Managed pubs better picks in tough 2010

By Atul Prakash

LONDON (Reuters) - Managed pubs and those offering cheap food are set to fare better than tenanted players in a bumpy ride for British pubs next year due to increased taxes, thriftier drinking habits and competition from supermarkets.

The sector, perceived to be a low-risk steady growth segment until two years ago, continues to face hurdles such as falling consumer footfall, impact of a smoking ban, political desire to control binge drinking and a reversal to higher value-added tax from the next year.

High unemployment and a squeeze in incomes have put pressure on the segment. Latest figures show that 2.46 million Britons are without jobs, leaving the jobless rate at 7.8 percent.

"If you look at the outlook for the economy over the course of the next year or two, it doesn't look particularly strong," said Peter Dixon, economist at Commerzbank.

"You might see a rebound in personal income growth over the next year or two, but my guess is that consumers will be more of a mind to save rather than to spend."

According to the British Beer and Pub Association (BBPA), beer sales in pubs fell 4.7 per cent in the third quarter, but sales in supermarkets and shops rose 4.4 per cent in the period.

Investors are likely to favour managed pubs, such as Greene King (GNK.L), Whitbread (WTB.L) and JD Wetherspoon (JDW.L), as they have pricing flexibility. For example, JD Wetherspoon offers a pint of beer for 99 pence and a range of meals from 2.99 pounds, leaving tenanted pubs struggling to compete.

Managed pubs are owned by a pub company or a brewery and employ salaried managers and staff. On the other hand, tenanted pubs are owned by a pub company which receives rent from the licensee who run the premises as their own business.

MANAGED PUBS TO FARE BETTER

Analysts see stiffer challenges for small pubs run by tenants, lessees and owners, which account for 80 percent of the UK's 54,000 pubs.

"Within the sector, we have a clear preference for managed pub and restaurant companies, which we think generally have stronger consumer facing franchises and better growth potential," said James R. Ainley, analyst at Citigroup.

"We continue to see downside risks to tenanted pubco profitability," he said in a recent report on the sector.

Tenanted pub operators such as Punch Taverns (PUB.L) and Enterprise Inns (ETI.L), which are grappling with crippling debt piles, tie their lessees into an arrangement which forces them to take beer supplies exclusively from their landlords.

That has left them less able to compete on price and led critics of the "beer tie" scheme say it has contributed to pub closures as tenants are being made to buy supplies at prices above the market rate. The BBPA says more than 50 pubs a week are being forced to close.

Citigroup favours companies that offer attractive long-term growth potential and its top picks include JD Wetherspoon (JDW.L), Mitchells & Butlers (MAB.L) and the Restaurant Group (RTN.L).