Greene King - Company Report INF6040: Assignment 2 Business report. Student Id: 160129151 Submission date: 3rd June 2019 Word Count: 2202 University of Sheffield Information School * Cover image (Greene King, n.d.) Page 1 TABLE OF CONTENTS Executive Summary .................................................................................................................................. 2 Introduction ................................................................................................................................................ 2 1. Key financial information ............................................................................................................... 3 1.1 Financials .......................................................................................................................................... 3 1.2 Analysis of financial health ........................................................................................................... 5 2. Industry and competitor analysis .................................................................................................. 6 2.1 Overview of the sector .................................................................................................................. 6 2.2 Industry Analysis ............................................................................................................................. 6 2.3 Other factors ................................................................................................................................... 7 2.4 Social media presence .................................................................................................................. 7 3.1 Current news .................................................................................................................................... 8 3.2 Investigations and negative publicity ......................................................................................... 8 3.3 SWOT analysis ............................................................................................................................... 9 3. Market analysis ............................................................................................................................. 10 4.1 Target market .............................................................................................................................. 10 4.2 Known characteristics .................................................................................................................. 10 4.3 Social trends affecting the market ........................................................................................... 10 4.4 Relevance to profitability .......................................................................................................... 10 4. Conclusions ...................................................................................................................................... 10 5. Recommendations .......................................................................................................................... 11 Bibliography ........................................................................................................................................... 12 Appendix ................................................................................................................................................ 15 Page 2 Executive Summary • Greene King is the market leader in the pub/bar sector. • Solid operational base and asset holdings. • Impressive track record of sound financial performance in challenging conditions and markets. New leadership which could lead to changes in strategy. • Effectiveness of capital employed is not market leading, improvements in this area desirable. • Concerns around cost pressures exist and whether revenues can keep pace, this is an industry wide problem. • The recommended stock action is: INVEST/BUY • Diverse business operations should mitigate downturns in a particular business. • Ability to off-load poorly performing pubs with enough cash to act quickly on the opportunities of the future. • Latest performance statements suggest that 2019 full year figures will be acceptable, although down slightly on what the market had hoped for. • Continues to proactively pay down debt and restructure finance to reduce liability. Introduction Greene King PLC is the UK’s largest pub retailer and brewer with over 2900 outlets at the time of writing. Headquartered in Bury St. Edmunds, England and founded in 1799 Greene King operates within the alcohol and food industry. Operations are divided into 3 distinct channels of business; 1. Pub company: Pubs, restaurants and hotels owned and operated by Greene King under a number of brands. 2. Pub partners: premises owned but operated independently by licensees. 