Pub groups' new frontier

The 2008 financial crisis coupled with the smoking ban prompted significant change across the industry. In short, the pub companies - many of which were leveraged beyond reason - fell foul of the rapid decline in consumer sentiment. Nearly a decade later, however, the majority of property disposals are complete and the focus has turned to improving the quality of estate portfolio once more. From this a significant trend seems to have emerged. Specifically, pub groups are pursuing sites likely to benefit from the growing eating and drinking "on-the-go" market, as well as that of targeting families with discount food offers.

Simon Emeny, chief executive at Fuller, Smith & Turner (FSTA) said his company has been searching for these sites for a few years. The success of the strategy can be seen in its Parcel Yard venue at King's Cross station which, as its top seller, pulls in £5m of turnover a year. The company has also opened new-build sites at housing developments along the River Thames and procured sites in Reading and Canary Wharf which will benefit once London's Crossrail is up and running.

Rival group Marston's (MARS) has opened more than 130 pub restaurants across its "destination business" since 2009 with a decent proportion linked to new housing developments. A good example is the Raven's Cliff site in Glasgow, which formed part of a redevelopment of the former Ravenscraig steel works.

"We built a new pub right in the centre," says chief executive Ralph Findlay, "we are looking for sites nearby to new housing developments and that has been a key part of our strategy." In terms of transport hubs, Mr Findlay said he preferred to identify sites near to railway stations, eschewing the competitive and often expensive business of securing a site inside the terminal. He cited examples such as The Fire Station, just down from commuter-centric London Waterloo and Birmingham Grand Central station, where he said there was "lots of provision and competition". The group is not on the site itself but very close to it with the Lost and Found pub just 200 yards away.

Indeed, Coffer Peach, an industry sales monitor for the UK pub and restaurant sector, recently highlighted that while there had been a net fall in the number of licensed premises across the wider city, shopping and leisure developments - such as Birmingham's Bullring shopping centre and Grand Central station - had seen casual dining brands "flocking in".

The Aim-traded, premium-focused Young & Co's (YNGA) also confirmed the trend. The company has a long-standing relationship with Berkeley Group, which was started 15 years ago with the Boathouse in Putney. Since then Young’s has opened seven new pubs with the Berkeley Group, with at least three more in the pipeline, and has recently opened two more under the Geronimo brand, the Guard House in Woolwich and Leman Street Tavern in the City. It already has pubs in transport hubs such as King's Cross and Heathrow Airport and a spokesperson for the company confirmed bosses were looking for more opportunities to acquire outlets in "these high footfall locations".

Network Rail's head of retail David O'Leary said of the 578,000 square feet of retail space at the 17 stations it manages, nearly a fifth is devoted to pubs and bars while nearly a quarter of the £200m revenue is generated by them. He estimates that's growing "roughly twice as fast as the rest of the estate" which "demonstrates the popularity of these units". Mr O'Leary said the "massive evolution" of pubs and bars - within communities generally but also in train stations - had made them compelling attributes for travel hubs. He said Fuller's was a good example of how pub companies had moved to focus more on service and a broader clientele which is "attractive for us as we like to have spaces which are attractive to a whole mixture of passengers".

Network Rail is also working with Mitchells & Butlers (MAB) and JD Wetherspoon (JDW), while pub giant Greene King (GNK) should join the estate for the first time in the near future. Stats from the rail operator show that in the third quarter of 2015, 63.2m people visited a retail outlet at a train stations - just shy of the total UK population of 64.6m. Mr O'Leary said stations were becoming a greater part of the community, something substantiated by the fact 40 per cent of the trade at Euston station's pubs, restaurants and bars comes from people in the area such as office workers.

IC VIEW:

It's likely consumers will see a growing number of pub groups present across the country's train stations given the potential for high turnover custom and the fact the average length of a contract with Network Rail is 10 years, providing management teams with decent revenue visibility. This type of site also counterbalances what is likely to be a community-style pub situated in housing developments. This means pub companies should have a more balanced basket of customers than they did during the wet-led years. The ability of pub groups to grow their portfolios via these two avenues could become a marker of which makes the better investment, especially as the offering to customers continues to improve.

Favourites

While nearly all the pub groups seem to be fighting for the premium end of the market, we have the most conviction in Fullers and Youngs. Both have a London skew or target affluent areas outside the capital meaning their clientele are likely to be more robust in the event of any consumer downturns. With Fullers, the company recently bought the freeholds at three key sites and its purchase of craft cider and pizza chain The Stable offers an interesting new growth angle.

We're also bullish on Marston's as the company has been successful in refocusing on a broader customer set thanks in part to its improved food offering.

Outsiders

The outlook looks less forgiving for the likes of Mitchells & Butlers and Wetherspoons in our view though. The former's recently-hired chief executive Phil Urban is also twisting the estate towards the upper end of the market but we believe this may take some time and its more salubrious brands such as Miller & Carter only has 42 sites at present. With Wetherspoons, management is trying to improve the offering with developments such as its breakfast business and the inclusion of local craft names alongside the usual staples at the bar but we're concerned about the impact the national living wage could have on the already weak margins.

The broker's view

Many major transport hubs have seen significant investment in the past three or more years, King's Cross being one of the most high profile and more recently Birmingham Central with a hugely impressive overhaul.

Food and drink has been central to these changes, and with the average consumer constantly increasing the number of brands in their eating and drinking out repertoire, it's finally giving consumers the choice that they demand.

This has seen a shift towards less established operators and even street food operators getting units that would have traditionally been out of their reach financially. All of this is with the aim of making these locations stand out against the quality and choice available to people outside of the station doors. This isn't just the case for restaurants either, as more drink-focused venues can thrive in or around this environment with no better example than the success of craft beer bars the Euston, York, Piccadilly and Sheffield taps.

Clearly, the number and breadth of people travelling through stations each day means that there will always be a place for functional and mainstream brands too, yet with the growing awareness of smaller and more exciting brands and those brands looking for growth, there needs to be space for both. The key is getting the mix right. Interest and excitement versus speed and function.

In a market with relatively static eating out frequency and growth in supply of places to eat and drink, fighting for share of spend is the key. With that in mind, the challenges for operating in these locations are exactly the same as they are outside - it’s about delivering a full experience that would satisfy consumers no matter of the location or occasion and operators need to always keep that in mind.

Jamie Campbell, business unit director, CGA Peach