For some time now, the eating-out market has grown faster than retail, as consumers have spent money on experiences rather than products. According to industry benchmark The Coffer Peach Tracker, like-for-like sales in managed pubs and restaurants rose 2.8 per cent year on year in December. The tracker has now outperformed the BRC retail index in 14 of the past 15 months.
And restaurant chains are now outperforming pubs. Like-for-like restaurant sales were up 4.7 per cent year on year in December, compared with 2 per cent for managed pub and bar groups. But this hasn't been a long-term trend: for the first half of 2014 pubs outperformed restaurants. And pubs are still doing better in London: for December, Numis reported a 5.4 per cent like-for-like improvement in restaurant sales outside London, compared with a 3.6 per cent improvement inside.
The scene is therefore set for a fairly buoyant 2015. The fly in the ointment could be oversupply. According to the Coffer Peach Tracker, restaurant supply grew by 7 per cent in 2014, with the number of restaurant chain outlets up 10 per cent. Yet discounting in a deflationary macroeconomic environment doesn't seem to be hitting restaurants nearly as hard as it is the retailers.
INSERT COFFER PEACH TRACKER GRAPH
City analysts still throw their weight behind market leader Restaurant Group (TRG). The shares have traded at a premium to the sector for several years, reflecting the company's long record of growth. We already know from a trading update that like-for-like sales rose nearly 3 per cent in 2014, with total sales up just shy of 10 per cent as a result of 40 new site openings. Analysts at Numis are forecasting 7 per cent profit growth this year.
The expansion in restaurant numbers is in contrast to a 3 per cent decline in the number of pubs. That decline is being led by those establishments focused on drink (down 5.5 per cent) rather than food (flat). That difference illustrates the ongoing shift in the pub industry. For a number of years pubs have noticed that punters are more interested in eating, and the introduction of food menus has boosted growth for several London-listed companies. Last year, the share of money spent on food outside of the home rose to 42 per cent, from 40 per cent, and there's no reason to think this number won't rise again in 2015.
But there are also ongoing challenges for the pub sector. The potential abolition of the beer tie could damage those with large tenanted estates. Under the terms of the beer tie, tenants are obliged to purchase beer and other goods - ranging from menus to coasters - from the parent company. Adding a Market Rent Option (MRO) to the Small Business, Enterprise and Employment bill would make the beer tie voluntary, leaving pub landlords free to purchase goods from wherever they choose. The MRO was approved by the House of Commons in late November 2014, and a number of companies with tenanted estates, including Enterprise Inns (ETO), Punch Taverns (PUB) and Spirit Pub Company (SPRT), saw their share prices crash in response. Those unaffected by the new law include smaller outfits outside the FTSE 350 such as Fuller, Smith & Turner (FSTA) and Young & Co’s (YNGA), whose tenanted estates are small enough to fall below the threshold for the new legislation.
| Company | Price (p) | Market value (£m) | PE Ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Compass Group | 1,125 | 18,763 | 23.1 | 2.4 | 14.4 | Hold, 1,073p, 26 Nov 2014 |
| Domino's Pizza Group | 677 | 1,120 | 27.2 | 2.5 | 29.5 | Hold, 544p, 29 July 2014 |
| Enterprise Inns | 110 | 557 | 5.8 | 0.0 | -33.2 | Buy, 105p, 19 Nov 2014 |
| Greene King | 812 | 1,778 | 13.3 | 3.5 | -10.0 | Hold, 758p, 5 Dec 2014 |
| Marston's | 145 | 829 | 4.2 | 4.6 | -3.9 | Buy, 146p, 28 Nov 2014 |
| Mitchells & Butlers | 442 | 1,820 | 13.7 | 0.0 | -1.9 | Hold, 355p, 26 Nov 2014 |
| Restaurant Group | 718 | 1,441 | 21.7 | 2.1 | 14.7 | Buy, 638p, 1 Sep 2014 |
| Spirit Pub Company | 111 | 739 | 15.6 | 2.0 | 29.6 | Await documents, 109p, 5 Nov 2014 |
| SSP Group | 270 | 1,285 | 20.3 | 0.0 | NA | Buy, 250p, 28 Nov 2014 |
| Wetherspoon (JD) | 801 | 983 | 16.5 | 1.5 | 1.5 | Buy, 773p, 15 Sep 2014 |
| Whitbread | 4,898 | 8,889 | 24.6 | 1.5 | 24.8 | Hold, 4,415p, 19 Dec 2014 |
Favourites
We're more bullish on some of the smaller companies in the sector, but our top picks from the FTSE 350 include Marston's (MARS) and SSP (SSPG). Marston's recovery plan is well under way, and the shares trade on a modest 11 times forward earnings and yield close to 5 per cent. Shares in recently-listed SSP - which runs food concessions in stations and airports and is led by former WH Smith boss Kate Swann - are up 15 per cent on our buy advice (234p, 23 October 2014), but the company's international growth plan has a way to run yet.
Outsiders
Should the MRO be passed, clear losers include Enterprise Inns and Punch Taverns. Punch had a torrid 2014 wrangling with bond holders and creditors over a potential refinancing. Meanwhile, analysts have predicted that without the beer tie investment in Enterprise Inns' estate would have to be cut by up to £20,000 per pub, which roughly equates to an £18m provision.
