Will the smoking ban stub out leisure sector profits?

As a regular visitor to the public house - both for personal reasons and as a judge for the pub industry's The Publican awards - drinking in smoke-filled rooms has not been a particular problem of mine so my view on the impending smoking ban in public areas in England was ambivalent.

However, a trip to Dublin after the smoking ban was imposed in Ireland in 2004 led to my re-assessment of smoking in public places. The lack of a thick throat- cutting fug pervading the bars and pubs of the Irish capital and the avoidance the next day of clothes smelling of stale tobacco smoke provided a much more agreeable pub-going experience.

And it would seem that many other people feel the same way, judging by a July 2006 survey from the Office of National Statistics (ONS), which found that 91% of people favoured smoking restrictions in restaurants and 65% supported them in pubs. Bans within other public areas also garnered great support with 87% of people advocating a ban in shopping centres, 93% in leisure centres and 83% in railway and bus stations.

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Whatever stats these surveys throw up the big question in England remains what exactly will the impact be on leisure businesses when the smoking ban is implemented on July 1?

The experience of smoking bans in other countries certainly bodes well for the industry including pubs, bars, hotels, betting shops and restaurants which would be the obvious candidate for bearing the brunt of any downturn in trade following a ban.

UK leisure sector: smoking ban successful elsewhere

Consider New York where the Smokefree Air Act came into effect in March 2003. One year after its implementation the restaurant guide Zagat surveyed 30,000 restaurant- goers and found that 23% were eating out more often since the introduction of the legislation.

Closer to home the experience in both Scotland and Ireland has generally been a lot more positive than many people had predicted. In Ireland the RTE national New Year's Poll for 2004 found that people in favour of a ban in pubs and restaurants had grown from 67% before the legislation to as many as 82% after its introduction. And almost universal support for the ban had been achieved one year after it was brought in.

It's a similar scenario in Scotland, which went smoke- free in March 2006, with support for the ban running at only 56% immediately prior to the legislation, compared with 69% just one month after implementation. This represents a dramatic turnaround from the 67% of people who were against it in a survey taken at the end of 2004.

UK leisure sector: businesses who already have the ban

However, the best indication of how businesses in England can expect to perform comes from those companies that implemented a ban ahead of the July 1 legislation. Among them is Mitchells & Butlers (M&B) - that has banned smoking at 200 of its pubs in England and Wales which found that sales growth was affected by less than 1% for the 16 weeks to January 20.

It's a similar story at JD Wetherspoon, which has had two non-smoking pubs trading for as long as two years. It found that they too had performed better than anticipated. In total it now has around 60 pubs that do not allow smoking and their recent quarterly sales increase of 12% surprised many analysts and tempered some of the worries circulating around the pub sector.

The company's Scottish pubs also performed well with like-for-like sales for the 12 weeks to January 21 increasing by 3.9%. Such is its confidence following these numbers that the company recently announced its intention to double its rate of expansion with plans to now open 30 new outlets this year.

Greene King also recently reported that its pubs in Scotland performed ahead of expectations. Although it acknowledged that sales of drinks fell at these pubs fuelling a like-for-like drop of 2.8% for the nine months to January 7 - this was better than expected and it highlighted an increased sale of food at these smoke-free outlets.

UK leisure sector: 'gastropubs' set to benefit

The trend for increased food sales is being seen throughout the pub sector with the eating out market expanding at 3.8% per year, according to ONS figures, which also revealed that food's share of pub revenue has grown from 22% to 26% between 1995 and 2005.

Not surprisingly food is now regarded as integral to any future success by many operators in the pub sector. It is the obvious way to offset the predicted loss in drinks sales after the ban as pubs will inevitably lose some of their hardened smokers who tend also to be the most frequent and regular drinkers.

Tim Clarke, chief executive of M&B, says: "We've always expected the first year after a ban would see most of the losses in drink sales. After that we expect revenue growth to strengthen as people who would have been discouraged from eating in pubs because of tobacco smoke come in for meals."

Senior management at Punch Taverns also hold the same positive view. Francis Patton, customer services director at Punch, suggests: "Too many people are looking at the smoking ban as a threat, but we know this is a huge opportunity...to get new customers [who want to eat] into pubs and also keep people there who go regularly."

Although Rooney Anand, chief executive of Greene King, has the aim of retaining all customer types smokers and non-smokers - he accepts that this will not be an easy trick to pull off: "It represents a marketing conundrum how to tap into the wider, but less committed audience of infrequent pub-goers without alienating the profitable, smaller (and slowly

shrinking) core audience of current customers."

UK leisure sector: smoking ban could attract more women

Figures from the ONS prove there is an opportunity to be had from the ban as they found that a hefty 22% of pub-goers said they would go more often following a smoking ban. And interestingly for the pub companies, an impressive 26% of women said this compared with a much lower 17% of men, which supports the argument that the smoking ban is a potential method of attracting a new wider female audience to the pub and one that could be enticed into consuming more food.

Evidence of increased spending on food has been seen at those pubs that have already banned smoking, according to a recent survey from The Times, which found that food sales had risen by 80% on average at these pubs and that nine out of 10 landlords reported they were selling more food.

Looking to tap into this trend is a huge swathe of pubs around the UK, including a number I've visited recently while judging for The Publican Awards 2007. One visit took me to The Mulberry Pub Company that operates four pubs around Leicester which went non-smoking in June. Although it initially experienced a fall in drink sales as some smokers (mainly at the younger end of the market) deserted the pub an increase in food sales helped the outlet achieve a 13% higher average spend.

