The boss of JD Wetherspoon has told investors that the pub chain might miss profit expectations because of rising costs, in the latest sign that the UK hospitality industry is doing its best impression of a soggy chip under the pressure of higher energy, food, labour and tax bills.
Chair Tim Martin announced on Wednesday that costs have seen “substantial increases,” which is a bit like saying a pint is “slightly warm” when it's been sitting in a radiator. This marks the third profit warning this year from the company, which operates about 800 pubs across the UK and Ireland. Investors had already been expecting a drop in pre-tax profit to £73m, compared with £81m last year.
Pubs, restaurants and hotels are collectively wincing as rising costs make profitability feel like a distant memory. The industry is adjusting to a rise in the minimum wage and business rates, which came into effect at the start of April. Martin has previously noted that increases in national insurance contributions and wages would cost the business about £60m a year. It's also facing an extra £1.6m in tax this year through the extended producer responsibility packaging levy - because apparently, cardboard isn't free.
As if that weren't enough, the US-Israel war on Iran and the resulting jump in energy prices are expected to drive up food and heating bills this year. Because nothing says “pub lunch” like geopolitical turmoil.
Strangely enough, shares in JD Wetherspoon rose slightly by 1% in early trading on Wednesday. Russ Mould, investment director at broker AJ Bell, suggested the rise probably reflected relief that profit might fall only “slightly short of expectations” and that sales growth suggested demand was “holding up well for now.” The pub chain said its sales at established pubs grew by 3.4% in the 13 weeks to 26 April, compared with the same period last year.
However, Mould added that Wetherspoon, which had an operating profit margin of 6.9% in its last financial year, was highly exposed to the energy price shock triggered by war in the Middle East. “A legacy of the pandemic is the heavy load of borrowings the company is carrying. While interest costs are expected to remain broadly unchanged year-on-year as debt ticks up, if interest rates move higher that could create another headwind for the business,” he said.
Wetherspoon forecast its net debt at between £740m and £760m by the end of its financial year. The company's market capitalisation is about £644m. So, they owe more than they're worth. That's fine - who needs a safety net?
Elsewhere, the drinks maker Diageo said on Wednesday it was “mindful” of geopolitical uncertainty, including the impact of the Iran war, but maintained its profit guidance for the year. The FTSE 100 company, which owns brands such as Guinness and Johnnie Walker, reported a rise in sales from customers stocking up before the Fifa World Cup. Overall its organic sales grew by 0.3%, ahead of an expected decline of 2.3% in the three months ending in April. Its shares rose nearly 5%. So at least someone's drinking away the sorrows.