MORGAN & CLARKE FEBRUARY 2016 NEWSLETTER NO. 51
(THE STATS AND PREDICTIONS ISSUE)
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: info@morganandclarke.co.uk Phone: 01285 719292
www.morganandclarke.co.uk
(Also at: London, Cardiff, Braunton, Lewes)
We are all being told that the provision and expansion of hot plated food is the saviour of the pub trade and that if you do not serve hot plated food in abundance, your days are numbered.
So we thought we would put things into perspective due to recent statistical analysis which confirmed the proliferation of eateries on the High Street, effectively all striving for a share of the consumer wallet, with the inevitable knock-on effect to food being served in pubs. The numbers are quite telling.
Recent figure released by the Local Data Company have indicated that there has been a 39.6% increase in the turnover of the UK restaurant industry, with a rise over recent years from £15.5 billion to £21.6 billion pounds, driven significantly by private equity groups who have funded a growing number of burger, pizza and ethnic fast food restaurants. There are a proliferation of new operators that have been established in the last few years, which leads to the conclusion of supply outstripping demand, linked with fierce competition for locations which ultimately leads to an upwards spiral of over-renting. Very largely, the investment market is to blame which is very much growth-driven. It starts with an investment model purchasing a growing and popular small chain which then expands from, say, 10 outlets to 50. The growing chain is then sold on on the basis of further growth potential. The new private equity owner then looks to double that number and, again, sell on based on a growth agenda.
At some point (which happened last year with, for example, La Tasca and Tragus) the model runs out of steam and someone is left with far too many outlets which are not delivering the sales and profitability on which the model had been founded. Basically this is nothing new and is a standard cyclical economic model.
The net increase in restaurants over the last five years has been estimated at 20% or 14,000 new restaurants throughout the British Isles, almost all of which are in urban locations. This then creates the base level of both price and quality, which has a knock-on effect to the pub trade.
- The Wetherspoon’s Factor
One of the most focused operators in the pub food business is JD Wetherspoon. At the time of writing, shares had slipped from 854 pence, down as far as 609 pence and have now bounced back to 722. Trading operations have been hit by rising wages on one side and competitors slashing prices on the other in an effort to get diners through the doors. If you are one of the committed Wetherspoon’s staffers, you saw wages rise 5% in October 2014 and a further 8% in July 2015. However, in an effort to maintain market share, food and drink prices have been frozen, causing operating profit margins to fall 6.3% which is down by 1.1% from a year ago. This in turn has led to a slowing down of expansion plans within the six months to January seeing only new openings and two pubs being sold. Having said that, the plans are still to open a further 10 pubs this year which is down from the 30 new pubs that were opened last year.
The Wetherspoon’s statistical data is considered very persuasive in the headlong pub rush to serve more hot plated food at overly competitive prices.
- Wages Prospects
We all know that in April the minimum living wage will be £7.20 an hour for the over-25’s with the expectation that the minimum wage rate will probably reach over £9 an hour by 2020. Couple this with employment in Britain reaching a record high, it is not unsurprising that significant wage rises are failing to come through the system. In the final three months of last year, the figure for people in work reached 74.1% and unemployment remained unchanged at 5.1% which is the lowest level in a decade and which has a strong influence on wage growth. The Office of National Statistics confirmed that the average annual pay growth in the three months to December 2015, slowed slightly to 1.9%, compared with 2.1% in the previous three months. Average weekly pay was £465 before tax, up from £456 a year earlier, but still – and this is the telling statistic – lower than the 2007 peak which was £490.
There are also more young people coming into the labour market. Unemployment amongst those aged 18 to 24 has dropped from 14.3% to 12% in the past year. However, younger people tend to be paid less which has a strong influence in pushing down the average wage. All these interesting statistics must be placed into context with the cost of putting the food before the customer and the retention of gross margins.
- The Gross Profit Conundrum
There seems to be a standard mantra evidenced in very many Pub Rent Assessment Forms, that the gross profit that should automatically be achieved on food sales should be 65%. This is backed up with the selective evidence of major statistical analysis, specifically from the BBPA. However, if you are using fresh ingredients and not pre-packed, portion controlled raw materials, the reality of input cost, faced with competitive pricing, has a dramatic and downwards effect on food gross profit margins, often resulting in levels hovering around the 50-55% mark.
