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Wetherspoon’s profits fall as labour costs increase

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

JD Wetherspoon, the no-frills pub chain, posted a sharp drop in pre-tax profits in its half year report today. Profits before tax fell 18.9% over the period to £50.3m despite rising revenues.

Wetherspoon’s profits fall as labour costs increase

This shouldn’t come as a surprise to investors as the company warned in a trading update in January that rising costs of “about £30m” would impact profits. With a business model based on low margins and high volumes, any increases in the wages of the company’s 40,000 staff will have a profound impact on profitability.

This is key for the company as Brexit looms ever closer, or perhaps not so close now as we wait to see whether the EU agrees an extension to Article 50.

It is estimated that 14% of the 450,000 people working in British pubs and bars are from the EU. This number rises to 23% of kitchen staff. With or without Brexit, the UK has been approaching near-enough full employment, which usually means wages begin to rise in real terms. Fewer European workers will only apply further upward pressure to the whole labour market.

Wetherspoon, or simply ‘Spoons’ to its many regulars, is a place you either head straight to or avoid at all costs. It’s not everyone’s cup of tea, which of course they do serve, alongside a vast array of increasingly non-European alcoholic offerings such as British ales, Californian brandy and Australian wine.

The past forty years since Tim Martin opened his first pub in 1979 has seen a radical transformation in the industry. With more and more people drinking at home thanks to low supermarket prices, the number of public houses in the UK has steadily declined, forcing many to close or dedicate more space towards serving food.

Offering good quality, low cost meals has been central to Wetherspoon’s success. In 2000 food made up 18% of its sales, it’s now 35%.

A pub is perhaps not the first place you would think of for breakfast (unless you’re on a stag do) but it’s a trend Wetherspoon is embracing. No doubt inspired by the success of Gregg’s vegan sausage roll, the company is hoping their new vegan, full English breakfast will tap into the UK’s growing appetite for plant-based eating.

Just as struggling high streets are trying to reinvent themselves to combat intense online competition, pubs have already learnt to adapt or die. Take any town in the UK and you’ll see former pubs morphed into new offerings. Suburban pubs on key road links have turned into Starbucks or McDonalds, while those in more central areas have become mini supermarkets such as Tesco Metro or Sainsbury’s Local.

This merely reflects changing consumer habits. Coffee has become a product we’re prepared to leave the home and pay a premium price for. Many of us opt to do the main grocery shop online now, supplemented with smaller, more impulsive ‘basket-only’ shops on the way home from work.

Judging by today’s results it appears Wetherspoon is doing something right. Business is buoyant with like-for-like sales up 6.3%. In the spirit of Greggs, Lidl and Aldi the pub chain is successfully appealing to the growing number of value-conscious consumers. Looking to the future its Eurosceptic Chairman, Tim Martin, anticipates an “unchanged trading outcome for the current financial year”.

While economic conditions may not have slowed down the drinking habits of its regular customers, investors will be keeping a close eye on any further signs of rising labour costs as that will be crucial to a business model where prices at the till have to remain low.

More on JD Wetherspoon

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