Toasting growth

Australia’s heavily-regulated pub sector has had a difficult few years, but the rapid consolidation of the industry should make the bigger pub players much stronger. IBISWorld general manager ROBERT BRYANT explains.

By Robert Bryant

Australia’s heavily-regulated pub sector has had a difficult few years, but the rapid consolidation of the industry should make the bigger pub players much stronger.

It’s been a tough few years for Australia’s pub industry. After a few years of soaring property prices and strong revenue growth, rising interest rates and high debt levels have put some pub operators into difficulty.

Cairns-based pub baron Tom Hedley is one operator who has struggled in the rapidly changing environment, with shares of his listed hotel trust plunging in value. But Tom and his colleagues shouldn’t have to drown their sorrows for too much longer – the outlook for the pub sector is improving.

IBISWorld estimates that this industry grew at an annualised rate of 2.7% over the five year period to 2007-08. During that period the industry continued to be affected by increased state government gaming machine regulations and taxes, which hit profits and employment growth.

In 2005-06, state governments across the country began legislating for smoking bans in pubs and clubs. As these changes were phased in during 2007, pubs faced increased costs from having to build facilities (such as outdoor areas and smoking rooms) to accommodate smokers.

As a result of these changes, and increase competition from the clubs sector, the pubs and hotels industry has seen a strong period of consolidation, with a number of pub groups – including Hedley Leisure & Gaming, ALH Group (which is controlled by supermarket giant Woolworths) and National Leisure & Gaming Group – buying up large numbers of pubs and driving economies of scale.

IBISWorld forecasts that this industry will grow by an annualised rate of 3% over the five year period to 2012-13. This forecast growth reflects forecast relatively stronger economic growth over most of this period, although expenditure on alcohol and gambling will continue to be affected by a number of factors, particularly social attitudes to alcohol consumption and gambling , which are being reinforced by government legislation and enforcement (including restrictions on the number of gaming machines allowed in pubs).

Industry consolidation is also forecast to continue, which should help the sector maintain profitability.

But there are a number of challenges on horizon. The impact of smoking bans will continue to be felt over the short term, while falling alcohol consumption and tighter controls on alcohol sales to young adults will also weigh on revenue.

The gambling side of the pub game also faces challenges, particularly from increasing competition from the clubs and casinos industry and the introduction of nationally consistent controls and regulations relating to gaming machines by governments.

Key success factors for operators in the industry

• Proximity to key markets. To be located in a high profile and high passing traffic area to attract custom.
• Membership of joint marketing/distribution operations. To be part of a group buying/promotional scheme in the retail sales of liquor (bottle shops) to allow for better purchase prices.
• Having a loyal customer base. To develop a base of regular and repeat clientele by offering facilities and hospitality attractive to them.
• Capacity to objectively assess new investments. To evaluate the introduction of gaming machines carefully in relation to the number required, the demands of your local clients and the costs (including operational ones).
• Production of premium goods/services. To have an emphasis on total hospitality within the hotel to ensure repeat visitors and good word of mouth recommendations.
• Easy access for clients. To have easy access to the hotel, from car parks etc.
• Effective cost controls. To have well developed accounting, sales and stock control systems to be able to monitor the financial status and cash flows.
• Ability to control stock on hand. To have well developed stock control systems.
• Highly trained workforce. To have well trained staff at all levels of the operation. To have an on-going program of staff training.
• Must comply with government regulations. To meet all of the requirements/conditions of the local liquor licensing authority/commission.
• Fast adjustments made to changing regulations. To take an on-going interest in changes in the hotel market and any proposed changes by governments to the industry’s regulatory environment – gaming, smoking bans, etc.
• Having a clear market position. To understand the correct market position of the hotel based on market demand and positioning, providing the correct ambience, facilities and food/drink, and possibly entertainment, in line with this market positioning.

Products and service segmentation

Major market segments

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au