On another judging visit, to Lincoln, Chris Bulattis, managing director of Ever So Sensible Bars whose outlets include three Dogma Bar & Kitchen venues - also highlighted his company's new focus on food. With the recent appointment of an executive chef he says he is hopeful that food sales can be increased from a current 11% of total turnover to a chunky 25%. Progress is being made with sales of food already 10% up on

last year.

Bulattis is very much of the view that those pubs and bars that adapt to the ban can be the winners long-term and that his company now has plans in place for installing partially enclosed/heated smoking areas at each of the company's sites.

UK leisure sector: tenanted pubs look vulnerable

It is widely predicted that those operators with a sizeable proportion of managed pubs (that are owned by the company and employ a manager) within their estate will fare better than those with more tenanted boozers (that are leased to third-parties to operate) because they more often serve food.

The likes of Greene King, M&B and Fuller Smith & Turner are regarded as among the better placed companies, especially when compared with some of the larger pub companies such as Enterprise and Punch Taverns which are massively geared to tenanted outlets.

Not surprisingly a great amount of activity has been taking place among the big boys as they seek to focus more on food ahead of the ban. This has included a frantic bit of M&A activity with Punch Taverns purchasing the 82-strong food-led pub chain Mill House Inns for £164m in September.

Another serious deal of this type was the recent £497m purchase by M&B of 239 pubs from Whitbread, which helped push the group's food sales up to 40% of total group turnover an impressive increase on the 33% prior to the deal. At £2.1m per site M&B was clearly willing to pay a high price to secure these food-led freehold assets.

M&B like others in the sector have not only been acquiring food-led boozers but has also been off- loading batches of small community drink-led pubs (with limited food offers) to smaller acquisitive operators.

While M&B sold over 100 community pubs in October to businessman Trevor Hemmings for £101m, Enterprise was off-loading a sizeable 769 small drink-led outlets for £318m to Admiral Taverns, which also bought over 150 such pubs in the South of England from Greene King.

UK leisure sector: hotel trade relaxed on the change

As in the pub sector there are certain operators in the hotel industry that have been introducing their own smoking bans ahead of legislation. Possibly they have been spurred on by statistics from the likes of the

2006 European Hotel Guest Satisfaction Index Study, which found that 70% of hotel guests in Europe prefer a smoke-free environment that goes beyond the boundaries of their rooms and into the hotel's public areas.

Among them is The Savoy in London that introduced a ban in all its smoking areas in January in response to a high level of feedback from both its guests and employees. The Capital Hotel, in London, also made changes to its smoking policy - well ahead of the legislation - with a reduction in the numbers of smoking bedrooms. Whereas they previously took up three floors of the hotel they now only account for one of its six floors.

Henrik Meuhle, general manager at The Capital Hotel, suggested that this was merely reflecting the demands of customers of which 35% come from the US: "In the US smoking bans are normal, there's simply no discussion about it. In five star hotels in New York you do not see anybody smoking."

In late-2005 Pat McCann, the then chief executive of Jurys Doyle Hotel Group which operates hotels in both Ireland and the UK, spoke to me about the experiences in Ireland where he had also reduced the number of smoking rooms due to public demand. He said the non- smoking floors at Jurys would have previously been in the minority but this had been reversed and it was the smoking floors that were now in the minority.

Based on the Irish experience he advised hoteliers in the UK not to worry about the impact of a ban on their businesses. Even in Ireland, where he says hotels are more a centre of social activity with a heavy focus on public areas compared to the UK, the impact on business was only a short-term issue and trade bounced back relatively quickly.

UK leisure sector: bowling, snooker and bingo halls could lose out

The bookmaking industry might also ultimately be affected a lot less by the ban than initially anticipated judging by the experience of major UK operator Ladbrokes. It found evidence from Scotland that showed punters had not been at all deterred from visiting bookies. As a result Christopher Bell, chief executive of Ladbrokes, felt sufficiently confident to recently state that the ban would be "the removal of the last stigma attached to high street betting shops".

However, all is not going to be hunky dory throughout the leisure sector because there does look likely to be some clear cut losers from the smoking legislation. For example, Georgica which operates tenpin bowling and snooker halls at its recent results admitted suffering from a downturn in trade at its Scotland sites, with its management putting it "in large part"

down to the effects of the ban.

Also fearing the worst from the ban in England are the bingo hall operators who predict that as many as 200 of the country's 800 halls could close after the legislation is brought in. One impact for example, is a reduction in the take from fruit machines. A key additional earner of bingo hall operators, these are typically used during the breaks between the bingo. In Scotland these takings have fallen significantly following the smoking ban as many people now opt to head outside for a smoke before the bingo restarts. To counter this, the largest bingo operators are in the process of persuading the Government to change the laws governing their business, which could include the scrapping of VAT on bingo hall takings.

In our opinion the number of potential losers' from the ban looks set to be relatively modest, which suggests that rather like the much-hyped Year 2000 computer upgrade and the recent 24-hour drinking legislation that created a media frenzy, the smoking ban will come to pass rather quietly on July 1. With most businesses largely unaffected we believe the majority of investors in the leisure sector can rest easy over the smoking ban.

By Glynn Davis for The Daily Reckoning. You can read more from Glynn and many others at www.dailyreckoning.co.uk

Editor's note: Glynn Davis is retail and leisure correspondent for The Fleet Street Letter. He also writes for The Grocer magazine, RetailWeek and several national newspapers.