Wetherspoons and the musings of chairman Tim

It might not feel like it, but the UK hospitality industry appears to be in recovery mode – at least in terms of trading volumes. Recent data from the Coffer CGA Business Tracker indicate that like-for-like hospitality sales in February were in advance of pre-pandemic levels. However, the nascent recovery was not uniform across the restaurant, bar and pub complex.

So, while restaurant delivery services and late-night bars have raced ahead of the 2019 comparator – the latter largely through the scrapping of the requirement for proof of vaccination – UK pub trading volumes are broadly in line. That’s progress of sorts, although the sector is now forced to contend with the reality of shrinking real disposable incomes, the impact of which will be felt more over the coming months.

The UK pubcos are faced with something of a balancing act due to the unfolding cost-of-living crisis. Publicans would be loath to imperil volumes following two years of intermittent disruption, but rising costs are already eating into margins and the worst may be ahead of us. Prices for key brewing inputs and logistics have gone through the roof and there are few signs of respite. And we shouldn’t forget that brewing is an energy-intensive business. With costs heading in the wrong direction, the central question to what extent can pub owners can pass on the increases to punters?

The answer is certainly not intuitively obvious. The chart below shows a sustained fall in UK beer sales from the turn of the millennium through to 2013, after which volumes stabilise and then edge up slightly through to the start of the pandemic. Part of the fall must surely be linked to the ‘beer duty escalator’ in operation from 2008-13. This entailed a yearly rise of 2 per cent above the rate of inflation. Figures from the TaxPayers’ Alliance show that 58,000 hospitality workers lost their jobs through the period – another feather in the cap for the Exchequer.

Curiously, the contraction in beer volumes seems at odds with some international meta-studies indicating that demand for alcohol is relatively inelastic. It is difficult to square this apparent contradiction, especially when you realise that the bounce back in sales was wholly attributable to the off-trade.

According to the Office for National Statistics, UK pub numbers fell by 22 per cent from 2000-19, with small pubs driving the decline in numbers, as they are more vulnerable to cost pressures from a scale perspective. There are also demographical and inter-generational effects to take on board, but it’s sobering to think that the great British pub could eventually go the way of the parish church. For investors, it begs the question: is the pub sector in structural decline?

At the time of writing, we don’t know if Rishi Sunak plans to the come to the aid of the industry, but Tim Martin, chairman of JD Wetherspoon (JDW), took aim at government monetary policy after the pubco announced an 87 per cent hike in half-year revenues to £807m. Although sales remain 11.8 per cent down on the pre-pandemic level on a like-for-like basis, it's a creditable performance given the impact of what the chairman describes as “lockdown by stealth” restrictions.

Martin points out that the threat of further restrictions – in his words, “kryptonite for hospitality” – has not gone away and said the creation of £400bn in "new money" for Covid-19 relief by the Bank of England had resulted in higher inflation and higher taxes. The good news for shareholders is that interest rates for the group’s freehold estate are fixed for the next decade, while rising input prices are “mitigated to an extent, by a number of long-term contracts”. At any rate, a JD Wetherspoon pub is always seen as a lower-cost option for a night out, which may prove even more advantageous as discretionary incomes evaporate.