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Can Greene King turn it around?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Brewer and pub operator Greene King told investors this morning it expects to achieve annual pre-tax profits of between £244m and £247m to the end of April. The chain said it expects like-for-like sales to grow by 2.9%, ahead of market expectations and helped by warm weather over the Easter weekend.

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The company has been dealing with rising costs due to food price inflation, wage increases and rising rates but managed to chalk up record sales of £7.7m on Christmas Day, and like-for-like sales growth of 4.6% over Easter.

Despite the upbeat figures, Greene King shares fell around 7% on the news, as investors might have been hoping for a little more to ease what has been a tough few years for the company.

Since its recent highs at the end of 2015, the firm’s share price has been on its way down, with 2019 showing signs of reversing the downward trajectory, in the first quarter. However, the traditional pint-puller seemingly hasn’t broken ranks with the rest of the struggling middle ground pubs and restaurants who have seen equally torrid times over the past two years. While we’re not eschewing pubs altogether - Greene King sales were up 61% on the day of the World Cup semi-final last year - once normal business resumes we just don’t have the same thirst for the chains anymore.

Today’s update highlights a few things for investors in the space to keep an eye on.

Arguably the most important factor to businesses like Greene King is a major shift in consumer tastes taking place. We often see products like beer as a staple, unwavering part of British life but in a tough consumer environment, even your standard pint can’t stand still. Generational shifts in consumption habits means brewers and pub operators alike are having to evolve to address new preferences.

Millennials are drinking much less than their parents and are willing to pay up for higher quality and exclusivity when they do. Ubiquitous pubs with the same beers and menus as next door won’t cut it with this generation. With nothing distinct to set them apart and customers being able to swiftly swap their product for something else, or take a few craft beers home instead, it’s innovate or die time. Brands like Greene King IPA, Old Speckled Hen and Abbot Ale don’t scream innovation and it seems like investors know it.

After humble beginnings making eyes roll everywhere outside Shoreditch, small craft breweries are making their way into the UK mainstream. Brands like BrewDog show the direction of the UK’s tastes and, with a £1bn valuation, demonstrate that traditional players ignore the craft side of the industry at their peril.

When innovation in the lower echelons starts to pick off smaller firms, it can pay to be invested in the biggest players in the market who can truck along without it affecting them too much, or buy out smaller disruptors if need be.

Nick Train, manager of the LF Lindsell Train UK Equity Fund, a Select 50 fund, explains his decision to include Heineken in his portfolio: “Investing in a global lager brand is a fantastic multi-year investment idea. If you look at global demographics, it has a young male market, particularly in emerging markets and lager consumption is due to rise over the next 20 years.”

The Select 50 has a number of funds with exposure to the sector, with Fidelity Global Dividend, Liontrust UK Growth and Fidelity Enhanced Income all holding Diageo, and Threadneedle European Select including Pernod Ricard in its top ten companies.

Five year performance

(%)
As at 29 April
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Greene King -4.8 2.3 47 -23.6 36.0

Past performance is not a reliable indicator of future returns
Source: Fidelity, as at 29.4.19, in GBP terms with income reinvested 

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