British pubs are changing — but is it enough?

Pubs occupy a particular place in British hearts. But that hasn’t prevented the sector from being a terrible investment over the past decade. The industry’s challenges have been numerous and substantial: competition from cheap supermarket booze, sizeable debt piles, pandemic-era lockdowns and — more recently — higher costs arising from measures in the UK Budget.

Pub group valuations on an enterprise value/ebitda basis have fallen between 16 and 28 per cent over the past decade, according to S&P Capital IQ data. But there are signs that larger companies, which can spread some costs over more pubs, can still eke out growth.

The UK pub market, which generates £28bn in revenues, is expected to reach about £33bn in sales by 2028, according to Mintel data cited by brewing group Marston’s this week. Much of this is expected to be taken by bigger companies rather than independents. Pub investors, however, have been burnt many times before.

Marston’s is a good example of how the sector has been transforming itself. In July, it sold its 40 per cent stake in brewing joint venture Carlsberg Marston’s Brewing Company for just under £203mn after fees to Carlsberg. This helped to lower its net debt, excluding lease liabilities, to £884mn at the end of September from almost £1.2bn the previous year.

Some rivals had already ditched lower margin brewing: for instance, Fuller, Smith & Turner sold its beer business to Japan’s Asahi in 2019 for £250mn. Pub groups have also been selling off lossmaking or less profitable sites — and in some cases buying in other more affluent locations. Some are trying different formats: Marston’s has outlets more focused on sports and others on families who want meals.

Those efforts — and crucially its debt reduction — have helped Marston’s shares rise 27 per cent in the year to date, although they are still down 67 per cent over five years. Its performance this year is also something of an exception. Others including Fuller’s, Young’s and JD Wetherspoon have fared less well, as investors fret over measures in the recent UK Budget — in particular changes to the salary threshold at which employers start paying national insurance contributions.

Despite some companies’ reassurance, investors remain nervous about the extent to which consumers can absorb even small further increases in prices. This won’t help sector valuations, even if many companies look cheap.

Those pubs that have survived the difficulties of the past few decades should prove resilient. But in a climate where UK equities as a whole are still suffering outflows, the sector will now struggle to find new investors willing to raise a glass to the industry.

nathalie.thomas@ft.com