Recent information from DEFRA confirmed that the price of beef rose by 35% between 2007 and 2014 and, not surprisingly, the quantity purchased went down by 20%. For lamb over the same period, prices rose by 42% and consumption fell by 32%. In the 12 weeks to October last year, pork sales showed a decline of 10.5% in sales volume and 4.7% decline in basic volume. NatCen Social Research recently confirmed that a large number of people have reduced their meat consumption over the past 12 months, with the primary driver seeming to be a concern over health issues, not least concerning cancer. Whilst meat sales may be declining due to both cost and health pressures in pub dining, the irony is that eating out for a Sunday lunch is steadily bucking the trend as more and more housewives are ditching their aprons on a Sunday for the pub experience of having someone else cook the Sunday roast. However, price sensitivity is seen as the key element in the uptake of pub Sunday lunches. Whilst hardly anyone hits the price point of the Wetherspoon’s Sunday Club (soon to end) of £6.75 to include a drink, a large number of outlets serving a regular Sunday lunch, are sub £10. This price barrier seems especially sensitive and if maintained will inevitably see food gross profit margins – certainly for Sunday lunches – slide quickly towards the 50-55% GP mark. Long gone are the days when price sensitivity was not an issue.
- The Millennial Consumer
We read with great interest the Boston Consulting Group paper on ‘the millennial consumer – debunking stereotypes”. The millennial generation is the generation of children born between 1982 and 2002, a large number of whom have entered further education and the work force and can legally exercise their discretionary leisure spend in the on-trade. This generation will replace the baby boomers as they retire.
The millennials have very different characteristics from any generation before them, and in order to capture this trade, on-licensed establishments have to change the way they do business. The millennials have grown up in a society very different from any group before them. They have been plugged into technology since they were babies, are a safe generation and are the first generation to be true multi-taskers and expect to have 6-8 careers in their lifetime. Clearly licensees will have to understand, accept and embrace the characteristics and values of this generation if they are to create and market the image of the pub and all of its diverse offerings that resonate with them and meet their needs.
Rubbing shoulders in a pub environment are the non-millennials who view them as not very kind, sometimes uncaring and as ‘spoiled, lazy’ or even ‘entitled’. Millennials are extremely comfortable with technology and are often referred to by researchers as ‘digital natives’, meaning that they have largely grown up with technology and social media, using these new tools as natural integrated parts of life and work. They will generally be the very first to try new technology and fully embrace Wi-fi capabilities in pubs and bars.
Millennials are more likely to use the internet as a platform to broadcast their thoughts and experiences and to contribute user-generated content. They are also far more likely to post on Trip Advisor and also far more likely to expect some form of positive feedback which we consider is an essential element of controlling rogue postings on Trip Advisor.
There was an interesting summary of attitudes as follows:
- “I want it fast and I want it now”. There is a premium on speed, ease, efficiency and convenience in all transactions. This has been recently borne out in the quite exceptional uplift in contact-free credit card transactions.
- “I trust my friends more than corporate mouthpieces”. The millennial generation will place credibility with anyone with first-hand experience, ideally a peer or close friend. More millennials than non-millennials use a mobile device to read user reviews and research new places to visit. ‘Crowd sourcing’ – tapping into the collective intelligence of the public, or one specific peer group – has become particularly popular. The reach and accessibility of social media has amplified the voice of individual members. Now anyone can become an expert.
- “I am a social creature – both on-line and off-line”. Millennials use technology to connect with a greater number of people more frequently and in real time. Social media platforms are credited as being utilised by almost 80% of all millennials and they also maintain substantially larger networks. Just under 50% have 200 or more ‘friends’ on Facebook, compared with less than 20% of non-millennials. Not surprisingly, millennials are far more likely than non-millennials to favour brands or venues that have a Facebook page and mobile websites. They overwhelmingly agree that their lives feel richer when they are connected to people through social media.
So what does all this mean for staying on top of the trend setters? Social media would seem to be the key issue, linked with a regularly updated website of latest products and events on offer. Wi-fi would seem to be essential, as would a contactless credit card facility.
- HMRC Directive 226
This concerns projected yield and the HMRC requirement that “your customer (for example the publican) be made fully aware in writing at or before the time of receipt of the quantity of beer on which duty has been charged”. If, for example, a barrel (163.7 litres) contains minimum 2.3 litres of undrinkable sediment, the customer must be made aware by a statement on the label, delivery note or price list and so on, that the duty has been charged on 161.4 litres and a copy of the notification to customers must be retained.
If your brewery company or pubco is not supplying you with this information, then the summary of prices on related product lists, may be at risk from being non-compliant under the Alcohol Wholesalers’ Registrations Scheme which is mandatory for all alcohol wholesalers, brewers, brokers and dry brokers. However, research by Chris Lindesay has indicated that there is very little industry compliance with HMRC 226 despite the fact that HMRC have recently made it crystal-clear that the notification of duty paid volume must be passed all the way down the value chain to retailers, to enable them to make product selection, pricing and margin decisions in full possession of the information that HMRC has required to be disclosed.
For example, if as is the case with rent review, you have been supplied with annual statistics of barrelage volumes and applied the correct projected yield, the realistic volume of beer that is capable of being sold, could be reduced by up to 2%.
- And Finally……..
Beer doesn’t turn people into somebody they’re not. It just makes them forget to hide that part of themselves.
Best Wishes from the Team at M & C
Email: info@morganandclarke.co.uk
Phone: 01285 719292