Stonegate Pub Co. spent about £1.3 billion ($1.6 billion) buying rival Ei Group just before the pandemic, becoming Britain’s biggest pub group.
(Bloomberg) — Stonegate Pub Co. spent about £1.3 billion ($1.6 billion) buying rival Ei Group just before the pandemic, becoming Britain’s biggest pub group.
Three years on — and with a £2.6 billion debt pile — the owner of the Slug and Lettuce chain is ready to scale back. Stonegate, owned by private equity firm TDR Capital, plans to sell 1,000 of its pubs, or more than a fifth of the total, for an estimated £800 million, people familiar with the matter said.
Like chains across the UK, the pub giant has struggled to make up ground lost during the pandemic, albeit the sale is aimed at paying down its debts. Soaring energy bills, persistent labor shortages and decades-high inflation are driving up costs, while some customers are choosing to drink at home.
“The biggest concern is energy,” Ian Payne, Stonegate’s chairman, said in an interview. “We know what we’re going to pay in February and March, but we still don’t know what we’re going to pay beyond that.”
A Stonegate representative declined to comment on the potential sale.
Costlier goods, coupled with a shift in consumer habits post-pandemic, have put the sector in crisis. JD Wetherspoon Plc, led by founder Tim Martin, said last week that it’s trying to sell 35 pubs. “Recessions are a doddle in comparison” to the pandemic and its aftermath, he said by phone.
For 43 years, Martin has lured punters to JD Wetherspoon with cheap pints and no-frills food. He recounted a worrying story from the manager of one of his pubs in Somerset, who said many regulars were switching to drink at home and only popping by for a top-up, or a bite to eat.
Wetherspoons isn’t alone. Pubs across Britain are facing higher beer and food costs from their suppliers, while their customers are being squeezed on all fronts by inflation. Pub chain Fuller, Smith & Turner Plc recently warned on profits, blaming rail strikes for lower sales before Christmas.
Closing Down
For many publicans, the challenges are too great. More than 4,800 licensed premises closed last year, according to this month’s AlixPartners CGA Hospitality Market Monitor. That amounts to 4.5% of the total number in the UK, which includes restaurants and other licensed venues. Closures accelerated in the final quarter.
Emma McClarkin, chief executive of the Beer and Pub Association, said the number of businesses failing was accelerating at a rate faster than during the pandemic. “We’re still seeing working from home, with people not coming into cities five days a week,” she said.
Ralph Findlay, who led the pub group Marstons Plc for 20 years until 2021 and is now chairman of drinks producer C&C Group, said prices had gone up in pubs and bars, while volumes had come down.
“You’re probably seeing quieter pubs which are higher priced, and they’re having to do that to survive,” he said.
Publicans are quick to point out that the pub remains an affordable treat, but the average price of a pint has risen from £2.30 in 2008 to £3.95 last year, while in London some pubs charge more than £8. And it could rise higher still.
James Watt, co-founder and CEO of BrewDog Plc, a brewery and pub chain based in Scotland, said earlier this month that if beer prices were rising at the same pace as energy, a pint could cost as much as £27.50.
“I’ve seen more breweries, bars and restaurants than I can name go out of business in the past few months and that trend is only going to accelerate,” Watt wrote on LinkedIn earlier this month.
Even large businesses that benefit from economies of scale are feeling the pressure. In the case of Stonegate, which has about 4,500 pubs, its debt costs an average of more than 8% annually to service, according to Fitch Ratings.
The chain has appointed real estate investment bank Eastdil Secured to advise on its planned pub sale, which is likely to kick-off by spring, the people familiar said, asking not to be identified discussing private matters. Deal making is expected to recover in the spring from the shock of rapidly rising borrowing costs that effectively froze the commercial property market in the final quarter of last year.
A spokesperson for Eastdil declined to comment.
Margin Squeeze
Along with the higher cost of heating sites and paying staff, pubs are also being asked to pay more to their suppliers. This month, Heineken NV pushed through a 15.8% increase in the price of draught and packaged beer, which it blamed on “unprecedented cost increases” — including from glass, aluminum and malted barley.
While larger pub groups are often able to negotiate discounts, smaller groups and independents are often less fortunate.
Philip Thorley, the operations director of family-owned Thorley Taverns, which has 18 pubs in Kent, southeast England, said he’d been forced to lift prices between 5% and 6% last month. But even that didn’t cover the extra costs, including from Heineken’s increase. “We are having to absorb some of that to make sure we maintain our trade and look after our customer base,” he said.
The cost of 350 staff, paying bills on time and investing in his pubs has wiped out Thorley’s earnings. “Profit may well be the casualty of what’s going on at the moment,” he said.
For Martin at Wetherspoons, times have changed and not for the better. He said “50% of the pints that were drunk in pubs 40 years ago are now drunk at home.”
Wetherspoons’ gross margin has fallen from more than 26% in 1995 to 5.8% in 2022, according to data compiled by Bloomberg. “The only real way to increase margins is by getting a big increase in sales,” said Martin. “In an environment like this, it’s very hard to do.”
–With assistance from Dasha Afanasieva.
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