3. Brewing and brands: Brewing facilities producing cask ale for the hospitality and supermarket markets. (“Understanding our Business”, n.d.) Greene King’s growth has been driven by a number of mergers and acquisitions particularly in the past 20 years, taking the company from a mostly regional brewer, to the UK’s biggest pub operator (“How a regional brewer became a national pub chain”, 2014). Today it operates a number of well-known brands such as Hungry Horse pubs and Loch Fyne sea food restaurants (“Our Brands”, n.d), whilst also producing some of the most recognizable (and award winning) cask beer in the UK which include Abbott ale and the Old Speckled Hen range of ales. (Vincent, 2018). Greene King has recently appointed Nick MacKenzie as CEO (May 1st 2019). He replaces the long serving outgoing CEO Rooney Anand. (Woolfson, 2019). Page 3 1. Key financial information The financial details outlined within this report relate to Greene King PLC, the ultimate owner of all subsidiary companies and businesses. Greene King PLC is listed on the London Stock Exchange as code GNK. 1.1 Financials Turnover – stands at £2.18Billion as of the 2018 annual accounts. This is down £0.4Billion (1.8%) from 2017. The 2018 annual report attributes this to “lower pub company sales” and cites poor weather and the disposal of some non-core pubs. (Greene King PLC, 2018). Profit (gross) – Increase on previous year to £0.2billion. This increase has been driven by a significant reduction in finance cost (£40Million) from 2017. (Greene King PLC, 2018). Page 4 Profit Margin – Only once in the last 5 years has the profit margin exceeded the 9.07% reported in 2018. Greene King profit margins are consistently above those of its competitors. (J D Wetherspoon and Mitchells & Butlers represent the two closest competitors in the pub operating market, this the largest business area of Greene King.) ROCE & ROSF – Whilst Greene King performs well in the headline balance sheet figures, it performs less well in some of the other profitability indicators when compared to its peers. Taking the 2018 financials, J D Wetherspoon outperforms Greene King in its effectiveness at employing capital and shareholders funds. Greene King also harbors considerable long-term debt, whilst this is not necessarily an immediate concern, changes in economic climate could raise questions around the ability to finance outstanding commitments. Page 5 1.2 Analysis of financial health Forecasted Annual pre-tax profits for 2019 are above expectation, thanks in part to a successful Easter trading period. However, market concerns around increasing business costs has forced the share price down in recent months, with prices falling as much as 6.7% (Awasthi & Hussain, 2019). Like for like (LFL) sales for the 52 weeks ending April 30th 2019 were up by 2.9% on last year, with the Greene King pub brand in particular performing above expectations with LFL sales increase of 4.6% (Greene King PLC, 2019). More positive news in the form of debt reduction with £393m (51%) repaid on the debenture taken to acquire the Spirit pub company in 2015. This may be “fully paid down over the next two years” (Janiaud, 2019). Freeing up additional cash for other business activities. However, market analysts are cautious of increasing cost pressures and Greene Kings “sizable debt pile”. Both of which have impacted stock performance. Whilst stock prices climbed on the back of impressive Easter trading figures, they have since dropped back due to a sales slowdown in the most recent reporting period (Hyett, 2019). Page 6 The current sentiment from the leading financial institutions is largely positive with the majority issuing either “buy” or “hold” advice in relation to Greene King stock (Kellogue, 2019), thus demonstrating a level of confidence in the future profitability of the company. 2. Industry and competitor analysis Greene King has a number of business interests with the largest being the operation of pubs and bars. This will be the focus for the industry comparison. J D Wetherspoon and Mitchells & Butlers represent the two closest competitors in the pub operating market. 2.1 Overview of the sector The pub industry is one which has been engrained in UK culture for hundreds of years. Taverns, Alehouses and Inns collectively referred to as public houses or simply ‘pubs’ play an important role in UK society, often acting as key social centres. (Johsnon, n.d). Today, even if occasionally, 90% of the UK adult population report visiting pubs or bars, with 18-34 year old’s being the most likely to frequent. The market is price-led and as such is closely tied to broader economic factors, particularly levels of individual disposable income. (Mintel, 2019). 