Wetherspoon woes point to hangover for other pub operators

Chronic over-capacity and price cuts bring more problems than just binge drinking

JD Wetherspoon, the pubs chain, yesterday announced its second profits warning in three months, displaying further evidence of the raging hangover it and other pubs operators are suffering after drowning the high street with drinking venues.

JD Wetherspoon, the pubs chain, yesterday announced its second profits warning in three months, displaying further evidence of the raging hangover it and other pubs operators are suffering after drowning the high street with drinking venues.

While the social problem of binge-drinking has become a headache for the Government and the police forces that clean up the streets on a Friday and Saturday night, there are also fewer happy hours these days for pub companies. Wetherspoon shares hit their lowest level in a year yesterday, before closing at 266.5p, as the company warned of increased costs and sagging sales.

It is not that finding customers is difficult for high street bars - although during the Euro 2004 championship Wetherspoon's mainly television-free outlets took a hard hit. Only about 100 of its 640 pubs have television screens and sales were negative during the competition. But sales at Wetherspoon, even before the football tournament began, have been struggling, indicating more widespread difficulty.

"The problem for Wetherspoon and other high street chains is chronic over-capacity," Nigel Parson, of Williams de Broe, said yesterday. This stems from an effort in the 1990s to regenerate town centres, which were losing customers to out-of-town retail parks.

Magistrates and local authorities allowed Wetherspoon and others to bring cheap beer and faux-Victoriana furnishings in to cinemas, churches, banks and other municipal venues that had fallen in to disuse. Wetherspoon, in particular, saw rapid growth and its rise seemed unstoppable - ever growing sales and a winning formula that appealed to undiscerning drinkers looking for an inexpensive pint.

But plenty of other discount operators also moved in, leading to a vicious price war in which operators slashed drink prices to bring in the crowds. Cue Wetherspoon's profits warning in April, which was accompanied by a similar announcement from Regent Inns, owner of the Australian-themed Walkabout drinking caverns, and Eldridge Pope, another high street operator. Greene King, the brewer and pubs operator, recently spoke of the challenging environment for its high street pubs, and when it bought part of the Laurel pub chain last week, it notably left behind 170 high street venues. Regent and Eldridge have both seen a significant slide in like-for-like sales - Wetherspoon's sales, at least, are so far remaining flat.

And supermarkets are also having a significant impact on profitability. "The impact of the supermarkets and their pricing regime cannot be underestimated," Jim Clarke, finance director of Wetherspoon, said. He said the price of a premium bottled beer in a pub is about £2. In a supermarket, the same bottle can cost as little as 60p.

James Wheatcroft, an analyst at Investec Securities, said: "During Euro 2004 the supermarkets appear to have been more aggressive than ever before as they, too, fought to get customers in their stores, hopefully buying other goods. People went to the pubs to watch England matches, but went to the supermarkets, bought beer home and watched the other matches from their sofas."

Cheap drinks have meant drunken, badly behaved punters. This has led to a vigorous assault on the industry from the Government. Nearly half of all violent crime in 2001/02 is believed to have been perpetrated by offenders under the influence of alcohol. The Government wants to crack down on town centre drinking, and has vowed to stamp out irresponsible drinks promotions that encourage alcohol excess.

This might lead to minimum charging levels, which may bring some relief to operators. Luminar, the night club owner, last week called for an end to discounting, demanding more seating in bars and a drive towards sales of soft drinks, food and coffee. But the transition to more socially responsible drinking outlets is not going smoothly.

Wetherspoon said yesterday its efforts to counteract binge drinking were having some impact on sales. "We are aiming to be competitive across the whole range of products we offer at all times. So that means no happy hours, no pushing of one or two particular products," Mr Clarke said. "We have also taken steps to put fewer shots in our cocktails and we are making it the same financial cost for buying single and double measures of spirits. We have also lowered the price of soft drinks, but the overall effect has been lower volumes."

A sustained period of heavy discounting has been accompanied by rising wage and property costs. Wetherspoon has been hit by the increase in the minimum wage, and its electricity bill has risen by 40 per cent.

How Wetherspoon and the industry can get out of its vicious circle is open to question. Changes to the licensing laws may allow more venues to open late, in a bid to end the social problems created by a universal chucking-out time. But the laws will also make obtaining a pub licence more difficult and make it easier to revoke a licence if a pub is behaving irresponsibly. This should curb further over-capacity, but regulatory action on pricing, if it happens at all, will have a long lead-time. Market forces may bring about a round of closures and consolidation before then.

Morgan Grenfell Private Equity, the owner of Laurel, pocketed £654m last week from selling its local pubs. It hung on to Laurel's high street outlets and it is being seen as a prime suspect to begin a consolidation spree. "Controlling prices will always be very difficult. The industry has no choice but to consolidate," Nigel Popham, analyst at Teather & Greenwood, said.

Law student who swapped the Bar for his own pub

With a distinctive haircut that looks like it hasn't changed since he founded the company in 1979, Tim Martin, chairman of JD Wetherspoon, presides over what has been until now one of the most successful pub chains in the UK. But with its second profits warning in three months, Wetherspoon faces a difficult period. There is even talk that Wetherspoon could be vulnerable to a takeover.

Mr Martin was a 24-year-old law student when he decided to abandon the legal Bar for the alcoholic variety. He has overseen rapid expansion of Wetherspoon (named after one of his former teachers), from one pub in north London to 640 pubs nation-wide. At its height his stake in Wetherspoon was worth about £150m. It is now worth £82m.

After 25 years running the company, he took a six-month unpaid sabbatical last year, much to the surprise of the City. His spell of learning French and travelling obviously agreed with him, and shortly before he was due to come back to the group, he announced he was stepping down to become a two-day a week non-executive chairman. John Hutson, its present chief executive, and Jim Clarke, the finance director, have full control of the business.

The company's share price had risen 15 per cent while Mr Martin was away, as the company continued to deliver strong like-for-like sales growth. But just after his return in April, Wetherspoon warned that its profits were slipping below expectations. In the wake of yesterday's profits warning, the shares have fallen back by 17 per cent, slicing £18m off his holding.