Last orders for pub investors?

Is it last orders for the UK’s pub industry? I, for one, sincerely hope not. I can’t tell you how nice it was to meet in one with friends last week and celebrate a big (but belated) birthday.

But the outlook doesn’t look great: gloomy statistics reveal that a staggering 17,000 public houses have shut down over the last 30 years*.

Back in 1990 there were 63,500 open for business – but this had fallen 26% to 47,200 by 2019, according to a report published by the House of Commons*. The smoking ban, recessions, increased taxation, and reduced alcohol consumption have been cited as some of the reasons behind the closures.

So, is the industry still worth investing in? Here we take a look at the sector and highlight some investment funds that still own some related stocks.

State of the industry

Pubs were already facing plenty of challenges – and then Covid-19 hit. The pandemic dealt a further savage blow with months of enforced closures putting it under severe strain. Unfortunately, the problems haven’t disappeared with the easing of restrictions. The increasing number of people still working from home, for example, is impacting city centre locations.

Trading updates issued by quoted pub groups in January illustrated the ongoing problems they were facing. Whether this turns around in the coming months remains to be seen.

Sales down

JD Wetherspoon, which operates more than 800 pubs, revealed like-for-like sales had fallen 11.7% in the 25 weeks to 16 January 2022, compared to the similar period in financial year 2020. It said sales in the second quarter had been affected by the ‘Plan B’ restrictions announced by the government in December to help control the spread of the Omicron variant**.

The comments followed an update from Mitchells & Butlers, whose brands include All Bar One, that showed like-for-like sales in the year to date (15 weeks to 8 January 2022) declined by 1.5%. The company had made a strong start to its financial year with like-for-like sales growth of 2.7% over the first eight weeks – but that changed in early December due to Omicron***.

Reasons to be cheerful

However, there is optimism. After months of turbulence caused by the Covid-19 pandemic, consumers are flooding back to pubs and bars, according to report by Gerald Edelman, the chartered accountants and business advisors.

The study found a growing interest in the food experience and a recent rise in staycations had helped trading to exceed pre-pandemic levels. “The industry outlook remains optimistic, as consumers look to make the most of their newfound freedoms, despite the scaling back of government support and challenges with staff shortages,” it stated^.

Pent-up demand

According to the Edelman study, the release of pent-up demand will see industry revenue bounce back from a pandemic-induced slump. In fact, it predicted revenue will grow at a compound rate of 7.2% over the next five years to return to pre-pandemic levels of over £20bn^.

While the UK Government supported the industry via schemes such as business rates relief, VAT deferrals and Eat Out to Help Out, some businesses have continued to struggle.
“This, coupled with the significant market fragmentation, leaves the industry ripe for investment and consolidation,” it concluded^.

M&A activity

The Gerald Edelman report also raises the prospect of mergers and acquisitions taking place on the back of the difficult trading conditions. It pointed out that M&A activity had remained active with more than 60 deals having been completed since the start of 2020^.

The fragmented nature of the industry, it suggested, continued to provide opportunities for people to snap up attractive opportunities. “Companies that will be at the top of prospective consolidators’ lists are likely to be those that have adapted to evolving consumer trends, developed a premium offering and successfully implemented modern technology,” it added.

Investment funds to consider

Of course, there are various ways to get exposure to this sector. You can buy into companies that run pubs and restaurants, as well as beverage giants that supply the drinks.

Here we highlight three funds that take different approaches, but could all benefit if the hospitality industry improves over the coming months.

Jupiter UK Alpha

This fund, which is run by Richard Buxton, has a holding in Whitbread. While this company is more familiar these days for its Premier Inn hotel brand, it still has pubs and restaurants.

As well as Whitbread, the fund owns other prominent household names such as Barclays and Lloyds banks, drugs giants AstraZeneca and GlaxoSmithKline, and mining company Rio Tinto^^.

Liontrust Special Situations

Beverages giant Diageo is one of the largest holdings in this Chelsea Core Selection fund^^^, which is managed by the experienced duo of Anthony Cross and Julian Fosh. Diageo’s impressive list of brand names includes Guinness, Gordon’s gin, Smirnoff vodka, and Captain Morgan run. The fund is a 'best ideas' portfolio, which encompasses any UK stocks regardless of size or sector, but typically will have a small- and mid-cap bias. 

ES R&M UK Recovery

This fund, which has been managed since its launch in 2008 by Hugh Sergeant, seeks out undervalued companies that are yet to deliver on their potential. According to a recent fund update, the portfolio has added to its holding in JD Wetherspoon, as it failed to participate in the large cap value rebound. There are currently 287 stocks in the fund, with the largest being very familiar large cap names such as Shell, HSBC Holdings, BP, and Unilever^^.

*Source: House of Commons Library briefing paper, number 8591, Pub Statistics, 22 April 2021
**Source: London Stock Exchange, trading update, 19 January 2022
***Source: London Stock Exchange, trading update, 13 January 2022
^Source: www.geraldedelman.com, Pubs & Bars Industry Update, Q4 2021
^^Source: fund factsheet, 31 January 2022
^^^Source: fund factsheet, 31 December 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.