An open goal by Michael Penfold

What now for the pub investment market, who will lead the mergers and acquisition (M&A) and expansion activity, and what can the pub sector learn from the experience economy and competitive socialising?

Time for more at the bar

The pub sector doesn’t really go for radical change but what it can offer is resilience and robustness, with both in large supply in 2018. While its casual dining cousins were hit by the maelstrom of higher costs, economic and political uncertainty, and a cautious consumer landscape, pub operators took advantage in an upsurge in wet-led sales, a long hot summer and a World Cup in which, for once, England exceeded expectations.

During the course of the year that positivity was matched by interest in investing in the sector. At AG&G, we advised on £171m of freehold pub sales in 2018, with the highest lot size £17m and the average net yield 3.44%. A good year and we expect more sale and leasebacks as pub operators exploit the hungry, low return-seeking investment market and utilise their own capital more effectively than being tied up in bricks and mortar.  This investor demand is largely driven by the deemed security of buildings that have traded as pubs for hundreds of years in many cases, held on long leases and widely perceived as secure in this time of company voluntary arrangements. We also expect group transactions to be more prevalent to satisfy investor demand for pub assets.

What’s the big deal?

Despite the uncertain economic background, M&A in the UK’s pub sector was strong and spread across all parts of the sector, from NewRiver’s acquisition of Hawthorn Leisure to Punch’s acquisition of Laine Pub Company, Fuller’s deal to buy Bel & the Dragon and Stonegate’s purchase of Be At One. The Restaurant Group also showed keenness to add to its Brunning & Price pub arm through the acquisition of Ribble Valley Inns, Food & Fuel and a number of single-site deals.

The start of this year has followed a similar theme. Stonegate has further consolidated the high-street bar market by acquiring Fever Bars, Young’s recently acquired 15-strong Redcomb Pubs for £34m, and Ei Group has agreed to sell the majority of its commercial properties arm for circa £350m to investment fund Davidson Kempner.

There are currently a number of businesses in process, all with good credentials and strong trading momentum behind them, including Coaching Inn Group and Arc Inspirations. It’s expected The Alchemist might join its bar-operating peers and test the market later this year but some investors may hold off to see how the Brexit fall-out goes before firming up their investment strategies for this year.

Initial public offerings (IPOs) also remain an attractive option, with Loungers and Oakman Inns intimating this could be a route each could explore in the future. The former has reportedly selected brokers to advise on a circa £250m IPO, which could take place as early as this quarter. Loungers is a stand-out company and a successful IPO would be a shot in the arm for the industry and hopefully a positive rallying point for investors that have become cautious about the wider sector following 18 months of negative headlines.

Are you experienced?

The experience market is expected to continue its strong growth trajectory this year, with the likes of Flight Club, Puttshack and others opening or seeking new sites. We are seeing a trend for bar operators to create something novel to entice customers with operators such as Mission Bars, Inception Group and Adventure Bar opening venues with specific themes and staff that go the extra mile whether acting a specific role or getting people to dance on the tables and sing!

These operators are looking to create an edge over the average bars, often using social media to show potential customers what a great time they can have at their bars. The use of an Instagrammable moment is becoming a necessity for social media-savvy operators. How long before we see larger, established operators using social media influencers who have millions of followers to drive footfall as this is already an important part of many up-and-coming bar operators’ marketing strategies.

With the experiential market likely to continue growth, we expect its influence to become stronger across the pub sector, especially with operators looking to better utilise space. City Pub Co and Laine Pub Company have both been moving into this space through the addition of crazy golf, virtual reality or escape rooms. Laine has been dabbling in the experiential and immersive market for some years and recently opened Ninth Life – one of AG&G’s 2018 freehold deals – an ambitious, festival-themed multi-storey venue in Catford with a street food village in the trade garden. 

Mission Bars’ Bohemian bier palace, Albert’s Schloss, has been winning awards and praise since it opened two years ago and is another great example of how pubs can tap into the communal, experiential market. Incipio Group, the company behind the Pergola On The Roof and Feast venues, opened The Prince in West Brompton, which houses four restaurants, three bars and a woodland pergola garden. If pub operators need ideas on how to reimagine some of their more established sites, this would be a good first point of call.

The issues the retail sector faces has left high-street voids up and down the land, creating opportunities for the food and beverage sector to step in where retailers have failed. Debenhams has been one of the businesses to feel pain but has been trying to counter that with what it calls “social shopping”, bringing in the likes of Franco Manca to take space in its sites alongside concessions for bars and food retailers.  

Can it really be too long before traditional retail and bar experiences combine and shoppers are encouraged to take refreshments while trying on clothes? Indeed, might fashion-resistant men such as those in the AG&G office welcome a personal shopper one day who offers fashion ideas while they watch the football, beer in hand? Now that’s an open goal someone should take advantage of.

For further information please contact Michael Penfold, Director on 0207 836 7826 or michael.penfold@agg.uk.com