Inflation Is Hitting British Pubs Hard

Britain’s biggest pub operators are facing strong headwinds because of soaring energy and supply chain costs and labor shortages. GLG’s Xavier Peluso recently hosted a teleconference with Paul Pavli, GLG Network Member and former Managing Director at Punch Taverns, to discuss the U.K. pub industry post-COVID-19, the new dynamics and challenges facing pub companies, and key industry players. Below is an edited excerpt from that conversation.

What is the current state of the pub industry in the U.K., and what is the overall size of the pub market?

The British pub industry is having a tough moment. So far in 2022, inflation in the U.K. has hovered around 9.1% and is predicted by the Bank of England to move past 10% by autumn. The squeeze on consumer spending is putting pressure on pubs and restaurants in numerous ways.

Food prices, drink prices, and energy costs are all up. Staffing shortages are widespread. UKHospitality reports that there are about 1.2 million vacancies.

That dearth created a capacity problem. Venues don’t fill every table because they don’t want to give poor service. Businesses also want to avoid putting pressure on their staff so they don’t lose the ones they have. So operators are holding capacity back to try to give great service and maybe drive spend per head a bit.

Concurrently, since the start of the pandemic, there has been an 8% reduction in licensed pubs. That’s about 9,000 fewer restaurants and pubs than there were in 2020.

That decline in pub numbers might not be a bad thing. If the right pubs leave the market for alternative use, it allows the pubs in that local area to compete for the trade and hopefully make their business a little more profitable.

Have Britain’s pubs returned to pre-pandemic levels of demand or customer behavior?

They have not.

City centers are starting to pick up but still struggling compared with pre-pandemic levels. Few are making more money than they were before, but we’re seeing some good comparable numbers.

Flexible work schemes have a lot to do with the struggle. Data shows that London is the worst-performing big city across the U.K. for in-office workers. Glasgow, Edinburgh, Manchester, Leeds, Liverpool, Sheffield, Birmingham, Leicester, and Bristol all have a larger percentage coming to the office.

London businesses have lost that Friday night, which is a big night. On Thursday, everyone’s going home and staying there on Friday.

Suburban areas and market towns are different. Local pubs and restaurants are drawing neighborhood customers much more than city establishments. So, it depends on where you are.

Overall the sector still is below 2019 revenue levels even though some companies are showing promising profit increases.

What are your views on the various business models in the sector?

There are fully managed, craft union models, tenancies, and leases. Each has its place.

Craft Union is a managed operator contract where the person running the pub gets a turnover share. All the bills, the food, and the drink are paid for by a corporate owner. The person only has to put the staff in place and agree on an activity plan with the area manager. This model is an easy one to follow.

Long-term leases are another option. Typically these run for 10, 15, or 20 years and an operator runs a business out of a corporation’s real estate. Then there are tenancies. Under this scheme, the risk and reward are shared with the operator and the corporate owner.

These are mainly wet-led businesses with low sales. They’re the bottom end of the landlord-and-tenant businesses.

By using all these business models in conjunction, the larger corporations have flexibility and maximize the profit potential for every single one of their businesses.

How are pubs typically managing inflation?

Most big pub operations are passing food and drink prices on to consumers and absorbing the other costs. Then they’re mitigating the risk with things like menu engineering. That means they’re making decisions like: “This has 80 grams of peas. Make it 70 grams of peas. It’s got too many mushrooms — put one mushroom on there.”

They’re bringing in different cuts of meat, looking at food and drink package deals. The big operators have really big food teams so they can do a lot of this.

Operators in tenancy face similar issues but with less buying power. They’re really going to be squeezed on food inflation. In a lot of cases, expensive items will disappear from menus.

What is your detailed outlook for the industry over the next 12 to 18 months?

It’s a tough next 12 months in the sector. But it’s resilient. It’ll recover with time.

Big pub companies are going to dispose of their tail end to invest in their top ends or create value by moving pubs into Craft Union schemes.

Food businesses will continue to battle food inflation prices. Staff shortages and capacity limitations are key indicators. Sales will recover across the sector once that turns around. Some forecasts show that revenues will return to pre-COVID levels by the end of 2023.

About a third of pub owners have a cash crunch. That means a month or less of cash reserve. So if something happens and they need some cash, 30% have less than one month. Thirty-six percent have less than three months of cash reserves.

Nearly three-quarters have debt. Operators running single sites have £47,000 of debt they need to repay over the next two or three years. They must service £4,000 a month of debt, which is a lot of money if you’re not making very much.

Energy prices, food and drink prices, labor costs, and the value-added tax increase are their biggest worries going forward.

The World Cup later in the year should help wet-led businesses in the middle of December. If England gets to the final, which is a week and a half or so before Christmas Day, that could have a real impact.

About Paul Pavli

Paul Pavli is an independent consultant who serves as an advisor at Pos8 Fetch and a volunteer business advisor at All Together. Before this, Paul spent 14 years at Punch Taverns, most recently as Managing Director. During his time with the company, he was also Operations Director and Divisional Director, among other roles.

This hospitality industry article was adapted from the GLG Teleconference “Stonegate Group — Performance Analysis and Outlook.” If you would like access to events like this or would like to speak with hospitality industry experts like Paul Pavli or any of our approximately 1 million industry experts, please contact us.

Questions Asked During the Teleconference:

• Could you provide us with an overview of the current state of the pub industry in the U.K.?
• To what extent have we gone back to pre-pandemic levels in terms of demand or customer behavior?
• How, then, did Stonegate overcome the crisis compared with the rest of the industry?
• Could you give us an update on the size of the pub market in the U.K. and how Stonegate is positioned?
• Could you give us an overview of the business model, the different operating models, and geographical footprint?
• What are your views on the various business models in the sector?
• Can you take us through the Craft Union hybrid model?
• Who are Stonegate’s existing key competitors?
• How are labor shortages impacting operators like Stonegate?
• What do you make of Stonegate reportedly exploring the sale of a 75-strong portfolio?
• What are your views on EI’s acquisition by Stonegate in 2020?
• Could you discuss the acquisition or divestment strategies of the key players in the sector?
• How are pubs typically managing this cost inflation?
• What are the key risks facing pubs soon and Stonegate more specifically?
• What is your detailed outlook for the industry over the next 12 to 18 months?