Wednesday, 7 November 2012

Punched out

The Burton Mail reports that Punch Taverns has recorded an unwanted achievement:
A Burton pub giant has seen an astonishing 99 per cent wiped off its value in the last five years.

Punch Taverns, based on Centrum 100, posted the single biggest loss of 13 firms who have the misfortune of being part of a group dubbed the ‘90 per cent’ club.

It is an exclusive society UK companies are not in a hurry to join as it consists of those who are still part of the FTSE All Share Index but have lost more than 90 per cent of their value over the last five years.

Of course, in the meantime there has been a recession, but they made a catastrophic wrong-way bet on the way the pub trade would go after July 2007, which has proved to be their undoing.
Oren Laurent, chief executive of trading firm Banc De Binary, said: “The pub industry in the UK has been devastated by the recession — it was reported earlier in the year that 12 pubs close every week in the UK.

“However, Punch Taverns has been hit the hardest as, in my opinion, they made the mistake of loading themselves with billions of debt just as their core markets started to shrink.”

Anyone who actually understood the pub trade had a pretty good idea of what was going to happen, but they knew better and have been found out. It’s not as if nobody warned them.

I can’t say I’ll be shedding any tears. Sadly, though, if the company goes to the wall and is broken up, we are likely to see the loss of many still potentially viable pubs.

(h/t to Arfur Daley on Facebook)

16 comments:

  1. From 2006:
    Punch said the introduction of outside smoking areas and better pub amenities, often including a quality food offer could not only negate the ban but lead to new opportunities.

    I sincerely hope that the antismoking shareholders who went along with this lost their life savings.

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  2. Smoking Ban? Debt?

    Punch appears to have destroyed shareholder value above and beyond other public quoted pub companies (barring Enterprise), so you might want to consider things that the whole market has not suffered.

    Capital structure ought not to be an issue, all capital has a cost and I don’t see them paying more to service their bonds than they ought to be able to pay to service their equity.

    I think you need to look at the way it has been run and place the blame firmly on the shoulders on the board. They have run a property company with little or no idea how to run pubs. Whilst it is possible to identify some decent pubs in their portfolio, there offer is by and large poor. Higher prices for distinctly average establishments. Sharp practice has seen good licensees leave and their reputation among potential licensees is dirt.

    Contrast that to the Wetherspoons pub company and you see a company run by a man who knows how to run a pub, knows what customers want and delivers it. In choosing a managed operation he is able to achieve a consistency of offer where the customer knows exactly what to expect from a Wetherspoons pub.

    The poor trading performance of the company makes it difficult to service the bond holders and the fall in equity prices indicative that all they can deliver to those is a destruction of value.

    The smoking ban has impacted the entire industry, not just Punch. The debt is a problem because of poor trading, not a cause of poor trading.

    If you have equities in this sector I would suggest worrying about Wetherspoons if and when it looks like Tim Martin is retiring and having a minor punt on Punch if they ever look like employing a CEO that knows something about pubs rather than financial engineering or general retail.

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  3. You have to wonder what Punch's business concept ever was. They handicap their own licencees to such an extent that its virtually impossible for them to be able to compete.

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  4. @anon. Yes, serves them right, though at the expense of true pub lovers. And it does suggest that they were well out of touch with their backbone clientèle, choosing to kowtow to the tobacco control industry who apparently had greater business expertise. Unsurprisingly, TC is now strangely quiet when it comes to earlier prediction than an influx of non smokers would revitalise an already struggling industry.

    You reap what you sow - stuff the lot of them, I'm past caring...

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  5. @py0 I gather the business concept was to run a property company financed through leverage. Not in and of itself a bad idea. Despite many assertions to the conterary, gearing can deliver higher returns to equity holders than intrinsic trading so long as everything is going well. You want the financial engineers in the shop, just not running the shop.

    However the property values are dependent somewhat on the trading viability of their licensees. By scuppering them with sharp practice their business concept was revealed to be a house of cards. If the pubs cannot trade well, the pub itself looks like an asset that might be better employed as a site for a Tesco Express.

    As Warren Buffett said, you see who is swimming naked when the tide goes out

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  6. The thing is - you have no way of knowing how many non-smokers who visit the pub now wouldn't be if the smoking ban hadn't been introduced.

    I go to the pub very regularly, and so do a lot of my friends. As is common with young people, none of us smoke. Some of us are asthmatic. If we came back every night coughing and stinking like an ashtray, would we bother? Probably not. Just stick up a dartboard in the spare room and drink at home instead.

    It could well be the case that the dropoff in the medium term would have been even worse without at least some form of anti indoor smoking regulation, and there's no way anyone can justifiably argue otherwise.

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  7. @py0: so why can't we have smoking and non-smoking pubs, and see which prosper, and which don't?

    And I think you'll find the proportion of smokers is actually highest amongst "young people" - even Cancer Research UK say so:

    "Since 1986, the highest rates of smoking in adults in Great Britain have been in the 20-24 age-group (27% in 2010), followed by the 25-34 age-group (26% in 2010). The lowest prevalence of smoking since 1974 has been in persons aged 60 and over (13% in 2010)"

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  8. Only cos all the old smokers are dead Mudgie.

    A competitive environment would be alright, but that wasn't the situation before though, was it?

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  9. I don't remember there being any law against entirely non-smoking pubs before July 2007. But I do remember that Timbo prematurely introduced a total ban in a few Spoons and trade fell off a cliff.

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  10. Just because there isn't a total ban doesn't mean the market is in equilibrium, though does it?

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  11. Professor Pie-Tin7 November 2012 at 17:33

    Only someone with a thick skin could provide statistics from Cancer Research UK to back up his argument for abandoning the smnoking ban.

    It's here to stay and favoured by every single person I know who drinks in pubs, many of them smokers.

    Pubs close because they're shit.

    That's all.

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  12. A few dozen rough smoker's pubs might have got pushed over the edge by the smoking ban when their regulars decided to stay at home instead, but they'd only have gone bust by now anyway if they hadn't.

    If the smoking ban hadn't got them, the recession and their inherrent crapness would have got them eventually. Decent pubs with something to offer - both food led and wet led - seem to be thriving to me.

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  13. In terms of thriving pubs I have noticed it is demographic led. Where the young and prosperous frequent, the bars thrive. Where the poor live, where welfare claims and joblessness are high the pubs are boarded up.

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  14. The question is Cookie, the bars may be doing well because the young and prosperous are going there, but why are the young and prosperous going to that pub and not to the one down the road?

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  15. Martin, Cambridge7 November 2012 at 23:02

    I'm impressed by Cookies economic analysis, the startling thing about Punch is just how dull and/or uncompetitive their pubs are, outside a handful of London gems. They rarely offer standout features like a standout beer range, and are beaten for value by any of the new Marstons/2 for 1/Spoons eating pubs.

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  16. Interestingly, I made a post with the same title back in 2009 in which I pointed out the lack of USP of the typical pub company outlet. That post is also correct about the regional and family brewers cherry-picking their best sites.

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