As we leave the interminable months of January and February behind and adopt a forward thinking approach with cautious optimism, we face an international year of general elections around the world including the UK and the USA. There are 65 scheduled worldwide for this year and this is a large number that will not happen again until 2048. If you are an avid pub quiz expert this may crop up as a question.
The most influential economic topics in the UK remain the prospect of falling inflation and lower interest rates. There are likely to be some Government giveaways in the Budget around tax reductions although this will continue to be set against the wars in Ukraine and the Middle East.
Whilst it is true that there are a shrinking number of pubs, this sector remains a resilient part of the British landscape and the economy. The relatively low cost of entry for a fully fitted business with living accommodation included remains an attractive option for prospective tenants who wish to run their own business in communities around the UK.
Whilst there may be some further sector consolidation, the acquisition activity around small groups of pubs with tenants in situ demonstrates the perceived value by the likes of Red Oak, Punch and Valiant. It is likely there will be more transactions in this sector during 2024 and this should bring fresh investment for pubs that require some tender loving care and hopefully reinvigorates neighbourhood pubs.
If we focus on pub numbers in the UK - the key trend to pick out from the graph below is that whilst overall numbers are down, this has stabilised, and crucially bigger pubs (with more than 10 employees) have actually been growing.
The Pub’s Code, which came into force in July 2016, certainly brought about change in the sector and was influential for the first few years, as tenants considered their Free of Tie (FOT) options under the Code and the Pub Owning Businesses (POB) made sure they were fully compliant. The unexpected intervention of COVID seemed to bring the two sides together and the POBs made £360 Million available to their tenants in the way of reduced rents and costs. Both sides have worked hard at their landlord and tenant relationship as pub partners. This is reflected in the statement from Emma McClarkin, Chief Executive of BBPA - “the partnership model is the backbone of the British pub sector”. There were no changes made to the Code in 2023.
In the managed sector of the market it seems that well-funded companies with manageable levels of debt and strong operational skills have been able to grow sales on food, drink and rooms as well as improve gross margins, although set against the backdrop of the rising labour and utility costs that have been a bugbear for all. It looks as though 2024 will continue to see further selective acquisitions in this sector. The following graph depicts the labour challenge that the hospitality sector has been facing. When comparing the vacancy rates of the whole economy versus food and accommodation services; the key trend is that this is still a challenge – although the pressure is easing.
Some pressure may be brought to bear on those companies that have higher levels of debt to service, with higher interest rates to add to the other cost burdens that already exist. There are already a few examples of this on the market.
There appears to be a cautious level of optimism this year that hopefully will be reflected in lower interest rates and lower inflation. At the very worst, if these matters are to be debated at length - let’s hope these discussions can be held in the comfort of a British pub.