2.2 Industry Analysis The industry has suffered in recent years due to the smoking ban of 2007 and the economic recession of 2008. Subsequently there has been a dramatic reduction in the number of pubs in the UK with 11,000 (23% of total) closures in the decade 2008-2018. (Office for National Statistics, 2018). Greene King defied this trend somewhat when it acquired the spirit pub company in 2015 vastly increasing its property holdings (see appendix for more details.). Future forecasts of industry performance are conservative with projected revenues predicted to increase by 8%, a 3% reduction in revenue increase observed for the 5-year period 2014-2018. There are a number of pressures which are being cited; • A growing number report that they prefer to spend time at home rather than visit a pub – comfort and price being the main reasons. • The “alcohol moderation trend” is expected to continue which is likely to erode beer sales – greater awareness of the health risks of alcohol, particularly amongst the young. • Rising costs with the national living wage set to increase along with national insurance and pension contributions. Business rates are also increasing in 2019 adding additional cost pressures. (Mintel, 2019). Page 7 2.3 Other factors Weather: Chessel (2019) speaking in the context of 2019 Easter results, “You simply can’t escape the fact that weather always has a major influence on the fortunes of the pub and restaurant sector – and what’s good for pubs is rarely good for restaurants.” This in response to figures which show that beer led pub chains saw impressive LFL trading improvements over the period, while restaurants suffered a considerable slowdown. This trade-off could be one explanation as to why most pubs now have a food and drink offering in an attempt to hedge the risk of a decline in one or the other. In contrast cold weather cycles lead to challenging periods for the sector. The ‘beast from the east’ cold weather phenomenon experienced in February and March of 2018 damaged industry performance. Global warming is arguably the great issue of our time, with growing evidence to support a correlation with weather extremes (Nunez, 2019). Extremes in weather pose a tangible threat to the industry given the links between weather and financial performance. Sporting events: High profile sporting events attract more consumers to pubs resulting in greater spending. This weekend is a good example (June 1st- June 2nd) with the champions league final, the cricket world cup, the rugby finals and heavy weight boxing expected to contribute to a potential 2 million additional pints being severed. The British Beer and Pub Association (BBPA) estimate that the increased footfall could equate to £5million in additional revenues for the industry. (Davies, 2019). Supply chain: Brexit related disruption could impact supply chains making it more difficult or expensive to source materials and labor. Impacts would be most acutely felt in a ‘no deal’ scenario. (Chambers, 2018). 2.4 Social media presence Greene King has an active presence on Twitter where it operates a page under the umbrella Greene King name. The page is used to update its 18.4 thousand followers of upcoming events and recent (positive) news stories, furthermore, the page is used to communicate directly with customers who raise concerns or queries in relation to service or quality experienced at an owned pub or restaurant. In contrast J D Wetherspoon has no social media presence since the decision was taken in April 2018 to cease all social media activities. Writing for the Independent (Griffin, 2018) quotes Tim Martins (The Chairman) who suggests the move is to encourage more people to socialize off line. Page 8 Key issues affecting the company 3.1 Current news A number of Greene King brewed ales have recently picked up gold awards at the 2019 Monde Selection awards, a nod towards the quality of the ale being produced in house by Greene King (Chambers, 2019). Quality products are more likely to attract interest. Inclusiveness for the LGBT community with the establishment of the LGBT+ network which aims to better support, promote, celebrate and “enhance the communities experience at Greene King”. (Greene King, 2019). Fostering a sentiment of inclusiveness to appeal to a wide customer base. 3.2 Investigations and negative publicity In contrast to LGBT inclusion, a recent news article explains how a disabled customer was refused entry into a pub in London on account of her multiple Sclerosis (MS), with a member of staff being quoted as saying “we don’t do disableds.” (Lowe, 2019). This story has been reported widely by the main stream media and is damaging for the brands image. There do not appear to be any major investigations outstanding. Page 9 3.3 SWOT analysis Information obtained from the following sources; (Butterworth, 2019), (Chambers, 2018), (Greene King PLC, 2018), (MarketLine, 2019), (Mintel, 2019). Page 10 3. Market analysis 4.1 Target market Primarily adults under 35 who are the most frequent pub and bar visiting demographic due to their increased likelihood of spending time out of the home socializing. Whilst pub visits are equal between men and women, men are more likely to visit primarily for a drink with 22% of men claiming they visit a pub at least once a week compared to just 9% for women. (Mintel, 2019). 4.2 Known characteristics Visits to pubs and bars is closely linked to perceived financial well-being, will all types of visiting behavior reduced for those who consider their finances ‘tight’ rather than ‘healthy’. The majority of people report that they visit bars and pubs ‘occasionally’ citing cost as the major barrier. Those looking for refreshment stick to known and trusted brands in 60% of cases. (Mintel, 2019). 