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From property to proposition: the shifting landscape of the pub sector

Pubcos and Brewers recognise the importance of proposition yet many remain property-led. Leaders need to decide which direction to take: our thoughts on the way forward.

The pub sector is changing. We’re seeing increased disruption, yet the rate of closures is starting to slow, and like-for-like sales are on the rise. The major Pubcos and Brewers are beginning to recognise the importance of proposition and yet many remain fundamentally property-led businesses. We believe it’s time for leaders to decide which they want their business to be, and act accordingly to thrive in this increasingly competitive market.

A promising outlook - sales growth and slowed decline

The pub sector continues to be in overall decline, but this downward trajectory is starting to plateau. Over the past 5 years we’ve seen a -11.3% drop in the number of pubs and bars, yet in the past year this has decreased to -2.4%. Historically, drinks-led venues have driven this decline whilst food-led pubs remained in some degree of growth, but things are starting to change.

Like-for-like sales were up 5.1% over the Christmas period, with drinks-led operators leading this growth. Full year figures also suggest a promising trend, thanks in large part to the trend for premiumisation and craft growing margins but not forgetting the positive impact that the World Cup and the long hot summer will have had on sales. It’s going to be a difficult year to compete against, and with weather having such a big impact on sales we only expect its increasing unpredictability to present more of a challenge in the future.

A changing landscape: Growth in managed estates and M&A activity

We’re starting to see a shift in operating models, with an increase in managed pubs (+11%) and a decline of both independent and leased or tenanted venues (-2% and -23.3% respectively). Independent pubs have maintained market share while leased/tenanted venues are losing share to managed brands. Whilst a large proportion of this is due to closures of underperforming sites and the emergence of new managed brands, the major Pubcos and Brewers have also contributed to the growth in managed operations.

Several operators have reported improved like-for-like sales across their managed estate in recent months. Most notably, in their quarterly update (Nov-Jan) Ei Group announced a 5.7% increase in like-for-likes across their managed estate, compared to just 2% in their leased and tenanted businesses. This is both cause and effect – operators are looking to grow their managed estates as they see uplift in sales across this category, and sales improve as operators invest in and manage sites more closely.

Following this update, Ei Group said that they will continue to expand their managed estate through conversion of existing leased businesses. Ei have so far converted 43 sites and plan to convert a further 62 this year. Other large Pubcos and Brewers have been increasing their managed estates through acquisitions of smaller brands and individual sites. A few notable additions in this space include Fuller’s acquisition of Dark Star Brewery and Bel & Dragon, Stonegate’s purchase of Be At One, and most recently Young’s takeover of Redcomb Pubs.

The managed sector is growing, but why is this happening?

Historically, pubs were all about footfall – have a property in the right place and customers will come. However, in an increasingly competitive market where consumers are ever more discerning, to win you need either a highly differentiated, or strong and focused proposition. This is why new entrants such as Brewhouse & Kitchen, Drake & Morgan and New World Trading Company are flourishing. To date these brands have had an excellent understanding of their consumer and been quick to react to trends in the market. These brands are the disruptors in the sector, challenging incumbent growth.

To compensate for this disruption, many operators have switched their focus to having a more effective operating model and a solid proposition. However, when most of your business operates through tenants or franchisees this can be challenging, so several businesses have started increasing their control over the estate by growing managed operations.

Whilst many are looking to increase their managed estates, most don’t have the capability or capacity for innovation in house and so have turned to acquisitions as a way of focusing more on proposition without having to adjust internal structures or ways of working. However, maintaining the strength of a brand whilst incorporating it into the parent company is challenging, you run the risk of diluting the newly acquired brand and disrupting central operations.

It’s time to decide if you’re a property or proposition-led business, and act accordingly

The rise in managed venues highlights that many of these large-scale operators are starting to recognise the increasing importance of customer and proposition in driving top line growth.

Despite the recognition that proposition holds increasing importance in a competitive market, the response seems to be more reactive than proactive. There comes a point where this type of behaviour is unsustainable, and a decision needs to be made. If you’re going to start creating competitive advantage through focus on the proposition, a fundamental shift in your strategy is needed.

Here are a few things to consider if you’re making this shift:

1. You need an operating model that can flex and meet demand: As we see a shift to increasingly large and varied estates, sites need to be treated individually to ensure they can compete with competition and meet local customer needs. To do this, businesses need to create an operating model that allows for adaptation and experimentation, whilst empowering front-line teams to deliver this.


2. Flexibility can’t come at the detriment to maintaining a focused and differentiated brand: The emergence of several highly differentiated and specialist brands has caught the attention of both investors and Pubcos alike. Their individuality and uniqueness sets them apart from the competition, so maintaining this whilst growing is essential to sustaining competitive advantage. Many larger companies have fallen into the trap of stretching their proposition to appeal to more customers, with the result of appealing to no one.


3. Never lose sight of your customers: Consumers are increasingly well informed and expect more from the brands they use, keeping up with their evolving habits and needs is essential for success. This is something small and independent players are good at but remains a challenge for larger companies. Maintaining regular conversation with your customers and front-line staff who interact with them daily should be a central part of your strategy.

4. Using your scale to deliver added value to the consumer: Big brands can use their scale to win. There will always be room for good value, reliable and familiar pubs and bars, something independents can’t compete with. Big brands must use their scale to deliver added value to the consumer, and this does not mean just by lowering prices.

5. Develop an approach to innovation, and maintain it: Big businesses find it very difficult to innovate successfully but market conditions mean it is increasingly important that they do so. Many companies are investing in this area but often fail when it comes to implementation or sustaining creativity. It is vital that you create an environment that encourages creativity, embraces failure and develops new ways to measure success.

Conclusion

Despite a tough trading environment in the pub sector, the outlook for 2019 appears to be brighter. We’re starting to see a shift in operating models, demonstrated by the rise in M&A activity across the sector, and growth of managed estates. The threat by smaller, highly differentiated brands has caused disruption in the industry and has pushed proposition and customer front of mind. However, with many of the big Pubcos and Brewers set up to deliver on a property focused strategy it’s time to decide if this will continue to add value in today’s (and tomorrow’s) market. If you’re going to focus more on proposition and customer, this can’t be half-hearted. Ensuring you’re set up internally to deliver this is essential if you’re going to create meaningful and long-lasting change.

Analysis by Stone & River’s Sophie Atkins

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