Join our community of smart investors

Coronavirus turns consumers to gambling, smoking & drinking at home

There has been an unexpected return to tobacco smoking, while pubs are facing a grim winter
Coronavirus turns consumers to gambling, smoking & drinking at home

Covid-19 has been with us in the UK for most of this year. And its associated restrictions on movement have changed many aspects of our lives – from how we work, to how we shop, to how we socialise.

In turn, the virus has altered the way we enjoy ourselves. Indeed, the shuttering of pubs and physical bookmaker venues during lockdown has led people to indulge their vices at home. With many transferring such pastimes to a domestic setting, the question is whether this now forms part of a longer-term trend.

Shift online

The internet has facilitated the shift to at-home vice activities. For one thing, video calls have provided many with their sole means of having a tipple with friends. Alcohol sales have accordingly transferred from pubs into supermarket shopping bags. At the same time, online gambling activity has soared – and so too, ostensibly, have stress levels and, to relieve them, smoking. Indeed, a recent update from Imperial Brands (IMB) revealed that people have been spending more on tobacco products during the pandemic.

Betting companies profiting from lockdown

In April, the UK government wrote to leading bookmakers calling for action against problem gambling, after the Advertising Standards Authority warned of a rise in gambling-related complaints since the start of lockdown. Even in the absence of sporting fixtures and betting shops, a toxic cocktail of wall-to-wall advertising and bored punters was potentially fuelling a gambling epidemic behind our front doors.

Months later, such concerns appear to have been well-founded, with companies translating vice into profit. Betting group GVC (GVC) announced this month that its full-year cash profits could touch £790m, roughly £50m ahead of previous forecasts. A provider of both sports betting and gaming, GVC witnessed a 26 per cent rise in its online turnover over the three months to 30 September, with online revenue up by a fifth so far this year. Online gaming revenues are particularly driving growth and are ahead of GVC’s pre-pandemic levels. The return of live sport came quicker than many expected, which added momentum to already soaring share prices across the gambling sector. 

The pandemic has even helped to reverse the fortunes of ailing betting brands, such as Flutter Entertainment’s (FLTR) PokerStars banner, which had been in decline before lockdown. PokerStars revenues leapt by 40 per cent over the group’s first half, and Flutter has now committed an additional £50m towards marketing the brand in the hope that it can turn this momentum into sustained growth.

Big Tobacco is selling more… tobacco

Amid concerns that smokers hospitalised with Covid-19 are more vulnerable to severe outcomes, University College London reported in July that more than 1m smokers had quit since the start of the pandemic. In the year to June, 7.6 per cent of surveyed smokers had stopped – the highest proportion since the survey started over a decade ago.

The proportion of UK citizens who smoke had already fallen steadily from 20.2 per cent in 2011 to 14.7 per cent in 2018, according to the Office for National Statistics (ONS). In response, tobacco companies like Imperial Brands have invested heavily in what the company calls its ‘Next Generation Products’ (NGP) - a collection of smoking substitutes, such as vaping cigarettes. 

Still, despite those trends, Imperial’s latest trading statement indicates that the pandemic may have inspired customers to revert to more traditional smoking habits. Working from home has, perhaps, lessened the need for more socially-acceptable and/or convenient ways to light up. The group explained that it has “experienced some Covid-related changes in consumer behaviour with increased overall demand against our expectations”. It now expects tobacco net revenues for the full year to rise by 1 per cent at constant currencies. These stood at $3.5bn at the most recent half-year mark.

At the same time, Imperial’s NGP turnover is projected to fall by nearly a third. But while the group called this “disappointing” such a performance was “in line with [its] revised expectations”. It had slashed its NGP expenditure in the second half, after enduring poor returns on investment in 2019 and seeing weaknesses in the vapour category. Said weakness has been exacerbated by rising concerns about the possible health risks of newer cigarette alternatives, particularly in the US, where the Food and Drug Administration (FDA) banned flavoured "pods".

For Imperial, tobacco remains the main revenue and profit engine – NGP sales remain a much smaller piece of the pie, making up just 2 per cent of net sales for the first six months of FY2020. Longer-term behavioural trends towards quitting suggest that a lockdown-induced fillip in tobacco sales might not be sustained as the virus wanes. Time will tell. With vaping on the decline, and Imperial slashing its interim dividend by a third in May, the pressure is on for new chief executive Stefan Bomhard to show how he is positioning the group for the future. He expects to deliver "initial observations” at the full-year mark in November.

A swift pint from… Tesco?

Months of national pub closures, followed by local lockdowns and curfews, have forced drinkers to source their alcohol from other locations. Drinking at home, or in parks, appears to have become entrenched even with the reopening of pubs. In the four weeks to 9 August, grocery alcohol sales rocketed 28.3 per cent, according to research house Kantar.

The collapse in bar sales in the UK and overseas was also reflected in beverage giant Diageo's (DGE) annual results, which laid out the cost of high exposure in Europe and Turkey to 'on-trade' (bar, restaurant and pub) sales. Operating profits for the region fell by nearly a third.

The 10pm curfew on hospitality in England has had a particularly ruinous impact. On high streets, which house most hospitality venues, footfall fell by 10.5 per cent between 10pm and 12am on Wednesday 23 September, according to Springboard. The curfew was introduced the following day, and on 25 September, footfall over the same two hours was 36.4 per cent below normal levels, plunging by over a half after 11pm.

Such restrictions have been criticised by industry leaders and may well come under fire from JD Wetherspoon (JDW) chairman Tim Martin when the pub group releases its full-year figures on 16 October. The results, which may take a similar tone to previous attacks on the difference in tax treatment between pubs and supermarkets, are likely to illustrate the impact of cheaper supermarket alcohol sales on pubs.

And there may well be more pain to come for pubs. Recent government data indicated that 14 per cent of common exposures to coronavirus, identified by backward contact tracing data, took place in pubs or bars, the highest out of any category. Hospitality overall accounted for more than 30 per cent of exposures, while supermarkets made up 6.3 per cent.