Can UK pub and restaurant stocks survive when they reopen?
Lockdown measures have kept UK pubs and restaurants closed for almost three months, but is there hope on the horizon as they are eased? We look at the opportunities UK pub and restaurant stocks could offer in the coming weeks.
By the time revellers were stumbling home on the night of Friday 20 March, virtually every pub, nightclub, café and restaurant in the UK had closed as the government announced the country was entering lockdown to stop the spread of the coronavirus.
The hospitality industry has been one of the hardest hit by the coronavirus. Although some have tried to adapt by offering takeaway or delivery services, most of the industry has had no option but to shut up shop entirely. Trade body UKHospitality has described the impact of Covid-19 as ‘devastating’ to the industry and warned around a third of hospitality businesses ‘will never reopen some sites’ as a result.
When will UK pubs and restaurants reopen?
The UK government is currently easing lockdown measures in phases and will only move to the next one when the science and the data suggest it is safe to do so. Subject to that, the plan is to start reopening the hospitality sector as a part of phase three, which it hopes to enter in July.
The date on the industry's calendar is 4 July, but the government is yet to review the situation and decide whether it is ready to reopen. However, there have been reports that some cabinet ministers are pushing for certain outlets, like those with more outdoor space, to start reopening earlier – as soon as 22 June.
The debate is over a matter of weeks, but that could prove crucial to both the rate that the virus spreads as well as the financial hit that the hospitality industry takes. The government is trying to balance the threat that reopening the industry will have on public health against the economic consequences that are building the longer it stays shut. The UK hospitality employs one in ten of the country’s workforce, over 3.2 million people in total, and, considering virtually all of them are being paid by the public purse, the government is keen to get them back to work and minimise any permanent job losses that will arise.
It is clear that both the government and the industry want to get the hospitality sector up and running again, and it looks like that will happen in the coming weeks. However, both will be aware that the nature of the industry – based on providing the exact opposite of social distancing – has the potential to spark a second wave and plunge the country into a second lockdown.
What challenges will pubs and restaurants face when they reopen?
It will not be business as usual when pubs and restaurants reopen. Every aspect of the operation will have to be assessed and adjusted to ensure it is safe for customers and staff. We can expect to return to some old habits. For example, bar service is out and table service is back in, while single-use menus and condiments will also be back in fashion. Small matters like how customers can go to the toilet or staff can collect empty glasses will cause big headaches for businesses. Outdoor spaces, where the threat of infection being spread is reduced, will become vital this summer, while dancefloors will be turned into extra seating space.
The difference one metre can make
The biggest concern as the industry prepares to reopen is how they can adhere to social distancing rules and remain profitable. Pubs and restaurants run on thin margins and many rely on volumes to survive. A city centre pub not only needs a bum on every seat but for the bar, stairs and every other available space to be occupied. Volumes are key, but keeping everyone two metres apart means they will have to operate at a reduced capacity. A small café or restaurant may only be able to safely cater to a couple of covers at a time.
With this in mind, the industry is calling on the government to implement a one-metre distancing rule for pubs, restaurants and other hospitality businesses. Scottish brewer BrewDog has said its sites would be able to operate at 70% to 75% their usual capacity if a one-metre rule was in place, but that drops to just 40% when a two-metre rule is in place. Loungers, which runs 167 cafés, bars and restaurants across England and Wales, has also said there is a ‘marked difference between one metre and two metre distancing’, and warned that a two-metre rule could make its more compact sites unviable.
The calls for a one-metre rule have been underpinned by Sweden and Denmark. Sweden is the outlier when it comes to responding to coronavirus as it has not imposed any lockdown measures, which means its hospitality sector is continuing as normal. Denmark halved its social distancing rule to one metre when it entered the second phase of easing its lockdown. Comparing the UK to either of those countries is difficult and nobody knows whether or not a one-metre rule risks igniting a second wave of the virus, but, as far as the industry is concerned, it is a risk that has to be taken to protect jobs and survive. At two metres, pubs and restaurants can’t function properly or make any profit but, at one metre, they might have a fighting chance.
