Shares digital

Fire without smoke? Can Wetherspoon’s cook up a plan to combat the ban on lighting up and other challenges?

by Simon Keane

It was definitely an awkward pause. Albeit for a couple of seconds, the subject of Tim Martin’s views on binge drinking and celebrity culture, had temporarily stumped JD Wetherspoon’s finance director Keith Down.

Martin, the pub group’s chairman, had recently blamed drunken celebrities as featured on our television screens and in newspaper gossip columns for inspiring copycat behaviour in pubs. I put it to Down that the public perception has Wetherspoon’s cheap drinks as the real culprit.

After the pause came: ‘Tim has his own views on celebrity culture, these are his own views. I think Wetherspoon is a responsible licence holder. There are a number of reasons why drinking could be a problem but the vast majority are cultural.’

So, was he trying to distance himself from Martin’s comments? ‘No. I think what Tim is saying [is] it’s a wider social issue and there are lots more factors at play, more than pubs and licence holders and that includes the way that the media portray celebrities and cheap and available beer from supermarkets.’

What did he mean by referring to Martin’s ‘own views’ then? ‘It’s his statement, I don’t think he’s blaming our celebrities per se.’ Mmm, ‘his statement’ seems different from ‘his views’ and yes, while Martin did mention parents ‘collaborating’ in enabling their children to drink, his interim results tirade didn’t refer to cut-price supermarket drinks.

It seems strange for management to diverge on binge drinking, surely a key risk for the pub sector. But binge drinking is just one of a list of challenges facing Down and his fellow directors. Like other pub groups they’re grappling with the smoking ban, a deteriorating consumer outlook and rising raw material and marketing costs. That’s before mentioning silly alcohol discounting at supermarkets (set to step up a gear with the Euro 2008 footie festival due to kick-off 10 June) and the chancellor Alistair Darling slapping an extra 4p duty on beer in last month’s budget.

Experience of tough markets

Despite the considerable challenges facing him, Down comes across as a man on top of events. The back room of the City-based Wetherspoon pub in which we meet is a world away from much of its surrounding area, where some of the swankiest, and most expensive, City office blocks imperiously stand.

Sitting relaxed in a white open-necked shirt, Down clearly does not need to hide behind typical business uniform or a huge oak desk.

Down clinically rebuts my suggestion that, at 43 years old, he’s not sufficiently battle-hardened to face a threatening recession. And he’s having none of it when I suggest a background in groceries (he joined Wetherspoon from Tesco – which, incidentally, bought out his corner shop operating former employer) doesn’t mean he can run a pub group, that a lack of direct experience must be a weakness.

‘I’ve worked in tough markets before; I think the convenience market was already a tough market,’ says Down of his time as director of financial operations at T&S. ‘Mayfair (referring to his time at Mayfair Vending) suffered a significant downturn in volumes and what [I] learned is how important cashflows [are]. I am well capable of handling anything the next few years can throw at me.’

Even when I rib him about the huge amount of ice in my Pepsi (is this a deliberate strategy to cheat customers?) he refuses to rise to the bait, reasonably pointing out, that I could have asked for no ice.

Returning to more serious issues, Down, who joined Wetherspoon on 9 January this year from Tesco, where he was commercial finance director, responds well. After reeling out the list of negatives currently conspiring against the pub industry, I put it to him that Wetherspoon’s six-month outlook is dreadful.

‘We would say that the next six months will be difficult but we are confident that as [we] go into next year [we] will be well-placed to get back into growth,’ he replies. ‘Wetherspoon is a value option [with] good-quality food, if there’s a limit in terms of peoples’ expenditure, Wetherspoon will be well-placed and I think the market is coming to us. I think people will still want to go out and eat and to have a drink.’

So, why, rather than increasing prices to offset rising costs, is he cutting prices by running promotions such as the £4.49 ‘Beer & Burger’ offer, I ask: ‘We find that actually we can be just as profitable running high-volume deals [as this] helps us cover our fixed costs and attracts a different type of customer at different times of the day.’

Fishing for revenue

Indicating the promotional leaflets propped up on neighbouring tables, Down continues. ‘At the moment our fish and chips £2.99 [offer] is driving trade we would not normally have between 2pm and 5pm, so while the margins aren’t as good as other meals it’s all incremental sales. We have invested huge amounts in the kitchens ahead of the smoking ban to produce high-quality [food].’

