‘Unprecedented’ cost pressures for beer boss

The Fuller's Griffin Brewery in Chiswick, west London. Pic: FS&T

These are difficult times for the pub industry.

The rate of closures has slowed down, from 29 per week several years ago to 21 per week now, but trading remains tough.

Pub prices remain high compared with cheap supermarket beer, while the competitive threat from supermarkets is exacerbated by the fact that food sold in pubs is subject to VAT, while food sold in supermarkets is not.

Many regular drinkers, who were driven away from pubs by the smoking ban in 2007, still prefer to drink – and smoke – at home.

Business rates, meanwhile, remain such a perennial bugbear that the Treasury has had to provide pubs with specific reliefs – renewed this week by the Chancellor in his Budget – to help dull the pain.

London, United Kingdom - July 6, 2016: HM Revenue and customs forms background with British currency coins. HMRC is the department of the UK government that is responsible for the collection of taxes.
Small firms 'need a break on business rates'

Societal changes have also contributed, including a switch from beer to wine among many drinkers and a drop in popularity among younger consumers, with one in six people aged between 18-25 thought to be teetotal.

And now, with earnings growth again starting to lag inflation, disposable incomes are again under pressure.

There is an additional factor in London. The Economist magazine recently published analysis showing that pub closures in the capital had been particularly marked, which it said was partly because London was over-saturated with pubs to begin with and also because of the growing concentration in some boroughs of Muslims, whose religion forbids them from drinking alcohol.

Under those circumstances, Friday's half year results from Fuller, Smith & Turner, the Chiswick-based pub operator and brewer of beers such as London Pride, are pretty creditable.

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Half year sales rose by 6%, to £209.3m, while pre-tax profits on an underlying basis rose by 4% to £23.8m.

Within that, sales and profits in Fuller's managed pub and hotel business, which now account for almost two-thirds of group profits, were up by 7% and 6% respectively.

Sales in the brewing operation, whose other brands include Honeydew, Seafarers, ESB and Frontier Craft Lager, were up 5%, but operating profits fell by 13%, which the company blamed on increasing marketing spending and a pincer attack from rivals.

At one end of the market, the global mega-brewers have been cutting prices aggressively, while at the other, independent craft brewers have been benefiting from lower levels of beer duty than their larger rivals. So Fullers has been caught in the middle.

Yet the pressure is still there. Simon Emeny, the chief executive, pointed out on Friday: "The last six months have seen some unprecedented influences on the business, not only in our particular industry, but in the context of the wider UK economy and global political scene.

"I cannot remember a time when we have faced such an array of additional cost pressures, particularly in our managed pubs, starting with the 26% rise in business rates. The pub sector is now responsible for 2.8% of the total business rates bill, despite only generating just 0.5% of total turnover.

"Over and above this increase, we have met with rises in the Apprenticeship Levy and Living Wage rates."

Fuller's is not the only pub operator warning of tough conditions. On Thursday, Mitchells & Butlers – owner of the Miller & Carter, Toby Carvery, All Bar One, O'Neill's and Harvester chains – announced it would not be paying a half-year dividend next year, flagging higher costs as a result of the drop in the pound, while also warning that it could face staffing shortages depending on changes to immigration and employment laws as Britain leaves the EU.

There was this warning, too, from the pub operator Youngs, last week: "The political environment remains predictable and this ongoing uncertainty is unhelpful when it comes to the strength of the broader economy." It, too, flagged concerns over Brexit.

But are pub customers really being deterred from popping to their local due to fears that Michel Barnier, the EU's chief Brexit negotiator, may be putting one over on David Davis?

Tim Martin, founder and chairman of JD Wetherspoon and a vocal supporter of the Leave campaign, made this observation earlier this month: "Statements have been made by some senior PLC directors and trade organisations which are factually incorrect and highly misleading.

"Unsurprisingly, the misinformation has been adopted by many among the media, investors and the public as if it were true."

Yet even Mr Martin, who says Wetherspoon is ready for Brexit, admits costs have been "significantly higher" than last year, with further increases expected in labour, business rates, utilities and sugar taxes.

Others warning recently on tough trading conditions include Marston's, the pub operator and brewer of beers including Pedigree, Hobgoblin and Thwaite's Lancaster Bomber, which warned last month of "subdued market conditions".

And Greene King, Britain's biggest remaining combined brewer and pub operator, warned in September that it expected "the challenges of weaker consumer confidence, increased costs and increasing competition to persist over the near term".

The message is clear: Britain's pubs are having a tough time of it. And the relief offered by the Chancellor this week, offering a £1,000 discount on business rates for pubs with a rateable value of under £100,000, may not be enough to stop that pub closure rate accelerating again.

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