Boozers on the brink as the bar is set too high

Costs are rising, beer sales are at depression levels and the City has decided the glass is half-empty. Simon Evans on the bleak outlook for pub chains

Perched on the edge of the road that runs between Lewes and Newhaven in Sussex, the Abergavenny Arms in Rodmell has been a fixture since the 17th century.

The pub, a stone's throw from the former home of the author Virginia Woolf, was all you'd expect of a typical English country ale house. The hub of the village, it hosted everything from the local darts team to a weekly quiz. But the Abergavenny Arms was suffering and recently it was forced to close its doors as the perfect storm of spiralling costs and falling sales finally took its toll.

Up the M23 in Twickenham, a similar story has played out. Less than a mile from the wealthy London suburb of Richmond, and in the shadows of England's rugby ground, the doors recently closed on the Ranch, a trendy, expensively renovated pub that only opened in April 2007. Run by the Mint Group, the owner of Camden's Koko nightclub, the Ranch now sports a closed sign over its door. The pub opposite, Twickenham's Up and Under, has also fallen on hard times and called time.

It seems that no one in the pubs and drinks sector is immune, and if the experts are to be believed, things will get much worse this year.

"I really can't see any light at the end of the tunnel," says Stephen Broome, the director of hospitality and leisure at accountancy firm PricewaterhouseCoopers (PwC). "The January-February trading period is traditionally the quietest in the drinks business, but this year things are much worse than normal. The 99p deal from Wetherspoons on Greene King IPA tells you all you need to know about the state of the industry. There clearly will be further distress and there will be further casualties."

The number of pubs either dead or on the critical list seems to be growing, with beer sales in Britain at their lowest level since the depression days of the 1930s and publicans facing spiralling costs and tax hikes. Industry representatives are set to meet Business Secretary Peter Mandelson to discuss the crisis in the next few weeks, following talks in December with Treasury officials. Top of the agenda will be a call for the postponement of the 8 per cent increase in drinks duty announced in November's pre-Budget report, which many think will tip more pub companies over the edge.

According to the British Beer and Pubs Association, around 30 boozers a week are succumbing to the credit crunch. Some estimates suggest that more than 2,000 pubs could go under in 2009.

Established names have already gone to the wall. Cains, the north of England brewing and pub group, fell into administration citing soaring costs and a 20 per cent drop in sales last year. Some pubs have come back from the brink. Orchid, Britain's fifth-largest pub chain, also slipped into administration late last year but PwC has managed to sell on large chunks of the operation. However, some 150 workers have lost their jobs and parts of the business remain unsold.

Most stock market analysts are recommending their clients steer well clear of the listed pubs and drinks sector. Charles Winston at Redburn Partners recently described it as no longer "economically viable".

Investors seem to agree. Over the past 12 months, Regent Inns, owner of the Aussie Walkabout chain, has seen its share price collapse by close to 85 per cent, while Punch Taverns, which operates more than 8,000 pubs in the UK, has suffered a similarly precipitous fall of around 86 per cent.

Enterprise Inns, which has to pay back a £1bn loan to its banking backers in 2010, has dropped by 82 per cent, and Mitchells & Butlers, the group behind the All Bar One chain, said in November that losses had quadrupled to £238m over the year.

Giles Thorley, the chief executive of Punch, rather conveniently blamed the fall in his company's stock on short- selling activity amid a wave of negative sentiment. They will have made a bundle on the collapse in the share price.

Just last week, Majestic Wine, once the darling of the junior Alternative Investment Market (AIM), revealed that its sales had slumped over the Christmas trading period – a fall it blamed largely on the dwindling demand for champagne in the City of London. Sales of fizz to its corporate customers sank by over 10 per cent.

It was the Laurel Pub Company, the firm behind the Slug and Lettuce and Ha Ha chains, that began the march of the doom-mongers when it fell into administration last year.

Graeme Smith and Nick Cropper, partners at Zolfo Cooper, the firm created after a management buyout of Kroll's restructuring business, handled the administration process at Laurel. "The few months after Christmas are always critical for pub companies," says Mr Smith. "Crunch time will come in March when pubs have to pay their rents. This is exactly what we saw at Laurel last year. All the cash gleaned from the Christmas trading period has now been totted up and many managers will be facing awkward decisions in the next few weeks."

Some pub chains, like retailers, are now in a dash for a shrinking pool of punters' cash. The 99p IPA pint offer from Wetherspoons came into force last week, though Greene King slated the decision and other pub firms derided it as unsustainable.

"They clearly won't make any money on direct sales of IPA, but it will surely increase footfall in Wetherspoons pubs," says Mr Broome at PwC. "They'll hope to get people spending more on food and other more expensive drinks. It's a deal born out of an exclusive sliding-scale purchasing agreement that Wetherspoons cut when it was small. The discount is probably at the highest level now and it is shifting lots of pints of IPA. I don't think anyone will be able to copy it."

For those companies unable to sell loss-leaders and sharpen their knives for a price war, the next few months will bring a "battening down of the hatches", according to Mr Broome. "It's vital in these quiet times for pubs to improve their food offerings," he adds. "They have very little choice because successful wet-led pubs will be the exception rather than the rule."

Mr Cropper at Zolfo Cooper says that in the coming weeks and months the fortunes of managed and tenanted pubs will diverge.

"There is a real polarisation going on which will gather pace in 2009," he explains. "The managed guys are really seeing the benefits of a centralised head-office approach. The big tenanted pubcos that relied on cash and property are being hit badly on both fronts at the moment."

For those pub chains trying to recruit new tenants or sell pubs to existing tenants, the picture remains gloomy. "There are a huge number of leased pubs for sale out there at the moment," says Mr Broome. "But in truth, I think that few will be sold. Tenants who might have snapped these up in the past would have traditionally released equity from their property to make payments, but with house prices falling like a stone, that's no longer an option. The supply of tenants has all but dried up."

It's no wonder that Enterprise Inns is looking to put empty pubs to alternative uses, while Punch, which has begun the sale process of some 500 of its outlets, is giving licensees until Easter to decide whether they want to buy their pubs or not.

But some think the gloom has been overdone. Paul Hickman, leisure analyst at broker KBC Peel Hunt, believes that the drinks arena is far more resilient than stock market valuations would have us believe.

"Many of these pub companies have been around for a long time and survived harsh downturns," he argues. "Many of these businesses are much more robust than people think. Look, I'm certainly not talking about earnings growth for listed pub companies any time soon, but talk of the imminent collapse of many of these firms is over the top.

"Debt management is the key. Lots of companies have securitised their debt for up to 35 years, so the pressure in the short term is not that great."

For those savvy enough, or perhaps lucky enough, to have negotiated long- term debt agreements at manageable rates, the immediate future might not be that gloomy. But for others, 2009 is set to be the toughest year for a generation of publicans.