4.3 Social trends affecting the market Recommendation from family or friends is most likely to result in sampling a new venue with 58% of new visits instigated in this way. 49% of the largest pub going demographic of 18-34 year old’s like to share photos on social media which presents an opportunity when developing interest in a venue. Locally sourced food and drink can act as a positive differentiating factor by fostering a sense of community. (Mintel, 2019). The growing social trend of healthier living has the potential to reshape the market with increased demand for non-alcoholic and vegetarian/vegan options. 4.4 Relevance to profitability Greene King is active in reacting to the trends described above. It consciously locates its brands geographically to maximize appeal. The Hungry Horse brand is price led so is located in cost sensitive areas, whereas Chef and Brewer pubs appear in areas which value locally sourced produce and are willing to pay a premium for it. The strong brand presence of its in-house ales allows it to provide trusted options across all locations. On the flip side 40% of customers do not look for trusted drink brands underlining the need for variety. Recent Gin and craft beer trends need to be catered for as does the changing attitude towards health. Drink and food offering should evolve to suit consumer needs in order to retain and attract new custom. 4. Conclusions Greene King is the market leader in the pub industry with a market share and reputation built over a number of years. It possesses the assets and experience to weather the storms of the future. However, those storms do lie ahead. The new CEO Nick MacKenzie is tasked with navigating a looming European exit in tandem with growing cost pressures. Add to this a younger, more health-conscious generation and the outlook appears less stable than perhaps in years past. Greene King and the industry at large must continue to adapt their positions to remain relevant. Dependency on weather, high profile events and the economic situation at large leave an element of uncertainty when it comes to financial success. Page 11 5. Recommendations The recommendation of this paper is INVEST. Greene King is the market leader with considerable assets. The management team have demonstrated an ability to generate returns in a challenging market place whilst reducing company debt. Market position is strong thanks to the existing exposure of the brand and diversification of business activities with regular internal reviews identifying and addressing inefficiencies by disposing or poorly performing pubs. The general consensus of the major investment firms tracking the stock is “Hold” or “Buy” to which this report concurs. Page 12 Bibliography Awasthi, S., & Hussain, N. Z. (2019, April 30). Pub operator Greene King's happy Easter doused by cost pressures. Reuters. Retrieved May 31, 2019, from https://uk.reuters.com/article/uk-greene-king-outlook/pub- operator-greene-kings-happy-easter-doused-by-cost-pressures-idUKKCN1S60FY Butterworth, B. (2019, May 27). Britain faces possible summer beer shortages as delivery truck drivers ballot for strike action. iNews. Retrieved from https://inews.co.uk/news/britain-faces-possible-summer-beer- shortages-as-delivery-truck-drivers-ballot-for-strike-action/ Chambers, s. (2018, November 29). 'No deal' Brexit could post 'significant risks', pubs and brewing group warns. East Anglian Daily Times. Retrieved from https://www.eadt.co.uk/business/pubs-and-brewing-firm-no- deal-brexit-risks-1-5799648 Chambers, S. (2019, April 25). Suffolk beers strike gold at internationally recognised awards. East Anglian Daily Times. Retrieved from https://www.eadt.co.uk/business/bury-st-edmunds-brewer-strikes-gold-at-2019- monde-selections-awards-1-6015015 Chessel, K. (2019, May 13). Easter heatwave is good for drink sales, bad for eating-out. Retrieved June 2, 2019, from https://www.cga.co.uk/2019/05/13/easter-heatwave-is-good-for-drink-sales-bad-for-eating- out/ Davies, R. (2019, May 31). Sun and sport to boost UK beer and pizza sales this weekend; Eating and drinking frenzy expected due to events including cricket World Cup and Champions League final. The Guardian. Retrieved from https://www-lexisnexis- com.sheffield.idm.oclc.org/uk/legal/news/document/urn:contentItem:5W7F-GGH1-JCJY-G3N1-00000- 00?q=sporting%20events%20in%20pubs&contentTypeId=news&ht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reene King PLC Financial profile. Retrieved from https://fame4-bvdinfo- com.sheffield.idm.oclc.org/version-2019527/fame/1/Companies/Report Greene King. (n.d.). Homepage [Twitter page]. Retrieved May 12th, 2019, from https://twitter.com/greeneking Greene King PLC. (2018). 2018 Annual Report. Retrieved from http://www.greenekingreports.com/ar18/application/files/8315/3267/9592/Greene_King_plc_Annual_re port_2018.pdf Page 13 Greene King PLC. (2018). 