No-one in the City questions Wetherspoon’s new focus on food. Even after disappointing first-half sales, translating into a 3.1% fall in like-for-like profits, which was worse than analysts had expected, the majority continue to support this strategy. So, while drinks sales, taking a hit from the smoking ban, may be in free fall, analysts point to rising food sales (up 9.7% in the first half). Look through the short-term pain, they say, and 2009 is promising as Wetherspoon continues to expand into smaller towns.

But should Wetherspoon be opening any pubs in today’s market? (The estate was at 681 at the half year point). Given the worsening economic outlook – Laurel Pub Company recently going into administration – wouldn’t it be sensible to batten down the hatches and focus on improving the existing estate? ‘We originally planned to open 30 pubs and scaled that down to 23,’ comments Down. ‘We are still profitable and cash-generative and still feel that we can open 20-30 pubs a year within the cashflow and grow organically.’

What about supermarket discounting? The grocers are selling alcohol at half on-trade prices, and this is particularly damaging for pub operators at the lower end of the market, such as Wetherspoon. What is Down’s answer to this? ‘From what we find, drinking in pubs is a social experience that [people] are willing to pay a little bit more for. I can hear what you’re saying about supermarkets impacting wet-led pubs, but what we are able to offer is that as food prices increase we may become a more attractive option compared with eating a ready meal, which may not be different in price .’

I put it to Down that never having previously worked at a pub group must be a weakness. Down points out that, when he worked there, Mayfair was a supplier to Wetherspoon. He draws parallels with Tesco’s ‘value offer, very competitive,’ and T&S, which was a ‘very similar business [with] 100 shops quite widely spread geographically’ where you need to ‘focus on poor performers’.

Unseen on screen

One of the criticisms of Wetherspoon is that sales suffer during football championships due to a lack of television screens. Is he doing enough to protect sales around Euro 2008, albeit England won’t be making an appearance? ‘Where we think it does work we put television screens in place and do have Sky Sports in some pubs. As a general rule our customers welcome the fact that it’s a quieter environment with less noise. On balance we find that, when we put music or television in, it drives away more customers.’

There is a perception in some circles that he is behind the curve in moving from analogue to server-based machines. (Richard Carter, analyst at Numis – ‘Every ten to 20 weeks they have to move the machines around, but [with] a server-based system [games can be changed] at the click of a button from a central server.’)

Down is ready with an answer: ‘We are trialling different parts of the market. The market is moving away from analogue to server. It does not necessarily mean that, just because other people have [switched], there is a proven market. We will test before rollout.’

On the subject of the company’s antiquated electronic point of sales (Epos) machines, Down has better news. In a recent interview with Accountancy Age, Wetherspoon chief operating officer Paul Harbottle identified the company’s ‘obsolete’ Epos system as a weakness in the supply chain. The problem being that the Epos system can’t be linked to systems at Wetherspoon’s Daventry warehouse, meaning a lack of real-time information on sales to help with planning. This is a serious handicap, I suggested to Down.

‘We are looking to roll out over the next year a new Epos system, which will help provide the functionality we need,’ he shoots back. ‘It’s a pilot, [we’ve] got about 17 of the pubs working on the new system.’

Wetherspoon has taken the policy to fix some of its key costs (derivatives are used to fix interest payments and long-term contracts entered into to fix utility prices). Only a couple of years ago energy prices spiked but then came off rapidly, meanwhile base interest rates are only going one way – down. Doesn’t Wetherspoon risk missing out by fixing forward prices now?

‘As far as the interest rates are concerned, the long-term interest rates we took out were at historically low rates. Rather than worry about short-term fluctuations, [we] wanted the stability over the longer term, over which we will be judged whether [it was] a good decision, but [we] feel in the current environment that should benefit us.’

Down has a self confidence that is difficult to knock. Perhaps he, Martin and the other directors, need to tighten up a unified line on binge drinking, but this looks a minor wrinkle that will be ironed out soon enough. In the meantime, shareholders can be assured that his is a steady and reliable hand on the financial purse strings.