Annual report 2016

Our markets Market overview

Our core markets are the UK eating
out and UK drinking out markets.
We also compete in the UK ale
market with our brewing of cask and
premium ales, and have a foothold
in the UK staying out market.

Over the last 12 months our core markets have continued to be supported by the macroeconomic environment. Alongside the rest of the sector, we continue to navigate a number of changes in the regulatory environment, in particular the introduction of the National Living Wage and the statutory Pubs Code.

The long-term fundamentals behind our core markets remain strong and we are cautiously optimistic about the future. We have seen the UK eating out market grow and expect it to continue to do so. We also believe it will become increasingly dynamic with intense competition for every pound in the consumer’s pocket. The UK drinking out market will continue to show resilience and hold its share of leisure spend.

Source: Coffer Peach Business Tracker.

While recent sector like-for-like (LFL) sales growth has been a little more subdued, within Pub Company, our largest and fastest growing business, we successfully outperformed the market in the 12 months to April 2016, growing our LFL sales by 1.5%, including by 1.9% in the original Greene King managed estate.

The macroeconomic environment continued to provide a strong backdrop to our core markets with consumers experiencing increases in average weekly earnings (supported by a tightening labour market). As a result of a low inflationary environment, the climb in consumer confidence throughout 2015 and an increasing appetite for households to spend rather than save, we saw UK real household spending grow by c. 2.8% in 2015.1

However, the picture was mixed across the year and, in the second half, as the UK referendum on the European Union approached, consumer confidence dipped and the economic environment showed some signs of softening with consumers more reluctant to spend discretionary income in the face of such uncertainty.

We remain cautiously optimistic about the future UK economic outlook and expect consumer discretionary spend to continue to grow, albeit at a slower rate as the growth in average weekly earnings slows (as the country approaches full employment) and inflation picks up.

Although the referendum is now behind us, the process by which Britain extracts itself from Europe is uncertain. We are mindful of the potential impact of this uncertainty on the consumer and expect consumer confidence to remain more subdued until this is clearer.

We are also mindful of the longer-term impact on household incomes from government plans to reduce welfare spending, which are likely to have a disproportionate impact on those with lower incomes.

  1. Source: Thomson Datastream, Capital Economics.

Regulatory forces have played, and will continue to play, a key role in shaping our markets and our business.

In July 2015, it was announced that the UK government would introduce a compulsory minimum wage premium for all staff over 25 years of age, known as the National Living Wage. Our people are core to our business and we constantly strive to pay them appropriately for their hard work while maintaining a high level of investment in development and training. We remain confident of being able to mitigate most of the impact from the ongoing increases in the National Living Wage.

Throughout the year, the Small Business, Enterprise and Employment Act has taken steps towards implementation, with the publication of a draft statutory Pubs Code in April 2016. Now that the revised Code has been announced, and assuming there are no further changes, we can start to plan for its introduction at the end of July 2016. We believe that the overall financial impact on the group will be immaterial.

We welcomed the Chancellor’s decision to freeze excise duty in March 2016. We maintain our support for an alcohol minimum unit price (MUP). We believe MUP, alongside other measures such as improved alcohol education, can be a highly effective measure in reducing irresponsible retailing and consuming of alcohol, therefore helping to reduce the costs to society of rising alcohol related illness and crime.

We await more detail around the proposed Apprenticeship Levy and will again look to work with government to ensure that this legislation supports rather than hinders investment in people development and training.

Source: Capital Economics

Source: GfK

We offer a variety of eating out options and experiences across both our destination and local community pubs, with eating out representing c. 40% of leisure spend in 2015.

We compete in a broad UK eating out market made up of around 330,000 outlets and annual total spend of c. £85bn1. Within this market, the pubs and bars segment consists of around 50,000 outlets and total spend of c. £22bn – c. 25% of overall eating out spend.

The market is increasingly dynamic. An environment of increasing consumer choice extends beyond the traditional pub and restaurant sector and includes the supermarkets, who have successfully made eating at home more attractive, and the takeaway aggregators who facilitate the option of combining the ease of eating out with the comforts of home. Understanding this, and ensuring our offer is compelling enough to compete successfully with this broader competitive set, is increasingly important for delivering long-term growth.

