown, reporting hearty 5.6 per cent like-for-like sales growth in January. However, behind the headline number, which was compiled by research firm Peach Factory in conjunction with KPMG and UBS, there are still grounds for serious concern, especially for tenanted-pub groups.

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As a trading period, January 2009 had a big advantage over January 2008 because the month contained one extra Friday and one extra Saturday. The other big factor at work was the extent of discounting by the industry, as highlighted last week. And the 11 big chains that contributed to the Business Tracker survey, which include listed companies Mitchells & Butlers, JD Wetherspoon, Whitbread Restaurants and Carluccio’s, were extremely active in offering cut-price deals to get punters through the door at the expense of profitability.

What’s more, it may be far too early in the life of our current recession to take comfort from strong industry data. “Based on ONS data from the last two recessions, eating out holds up until the third quarter after the recession starts, but then it falls away sharply.” says Seymour Pierce analyst Hugh-Guy Lorriman, "I now think the hit will happen in the second half."

Furthermore, the extent of the success of the 11 contributors to the Peach Business Tracker could spell trouble for large tenanted pub companies, such as Enterprise Inns and Punch Taverns. It is unlikely these companies’ tenants can compete with the deals being offered by major chains. That will add to tenants’ need for rent concession and other forms of support if they are to make it through the downturn.

IC VIEW:

Sell

The apparent success of the big managed pub chains such as Mitchells and Wetherspoon could well be coming at the expense of tenant-run operations. Shares in Enterprise and Punch are down 45 per cent and 84 per cent respectively since our sell advice of 18 November and 25 September last year. However, given the extent of uncertainty surrounding their future we remain sellers of Enterprise at 46p and Punch at 38p. Based on the view that Mitchells can get through the downturn, its shares are one of our 2009 tips of the year, albeit a high-risk option.

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