The Two Rivers retail park in Staines does not look like a traditional site for a pub. It is a sprawling collection of shopping outlets at the edge of the M25, without a residential street in sight. But pub company Mitchells & Butlers opened a Harvester there in late 2010, the precursor to a £16.5m expansion in retail and leisure parks across the country in the weeks leading up to Christmas.
“We’re really more like a brasserie,” said Steve Cash, director of brand operations, alluding to the Harvester’s non-traditional pub interior: blonde-wood, soft lighting and an all-day salad bar. “The pub is just a stage-setting.”
Amid a backdrop of flat beer sales, the sector’s health in 2012 depends on the answer to a question deemed peripheral by many pubs less than a decade ago: will people continue to eat out?
The most overtly food-led of the pub chains – Marston’s, Greene King and Mitchells & Butlers – are making a combined £227.5m this year in food-led capital expenditure. Increasing food sales is crucial to earnings growth and servicing an average sector debt load that stands roughly five times earnings.
According to the consumer research group NPD, pub meals (including drinks sold with food) account for some £9.8bn of an eating out market worth an estimated £45bn per year.
Coffer Peach Business Tracker, which collects data on dining habits, said pubs’ share of the dining market is growing.
Last year pub chains outperformed restaurants by approximately 2 per cent in every month except one as hard-up consumers traded down from restaurants. By contrast so-called “wet” pubs, which rely on beer sales, account for around half of total pub closures – an average of eight per week – according to pub campaigners Camra.
Highly leveraged companies which mostly consist of tenanted estates – deriving their income from rent and beer sales instead of food – are finding trading more difficult.
“Companies like Punch Taverns and Enterprise Inns are between a rock and a hard place,” said Paul Leyland, an analyst at Liberum. “They need a soft cost environment to justify rent increases – but if that tenant struggles in trading, then it will hit the companies’ bottom line either way.”
The food-led pub companies argue that their prospects are much rosier. With food inflation widely expected to moderate downwards from 2011, pub companies with managed estates argue they can maintain cheap prices – a main meal in a Hungry Horse pub starts at £3.99 – and protect margins.
Rooney Anand, chief executive of Greene King, echoed many of his food-led peers when he said consumers would not cut back on the “everyday indulgence” of a pub meal.
Critics are not so sure.
“The pub companies can’t have their cake and eat it: if input costs decrease it’s due to slower economic growth which will hit consumers’ pockets and affect footfall,” said Mr Leyland. “We’ve been lulled into a false sense of security that food grows – but common sense tells you dining out is a cyclical activity.”
That has not stopped Marston’s from trying to redefine pubs so customers think food first and beer second. “The idea people have of a pub, what it is and who it caters to, is changing,” said Ralph Findlay, Marston’s chief executive.
Over the past two years the company has spent £55m-£60m building 25 pubs per year for what it calls “food-led occasions”. In 150 pubs Marston’s has introduced full table service.
Can we soon expect a maître d’ at the local Dog & Duck?
“We call them greeters – someone who meets you at the door and takes you to a table where you can order drinks and food,” said Mr Findlay. “Of course there’s a bar, which you can use if you want, but you can spend the entire time in the pub without going to it.”
However, the increasing focus on food could lead to a new problem for the industry – oversupply.
Paul Hickman, an analyst at Peel Hunt, said: “It will be difficult for pubs to put clear blue water between themselves and the competition.”