2018 Financial Statements. Retrieved from http://www.greenekingreports.com/ar18/application/files/8515/3262/2151/Greene_King_plc_Annual_re port_2018_-_Financial_statements.pdf Greene King PLC. (2019, April 29). Greene King launches LGBT+ network at London’s oldest gay pub. Retrieved from https://www.greeneking.co.uk/newsroom/latest-news/greene-king-launches-lgbtplus-network- at-london-s-oldest-gay-pub/ Greene King PLC. (2019, April 30). Pre-close Trading Statement (Press Release). Retrieved from https://www.greeneking.co.uk/media/4149/30-april-2019-pre-close-trading-statement.pdf Green King: How a regional brewer became a national pub chain. (2014, November 20). East Anglian Daily Times. Retrieved from https://www.eadt.co.uk/ea-life/greene-king-how-a-regional-brewer-became-a- national-pub-chain-1-3842200 Greene King PLC SWOT Analysis. (2019). Greene King PLC SWOT Analysis, 1–7. Retrieved from http://search.ebscohost.com.sheffield.idm.oclc.org/login.aspx?direct=true&db=buh&AN=134890873&site=e host-live Griffin, A. (2018, April 16). Why did Wetherspoons really shut down its Facebook, Instagram and Twitter? The possible reasoning behind pubs’ bizarre decision. The Independent. Retrieved from https://www.independent.co.uk/life-style/gadgets-and-tech/news/wetherspoons-facebook-accounts-shut- down-why-twitter-instagram-pubs-a8306571.html Hyett, N. (2019, April 30). Greene King – performance disappoints. Hargreves Lansdown. Retrieved from https://www.hl.co.uk/shares/share-research/201904/greene-king-performance-disappoints Janiaud, A. (2019, May 3). Investors Chronicle: Greene King, Standard Chartered, GlaxoSmithKline. Financial Times. Retrieved from https://www.ft.com/content/e75d9ad8-6c31-11e9-80c7-60ee53e6681d Johnson, B. (n.d). Retrieved June 1st, 2019, from https://www.historic-uk.com/CultureUK/The-Great-British- Pub/ Kellogue, C. (2019, May 31). Greene King’s (LON:GNK) “Neutral” Rating Reaffirmed at JPMorgan Chase & Co. Mayfield Recorder. Retrieved from https://mayfieldrecorder.com/2019/05/31/greene-king-gnk-rating- reiterated-by-jpmorgan-chase-co.html Lowe, Y. (2019, May 22). Greene King pub forced to apologise after woman with MS refused service. The Telegraph. Retrieved from https://www.telegraph.co.uk/news/2019/05/22/greene-king-pub-forced- apologise-turning-away-disabled-customer/ Mintel. (2019). Pub Visiting - UK - May 2019 Retrieved from Mintel Academic database. Nunez, C. (2019, January 22). Causes and Effects of Climate Change. National Geographic. Retrieved from https://www.nationalgeographic.com/environment/global-warming/global-warming-overview/ Office for National Statistics. (2018, November 26). Economies of ale: small pubs close as chains focus on big bars. Available at Page 14 https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/articles/economiesofales mallpubscloseaschainsfocusonbigbars/2018-11-26 Our Brands. (n.d.). Retrieved May 12th, 2019, from https://jobs.greeneking.co.uk/our-brands Stock Price graph for Greene King plc. (n.d.). Retrieved June 1, 2019 from https://www.google.co.uk/search?tbm=fin&q=LON:+GNK&stick=H4sIAAAAAAAAAONgecRoyi3w8sc9YSmd SWtOXmNU4-IKzsgvd80rySypFJLgYoOy-KR4uLj0c_UNkrPzcnKzeBaxcvj4- 1kpuPt5AwDbUbVSRQAAAA&biw=1920&bih=944#scso=_2zvyXPWeB4Gk1fAP64uk-Ao2:0 Understanding-our-business. (n.d.). Retrieved May 12th, 2019, from https://www.greeneking.co.uk/our- company/understanding-our-business/ Vincent, D. (2018, September 3). Raising a glass to cheer Suffolk success in the World Beer Awards. East Anglian Daily Times. Retrieved from https://www.eadt.co.uk/business/greene-king-and-belhaven-breweries- win-nine-world-beer-awards-1-5678155 Woolfson, D. (2019, January 16). Nick Mackenzie hired as Greene King CEO. The Grocer. Retrieved May 27th, 2019, from https://www.thegrocer.co.uk/movers/nick-mackenzie-hired-as-greene-king- ceo/575564.article Page 15 Appendix 1.1 Conversion of acronyms GNK Greene King stock trading code as quoted on the London stock exchange. ROCE Return on Capital Employed ROSF Return on Shareholder’s Funds LFL Like for like BBPA British Beer and Pub Association 1.2 Profit and finance cost comparison between the 2017 and 2018 year end results. Note the £42.1Million pound reduction in finance costs in 2018. This drives gross profit up, even though there is a fall in operating profits Data obtained from the official financial reports of Greene King PLC. (Greene King PLC, 2018). Page 16 1.3 Greene King Turnover & Gross Profit figures for the past 5 years in full: Data obtained from FAME database 2019 – (FAME, 2019). 1.4 Greene King acquires Spirit pub company in 2015 https://www.telegraph.co.uk/foodanddrink/pubs/11710034/Greene-King-sales-climb-as-it-completes- Spirit-acquisition.html Page 17 1.5 Average number of pubs trading for each financial year Data obtained from “Our Financial Performance” retrieved from https://www.greeneking.co.uk/investor- centre/our-business/our-financial-performance/ 1.6 Brand matrix, breakdown of each brands area of focus Data obtained from “Why invest in Greene King” Retrieved from https://www.greeneking.co.uk/investor- centre/our-business/why-invest-in-greene-king/
























































































































































































































































































































































































































































































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