The Group operates in the highly dynamic UK out-of-home eating and drinking market, a market of large scale and wide reach: the value of out-of-home eating and drinking is in excess of £75bn1 and 85% of consumers claim to visit pub restaurants to eat and drink out. Notably, more people visit pub restaurants than any other eating out channel2 with the sector well placed to capture lower-spend casual dining occasions.
The market is increasingly fluid, as historic conventions between in-home and out-of-home consumption blur. Supermarkets are extending their in-store offer into hospitality, food delivery services are rapidly expanding in the major conurbations, the ‘on-the-go’ food sector is growing as out-of-home breakfast sales increase, and ‘pop-up’ street-food providers and event spaces are adding further diversity and innovation into this already complex market.
Long-term growth in the out-of-home food and drink market is aligned to consumers’ desire to add more leisure activity into their available time, and is an embedded trend going back several decades, interrupted only by periods of economic uncertainty. Whilst the Brexit referendum result earlier this year may affect consumer and business confidence in the short-term, eating out has escaped the slowdown in consumer spending during the last recession and has achieved strong growth in the past few years.
Around 40%1 of food and drink spending in the UK now takes place out-of-home. However, the underlying long-term trend for food spending to move out-of-home, where the UK is emulating the USA market, is in contrast to the UK beer sector. This was historically dominated by the on-premise channel, but just over half3 of market volume is now sold through the off trade, a trend that has been encouraged by long-term movements in relative price.
These structural shifts are reflected in the changing pub market. The number of pubs in the UK has fallen from 59,000 to just over 52,000 since the end of 2010, with the leased and tenanted sector in which the Group predominantly operates reducing by the most. However, leased and tenanted pubs still account for over 40% of the UK pub population4 and it is progressively focusing on fewer better sites, with averageper-pub drinks sales growing by 3% in the year to June 20165. At the same time the sector is developing trading models and formats that give operating companies more control over the pub proposition, including the evolution of managed operations.
The consequence of rationalisation is that standards are improving, and with over £7 billion of pub industry turnover now derived from food, the pub sector is aligning more closely with contemporary consumer aspirations. Pubs are well suited to an increasingly informal out-of-home eating market, but they are also widening their consumer appeal, particularly addressing the potential of trade in the mornings, with more sophisticated breakfast, brunch and coffee propositions.
On-premise retailers are also adapting to rising consumer expectations, moving their proposition in a more aspirational direction. This is manifested in product category trends, with a move towards more premium products. Whilst volume sales in the out-of-home drink market are flat overall sales have grown by 3%, driven by strong performance from premium categories, exemplified by double digit market volume growth for premium and super-premium spirits, and over 40%5 volume growth for craft beer. We believe this broad and long-running trend towards premiumisation will continue.
The Group’s estate strategy acknowledges these market dynamics. In particular, we are developing the capability to operate a significant managed house business, with over 100 pubs already trading, and a plan in place for around 800 by 2020. This includes an expanding series of innovative partnerships with selected managed house ’expert’ operators, to develop opportunities in high quality sites in our estate. In this leaner, fitter pub market, industry sales are expected to grow to around £21.5bn2 in 2016, an increase of 1% on 2015, with modest sales increases also forecast for the near-term future.
Regulation and legislation
The market in which the Group operates is routinely subject to regulatory and legislative scrutiny, and over the past decade, the pub sector has been affected by a number of important changes, on top of the Government’s fiscal adjustments to the alcohol duty regime.
Among the more significant examples of recent legislative actions are:
- the National Living Wage, which disproportionately affects the hospitality sector;
- the proposed ‘sugar tax’ which will be applied to certain styles of soft drinks; and
- the Pubs Code, and the appointment of an independent Adjudicator to enforce the Code.
The advent of the Pubs Code brings significant specific changes to the leased and tenanted pub sector and these are discussed in more detail in the Chief Executive Officer’s review.
1 - ONS Consumer Trends Q1 2016
2 - MCA, The Pub Market report, 2016
3- BBPA Beer Barometer report
4- CGA Strategy, Outlet Index on trade universe database, June 2016
5- CGA Strategy, OPM to mid-June 2016