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FTSE350: Post-pandemic realities can't be avoided

The pandemic and the cost-of-living crisis has cast a pall over the sector, but there are still companies that can dispel the gloom
April 28, 2022

It would be easy – and reassuring – to think that now the dark periods during the pandemic when the FTSE 350 restaurant and pub companies were forced to shut their doors seem to be behind us for good, these businesses can simply move forwards into sunnier uplands. The end of pandemic restrictions is obviously good news for the sector, but it would be premature to conclude that the outlook is looking significantly more robust. 

BDO partner Sarah Rayment said in the advisory firm’s recent Restaurants and Bars Report 2022 that “many businesses have a build-up of debt comprising government-backed loans, HMRC and rent arrears”, while income statements “continue to strain against the consequences of labour shortages and increased supply chain costs”. Gulp.

These companies are now also having to deal with the cost-of-living crisis and soaring inflation – factors which clearly won’t be beneficial. The impact of this, combined with pandemic trends, can be seen on share prices for many in this sector, plenty of which are heavily down over the last 12 months.

Companies in this category include J D Wetherspoon (JDW) and Mitchells & Butlers (MAB). Pub operators were already doing business against a backdrop of a long-term decline in the number of UK pubs, and are working out the implications of the new post-pandemic working environment where city centres are quieter and local establishments busier. The central London landscape, for example, where there sit very many pubs (and restaurants) with expensive leases, could look very different in the years ahead in terms of consumer demand. 

A company such as Wetherspoons is especially sensitive to the inflationary environment, given its reputation for offering low-cost fare. Margins will suffer. Mitchells & Butlers warned in its latest trading update of significant cost headwinds “due particularly to high levels of statutory wage rate increases and persistent historic high prices in energy markets". These are likely to worsen further.

Kitty Ussher, chief economist at the Institute of Directors, noted that “when people re-started their social lives as restrictions ended in March, the places they visited were able to pass on their own higher costs to their returning customers”. How long this will hold up is a key question.

It is no surprise that the sector is coming up with new methods of reaching customers, given pandemic experiences when they were forced into a different operational model. Greggs (GRG) is a case in point. The company’s partnership with Just Eat (NL:TKWY) has been built up: delivery is now offered from over 1,000 shops across the UK, with delivery available through all channels from around 1,300 company shops. Penetrating the evening market, via food items such as pizza and fried chicken, is a key part of the company's growth strategy – Greggs thinks that expanded evening opening hours and delivery could bring in an additional £180mn to annual sales by 2026, which is nothing to sniff at.

But the pandemic and delivery trends don't mean the sector has turned its back on physical stores – judging by recent moves, it looks like the opposite. Several of the non-pub companies here have ambitious growth plans that are centred around a significant expansion of their high street estates. Domino’s Pizza (DOM), after resolving the headache of a dispute with franchisees in December, is now aiming for over 200 new stores in the medium term and expects an average of 45 new openings a year over three years. At Greggs’s last reporting date it boasted 2,181 shops, after opening over 100 net new units in its latest financial year, and is aiming to hit 3,000.

 

NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
Compass Group1,74931,20712.0%311.6Hold, 1,519p, 23 Nov 2021
Domino's Pizza Group3681,6290.0%173.0Buy, 357p, 08 Mar 2022
Greggs 2,3862,4314.0%202.8Buy, 2,080p, 08 Mar 2022
J D Wetherspoon747962-44.0%410.6Hold, 1,042p, 01 Oct 2021
Mitchells & Butlers2291,367-23.0%140.0Hold, 338p, 17 Feb 2021
SSP Group2431,931-22.0%na0.0Hold, 238p, 08 Dec 2021
Source: FactSet