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The Young and Fuller families, London’s oldest brewing clans, have competed for almost two centuries to quench the thirst of the capital’s ale drinkers.
The shares of each company have outpaced the FTSE All-Share Index almost equally over 20 years. Now it’s Young & Co.’s Brewery Plc (YNGA) that’s breaking away, with the stock gain in 2013 almost double that of Fuller Smith & Turner Plc. (FSTA) The reason: Young’s stopped making beer and is managing more pubs.
As English watering holes fail and beer taxes rise, Young’s is trying to redefine the pub experience. Among its revamped venues, the Wheatsheaf at Borough Market is proving a hit with hip music and a garden where customers can smoke, buy drinks from a VW van and order mussels.
“Our managed estate, which accounts for over 90 percent of group turnover, is the main driver of our growth and we don’t see that trend reversing,” Young’s Chief Executive Officer Stephen Goodyear said in an e-mailed response to questions.
Young’s is increasing the share of pubs for which it hires the managers, and lessening reliance on landlord-run, or “tenanted” pubs. “We have invested heavily in our premium, managed pub estate” while improving food and offering more craft beers and fancier wines, Goodyear said.
Young’s stock closed 2013 with a 40 percent gain, the biggest in eight years, outperforming Fuller’s 21 percent advance. Young’s profit will probably rise to a seven-year high this fiscal year and gain the following year, according to average analyst estimates, while Fuller’s net income may slip 14 percent this year and gain 4.3 percent in fiscal 2015.
“It’s been a long process of correction on valuation,” said Simon French, an analyst at Panmure Gordon. “Young’s has historically traded at a discount to Fuller’s, which was unwarranted given that Young’s has faster earnings growth.”
The managed pubs operated by Young’s tend to allow easier expansion into food and beer gardens than the landlord-run taverns that make up more of Fuller’s stable, according to French. A smoking ban has boosted outdoor drinking while rising beer taxes have caused pubs to concentrate on food to survive.
Landlord-run pubs have been less able to cash in on dining because they are generally smaller and difficult to modify, French said. “They don’t necessarily have the footprint for either outdoor areas or kitchens and therefore haven’t been able to capitalize on growth in food and also to overcome the smoking ban.”
Managed pubs make up 68 percent of Young’s 240 taverns, up from 55 percent in 2009. Fewer than half of Fuller’s pubs are managed by the company.
While boarded-up pubs are a common sight in the U.K., both Young’s and Fuller’s signs are ubiquitous on drinking establishments in London. Young’s pubs include the Lamb Tavern adjacent to Lloyd’s of London in the financial City, while Fuller’s pulls pints at the Flask in Highgate, home to stars such as supermodel Kate Moss.
The number of pubs fell by 11 percent in the U.K. from 2007 to 2011, to about 50,400, according to the British Beer & Pub Association. Beer consumption has slumped since the smoking prohibition began in 2007, and as the financial crisis combined with rising taxes led people to drink at home. The duty on beer rose about 40 percent in that period.
The decline isn’t evident at Young’s Wheatsheaf, which was packed on a recent Monday evening.
“Since this place opened I keep coming here,” said Nicola Mather, a marketing manager at PayPal Inc. who was sipping wine in the garden. “It has a better atmosphere and better music than other pubs.”
String of Sausages
In six months the pub has sold enough sausage rolls to stretch from the Wheatsheaf to the top of the nearby Shard skyscraper and back, according to Young’s. The ale still has the Young’s name, though the company moved production from London in 2006 and sold its share in the venture two years ago.
Fuller’s declined to comment on strategy and performance compared with Young’s. It seeks “acquisition and development opportunities” and is broadening high-end offerings, it said in a statement in November.
While Fuller’s serves food and has about 385 pubs, it still brews in the city. It’s playing up the connection in a “Made of London” advertising campaign for London Pride ale with images evoking survival in the World War II blitz.
“Fuller’s gets a lot of kudos in terms of the local marketplace from being London’s only remaining brewer,” said Douglas Jack, an analyst at Numis Securities Ltd. It also may have an easier time motivating staff at tenanted pubs because landlords can have a stronger profit motive than salaried managers, according to David Chubb, a pub and restaurant restructuring specialist at PricewaterhouseCoopers LLP.
Fuller’s earnings before interest and taxes from tenanted pubs gained 18 percent in the last fiscal year. Ebit from brewing fell 3 percent as global beermakers including Anheuser-Busch InBev NV, the world’s largest, and Heineken NV turn to emerging markets to compensate for weak consumption in Europe.
Young’s has an enterprise value to operating income multiple of 17.5, compared with 16.4 for Fuller’s. That’s a reversal from the last two fiscal years — after Young’s sold its remaining brewing stake — in which Fuller’s value on that basis was higher.
For now, Chubb says Young’s effort to dust off the traditional pub experience is paying off.
“They’ve spent quite a lot of money and they’ve introduced different concepts to suit their different pubs. That’s what you have to do in this sector.”
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