Pubs fight back against Covid-curbs

Outside the Sugarloaf on Cannon Street a queue is forming. It’s Friday night and thirsty Londoners, grey from another week of virtual meetings, stilted communication and long hours in front of a screen, are seeking the comfort of a pint.

But the pub is dark and quiet, its windows and doors shuttered. The queue is for the off licence next door, which is giving plastic pint cups to those buying beer so that they can stand on the pavement outside and drink and chat and relax. London’s office workers might be thin in number, but their desire for a pint will not be dampened by government restrictions, lack of toilets or the cold.

No wonder the City’s publicans are furious. They are the ones paying the price of restrictions at a time when daily coronavirus cases are falling and hospital occupancy is being well managed. In the 34 weeks to 21 November, Fuller Smith & Turner (FSTA) reported like-for-like sales at just 69 per cent of the previous year. The company swung into a net loss in its half-year results as revenue plunged 73 per cent to £45.6m.

West-London peer Young’s (YNGA) is in a similarly sorry state. Sales slumped 67 per cent to £55.1m in the six months to September, described by chief executive Patrick Dardis as “one of the toughest periods” in the company’s 189-year history. At Mitchells & Butlers (MAB), which runs pub chain Nicholson’s (owner of the Sugarloaf) among other hospitality brands, pre-tax losses hit £123m, from a pre-tax profit of £177m in the previous year.

All three companies will continue to endure restrictions when lockdown ends on 2 December. Indeed, the vast majority of the nation’s pubs are in tiers two or three, which, according to Nick Mackenzie, chief executive of Greene King, amounts to “lockdown in all but name”.

He’s not the only company boss to have spoken out against the latest restrictions, in which tier two pubs will have to serve a "substantial meal" with drinks to customers who can only sit inside with members of their household and outside in socially distanced groups of six, while tier three pubs can only serve takeaway. Tim Martin, founder and chairman of JD Wetherspoon (JDW), has accused the government of “lockdown, by stealth”.

His company – which thrives off high volumes and low prices – is in an especially precarious position owing to the restrictions. Even in good times, the company operates with wafer-thin operating margins (8 per cent in the year to July 2019, compared with 18 per cent at Young’s) and so it is hardly surprising that the company found itself reporting its first pre-tax loss since 1984 in 2020 – a year when footfall has been decimated even in pubs that have been allowed to open.

Mr Martin's anger – directed at the “weak leaders” in Westminster – is not unjustified. The outspoken founder points out that pubs complied with the strict hygiene and safety standards set out the summer which, "with difficultly, allowed pubs to trade viably". These measures will have cost the pub industry at a time when budgets are already under severe strain. Mr Dardis at Young’s agrees: “The cautious approach we adopted and the safe environment we provided were key reasons why our customers flocked back in large numbers,” he said in the company’s half-year results announced at the start of November.

But there could be a glimmer of hope for the sector’s listed players. Many independent pubs have already closed their doors for good and many more will not survive the latest round of restrictions – that gives the financially stable companies scope for consolidation and expansion. Indeed, the allure of an independent pub may have been permanently shattered in the economic catastrophe of lockdown – in the future, pub landlords might seek the security of a large organisation, rather than set up on their own.

Young’s has the balance sheet strength to survive lockdown and perhaps utilise the gaps in the market to bulk up its portfolio in the aftermath. Over 80 per cent of the group’s estate is freehold or long-lease, all of which occupy the premium end of the pub spectrum. The company is our top pick of the sector and with the shares down almost 30 per cent in the year to date, now could be a buying opportunity. (Buy at 1,180p).

Fuller’s and Wetherspoon’s financial stability is underpinned by their property assets. The former owns the freehold of 92 per cent of its pub estate and the latter has been busy buying many of the properties where it was previously a tenant. Wetherspoon’s balance sheet might look a little more fragile than some of its peers, but its property estate hasn’t been valued since 1999 – it’s likely to be worth a lot more than the £1.4bn currently on the books. All three company’s share prices have been hammered in 2020 – as long as they can survive this “stealth” lockdown, they could enjoy a recovery in 2021.

Hold Fuller's at 678p and Wetherspoon's at 1,177p.