The overall UK eating out market is expected to grow at an average annual rate of c. 3–4% over the next three years1, supported by rising real incomes, supply growth in the market and increases in the proportion of adults eating out of home and the frequency with which they do so, driven in particular by younger adults.

Hectic lifestyles and the increasing desire to seek experiences mean that consumers are increasingly attracted to both informal dining with great value food and drink across all day parts as well as more premium offerings. Segments of the market such as fast food and ‘retail grab and go’ will therefore be among the fastest growing parts of the market. We will continue to develop our offer to meet these needs, and are making progress in improving our coffee offer and targeting breakfast and snack sales as well as the more traditional out-of-home dining occasions.

The pubs and bars segment is forecast to hold its share of this market at c. 25%. Managed and branded pubs will be the key drivers of the evolution of the pub sector as consumers are drawn to brands that stand out and have defined, consistent propositions that signal reassuring brand familiarity, excitement and the opportunity to try something new. In contrast, overall spend in the tenanted and leased sector will continue to decline primarily as a result of falling supply. We see an opportunity here to buck the inherent market decline by strengthening the quality of our estate to win share from less well invested competitors.

Source: M&C Allegra (2015)

Through our pubs and our portfolio of award-winning ales we offer choice for all types of drinkers and occasions. Drink is a key driver of overall spend in the pubs sector with 40% of all meals involving an alcoholic drink and 52% of consumers saying that alcohol is an important choice driver for where to eat.2 A strong drinks range is therefore a crucial factor in achieving overall customer satisfaction and we aim to capture share of spend by providing a drinks range that offers value, quality and an experience to our guests.

After a notable decline in alcohol consumption between 2007 and 2012, consumption has levelled off more recently.3 We have seen drinking out spend retain its share of leisure spend at c. 22%.4 We expect to see continued resilience in drinking out spend in value terms, which will be supported by the broader increase in discretionary and leisure spend. We also expect the price differential between the on and off trades to become less relevant as consumers are drawn to the ‘experience’ of drinking out of their homes.

Source: ONS

UK ale market

We are the UK’s leading cask ale brewer and premium ale brewer. The overall UK ale market was flat in the 12 months to April 2016. This improving picture has been driven by a slowing in the decline of standard ale in keg and can formats and continued growth of premium ale through cask and bottle formats.

During this period, we were successful in extending our share of the UK ale market by 40bps to 10.5%, which we have achieved through building consumer loyalty to our core ale brands, which have all grown in the year, and through developing our innovative range of seasonal and ‘craft’ beers to appeal to a new generation of beer drinkers.

We expect the UK ale market to continue to evolve and improve and to see low single-digit growth in the total market. We remain confident in our ability to continue to grow share with our enviable portfolio of brands that can meet the needs of consumers across all drinking occasions.

UK staying out market

We compete in the UK provincial staying out market and offer great value and convenience to guests on both business and leisure visits, with our estate at the year end consisting of 3,399 bedrooms. We see the combination of a pub restaurant and adjacent rooms to be an attractive guest proposition in the context of increasing business and leisure travel, and therefore one which offers plenty of opportunity for pubs to take share from the more traditional branded hotel chains. The staying out market enjoyed a strong year in 2015, benefiting from the economic recovery and a buoyant travel market. RevPAR (revenue per available room) in the market continued to grow in the provinces, and RevPAR across our combined Pub Company estate grew by 4.5% across the financial year. RevPAR in the provincial staying out market is expected to grow by c. 3–4% over the next two years (i.e. continued growth, albeit at a slower rate) driven by moderate increases in occupancy and hoteliers’ average daily rate.5

  1. M&C Allegra (2015).
  2. CGA Peach.
  3. ‘% of UK population who drank in the last week (aged 16 and over)’
    (source: adult drinking habits in Great Britain, 2014 ONS, released March 2016)
  4. GK Leisure Tracker.
  5. PwC (2016).