Sunday 22 September 2019

Wetherspoons issues profit warning despite Rugby World Cup sales boost

The company’s margins are coming under considerable pressure
The company’s margins are coming under considerable pressure

Ben Martin

The founder of pubs group JD Wetherspoon has hinted the business could lift the price of a pint after warning that the company’s rising wage bill may knock annual profits this year.

Tim Martin set up Wetherspoons in 1979 and the pubs business, which manages more than 900 hostelries, prides itself on offering food and drink that is cheaper than its rivals.

However, the company’s margins are coming under considerable pressure from rising labour costs, which could force the group to hike prices to offset the hit.

“It’s always an area for fine judgement and I suppose in retrospect our prices might be a little higher,” Mr Martin, who is the company’s chairman, said, stressing that “no decision has been taken” in relation to a price increase.

“Shareholders like price rises, customers tend to be more dubious,” he added. “If anyone wants to pay more we’re happy to accept donations but we haven’t actually put prices up yet.”

Analysts urged Wetherspoons to hike prices today after the company disclosed that its operating margin fell to 6.2pc during the 13 weeks to October 25 from 7.7pc in the same period a year earlier, knocked by wage increases the company introduced in October last year and the end of July.

The 150 basis-point plunge in the margin was heavier than investors had expected and came despite the pubs business receiving a boost from the Rugby World Cup, which contributed to a 2.4pc increase in like-for-like sales and a 6.1pc rise in total sales.

Margins at Wetherspoons have been under pressure for some time, and yet another fall dismayed investors, who sent shares in the company down 7pc to 722p.

Mr Martin, who has been a vocal critic of the new national living wage, warned that “increased labour costs are clearly an important factor for all pub and restaurant companies and may result in our annual profits being slightly lower than the last financial year”. In September, Wetherspoons reported a 25.1pc drop in pre-tax profits to £58.7m.

While price rises would help the FTSE 250 group counter its heavier labour costs and stop margins from deteriorating further, Peel Hunt analyst Nick Batram noted that Wetherspoons has so far been “reticent” to lift them. Numis analyst Douglas Jack said that the latest margin decline “requires the company to make price increases, but this has still not happened in a meaningful way”.

The problem of labour costs is only set to get worse. The company will have to comply with the National Living Wage of £7.20 an hour for workers aged 25 of over, which will come into force in April. The minimum wage is forecast to hit at least £9 an hour by 2020.

Mr Martin said that while Wetherspoons is “more less in line” with the new pay level, “I think we have to raise the minimum rate a little bit more” to meet the April increase. For “some categories of staff” it will require an increase of 20p, he added.

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