UK pub and restaurant stocks to watch
All of the major UK pub and restaurant stocks have had to take similar action as a result of the lockdown. The uncertainty over when they can reopen means guidance for this year has been withdrawn. The vast majority of workers have been put on furlough, most boards have taken pay cuts, spending has been cut across the board, and dividends have been cancelled or postponed.
We have a look at some of the top stocks to watch as they prepare to reopen.
- JD Wetherspoons
- Mitchell & Butlers
- Restaurant Group
- Fuller, Smith & Turner
- Revolution Bars
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JD Wetherspoons, run by its founder and chairman Tim Martin, has caused a stir during the lockdown. Martin has been among the harshest critics against the government’s reaction to the coronavirus and the closing of pubs, while the company has also drawn criticism about the way it has treated staff during the crisis. Earlier this year it said that profits would be below expectations ‘so long as the current health scare continues’. It raised £141 million through a placing in late April as a ‘precautionary’ measure to bolster its balance sheet.
The company said in late April that it expected to start reopening sites in late June, assuming it is allowed to do so. Wetherspoons has said its principal assumption is that initial sales will be 15% lower than pre-crisis levels when it reopens and that total sales in the year to the end of July 2020 will be down 26%.
Wetherspoons believes it has an edge over most of its competitors. Most of its sites are larger in size, boast garden areas and can already be served by its table-service app that has been in use for years. Its average weekly sales are much higher than the industry average, which gives it ‘some scope for profits at reduced sales levels’. It believes it can be cashflow neutral even if it has to cut capacity in half. Plus, if there is longer-term economic hangover from the coronavirus then its position on pricing may also go in its favour as people may be more inclined to search for a cheaper pint if their finances are in bad shape.
Mitchell & Butlers (MAB.L)
Mitchells & Butlers runs 1700 pubs and restaurants in the UK under a string of well-known brands including O’Neills, Toby Carvery, Harvester, All Bar One, and Miller & Carter. The company said it expected a ‘significant reduction in our expected outturn for 2020’ as it prepared to shut its sites.
The company is one of the few that is yet to tap the markets for additional money to prop the business up through these tough times, but it may have to in the future depending on how long lockdown lasts. It has said that its balance sheet should be sufficient to fund the business 'well into the second half '(H2) of the financial year that runs until the end of September 2020. It reported £1.56 billion of net debt as of 28 September. Fortunately, it has already secured key waivers to its covenants from its lenders, which should give it some breathing space.
‘Great uncertainty remains not only as to the extent of the current shutdown but also the profile of any reopening and recovery period back to normality,’ the company said on 14 April. It is yet to unveil any plan on when or how it could reopen.
Marston's operates a range of pubs, taverns and inns as well as a brewery. The company was already trying to reduce debt before the coronavirus came around, and has now built on its existing plans by cutting costs further across the business. It has also raised the number of disposals it will achieve this year from an original target of £45 million to £85 million to £90 million in order to drum up some vital cash for the business. It too has secured waivers from its lenders and additional headroom from the banks, underpinned by its large property portfolio as it owns 93% of its estate (rather than leasing from somebody else).
Marston’s has also unveiled a major deal for its brewing business that could help the company. It announced in May that it will combine its brewing business with Carlsberg’s UK operation to create a ‘brand-led UK brewer and distribution company with increased scale and resources’. It will be set up as a joint venture with Martson’s owning 40% and Carlsberg UK owning the other 60%. Importantly, Carlsberg will pay Martson’s up to £273 million as an equalisation payment, which it plans to use to ‘materially reduce debt’. This will also allow Marston’s to focus on the pub business while retaining exposure to a new brewing business. The pair are hoping to close the deal in Q3 of 2020, when it hopes the industry will have began to reopen to give its new venture a kickstart.
Restaurant Group (RTN.L)
The Restaurant Group runs over 650 restaurants and pub restaurants under several well-known brands, led by Wagamama, Frankie & Benny’s, Chiquito and Brunning & Price.
