Food sales fuel Mitchells & Butlers revival

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Beer sales might be falling in pubs across the country but Mitchells & Butlers offered proof that there is still money to be made from wine, coffee and a £4 roast dinner.

The pub operator, owner of the All Bar One and Browns chains, avoided the worst of the sector gloom by reporting a 1.1 per cent rise in like-for-like sales for the 10 weeks to July 19.

The increase in trade was driven largely by strong demand for food, which accounts for two-thirds of M&B’s business. Food sales rose 5.1 per cent during the quarter, though drinks fell 0.2 per cent.

Tim Clarke, chief executive, said the rising cost of supermarket food helped spur “some particularly powerful performances” from its value-food pubs.

At Pub & Carvery, where a roast dinner costs £3.96, sales growth has been in the double digits as belt-tightening Britons trade down.

The trend echoes that reported by JD Wetherspoon earlier this week. The budget pub group also increased sales thanks to its £4.59 “beer & burger” promotions.

Like his peers, Mr Clarke expected market conditions to remain challenging.However, he believes the company’s focus on value should continue to help sales even if economic pressures increase.

Analysts said the update was reassuring given how the wider pub sector had been faring of late.While beer sales at M&B were down about 2.5 per cent for the quarter, this was offset by growth in soft drinks, coffee and wine sales. It is also ahead of the 9 per cent decline that the industry saw in the first five months of 2008.

“Someone’s suffering out there but it’s not M&B,” said Mark Brumby, analyst at Blue Oar Securities.

Shares in the company, which is trying to rebuild its credibility among shareholders following hedging losses, rose 2¼p to 264¾p.

FT Comment

M&B continues to outperform most peers – not an easy task given the tough trading conditions. Yet a strong third quarter raises questions about whether a conversion to a real estate investment trust is in the best long-term interest of the group. Analysts have been scathing about a proposed move to split the property assets into a separate business. It is not hard to see why. The tax saving would be just £21m a year against an upfront cost of £200m-£225m, a tiny return for a structure that could severely impair the business model. In spite of Mr Clarke’s insistence on the contrary, it is hard to see how property entrepreneur Robert Tchenguiz’s short-term interest – to maximise value from M&B’s freeholds – could be the same as the management’s. To get the most value for its freeholds, M&B has to offer a high rental yield. This might be benign when times are good but any sharp turndown would immediately put pressure on the pub business. To the group’s credit, it is trying to find a way to convert to a Reit without splitting out its freehold. But this will be complicated, if not impossible. Until M&B gives details of how it plans to complete the Reit conversion without relinquishing freeholds, investors should bear in mind the fate of other pub groups that have sold off their property freeholds, namely Laurel Pubs – also owned by Mr Tchenguiz – which was put into administration this year because of high rental obligations.

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