In April, it said it assumes ‘that we would be extremely disciplined in the phased reopening of our restaurants through July 2020 to December 2020 and would expect to reopen around 400 of our 600 restaurants and pubs across that period, potentially with some restrictions on operations immediately following lockdown.’
Under that scenario, the company warned that like-for-like (LfL) sales could be down as much as 60% in H1 of 2020, but that a reopening would result in a 30% decline in H2, levelling out at a 45% drop for the year. It is also important to note that it has a substantial concessions division that trades in UK airports, which have the additional burden of being exposed to the travel industry grinding to a halt. Even once the economy reopens in full the travel industry is expected to suffer a bigger hangover than even the hospitality sector, so this part of the business could experience a longer downturn than the wider business. It expects concessions to still see LfL sales to be down as much as 31% in H2 of 2020.
It said it would cost around £5 million for every month its outlets have to remained closed and, after raising £57 million in a placing at 58p each in April, it should have enough to weather even a lengthy storm.
Fuller, Smith & Turner (FSTA.L)
Fuller Smith & Turner runs 400 managed and tenanted pubs throughout London and the South East, as well as a number of hotels. The business has said the impact of the coronavirus ‘cannot be underestimated’ and has said ‘steps have been taken to minimise all outgoings and to preserve cash’ while sites remain closed.
The company has consistently stressed that it has an ‘excellent’ relationship with its lenders and has a ‘healthy balance sheet’. Yet that has not stopped it scrapping its dividend and securing new debt as a result. Its last reported net debt figure was on 28 September and sat at £118.8 million, equal to about 1.7 earnings.
Loungers operates 167 cafes, bars and restaurants in England and Wales under two brands: Lounge and Cosy Club.
Unlike most of its peers, it has already reopened around 27 Lounge sites for takeout to keep some cash coming through the door. It has said that this move ‘won’t move the dial financially on a standalone basis but could potentially provide a further revenue stream when re-opened, as well as providing a service to anyone who is less comfortable eating out.’ It contemplated launching a delivery service but said it isn’t appropriate for the business.
On 4 June, Loungers said it was officially ‘preparing for re-opening’ of the majority of its portfolio in early July and is confident of a quick recovery. It said a survey of its customers showed the ‘vast majority … are looking forward to returning’ and claims just 2% of the 6000 respondents said they won’t be comfortable drinking and dining out once lockdown ends. It has had to make a U-turn on previous attitudes, like its view that table-order apps were not suitable, and limiting the menu to make it safer for kitchen staff. It is also one of the latest businesses that has said it will go cashless when it reopens to stop the virus from spreading.
‘Due to the size and layout of the majority of our sites and the spread of our trade across the day parts, we anticipate being able to trade profitably with distancing rules in place,’ said Loungers.
It also struck a confident tone about the possible long-term implications of lockdown, such as more people working from home and less people commuting into city centres. The fact most Loungers sites are in suburban and market towns means it expects to ‘benefit from more home-working’.
After securing additional debt and raising £8.3 million in a placing priced at 90p per share, Loungers has said that it has ‘sufficient liquidity in the event that Covid-19 materially impacts the company's sales into 2021’. It has also struck a bullish tone by saying it plans to continue with its expansion once it can.
Revolution Bars (RBG.L)
Revolution Bars, runs 74 sites under the Revolution and Revolución de Cuba brands. Although it is by far the smallest player on this list, it looks like it has the resources it needs to survive. After its banks gave it extra headroom and it raised £15 million at 20p per share – a huge 42% discount to its share price at the time – the company should have enough to see it through these tough times considering it is costing it around £1.6 million for every month it remains closed. Net debt stands at around £22 million and Revolution says it ‘is confident that the group will have sufficient liquidity for the foreseeable future, even taking into account the board's downside Covid-19 trading scenario’.
Notably, Revolution Bars also took the opportunity to move its listing when it raised funds from investors, delisting from the main market and moving to AIM. Although it has said it shouldn’t need any more funds anytime soon, it is clear that it wants to raise more equity in the future, stating the move to AIM ‘enables quicker and cheaper fundraisings and is a more appropriate listing venue for the company in the long term’.
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