A pint at your local JD Wetherspoon PLC (LSE:JDW) is cheap as the pub chain’s chips.
Even in the iconic British boozer chain’s Mossy Well, situated in the affluent London suburb of Muswell Hill, one can pop in for a jar as little as a couple of quid.
Such is the staple of a classic British night out, that a bargain round of pre-session beers at your local ‘Spoons is more or less a national pastime.
Wetherspoon’s popularity was on display in today’s trading update, reporting a 9.5% increase in like-for-like sales from its pubs in the first 14 weeks of its new financial year.
This doesn’t say much about the bottom line though, with margins and underlying earnings excluded from the update.
Inflationary pressures may have eased lately, but, as boss Tim Martin today stated, “energy costs, in particular, remain at far higher levels than pre-pandemic, putting pressure on suppliers and the wider economy”.
So how exactly is JD Wetherspoon maintaining a decent margin when everything from real ale to beer line cleaning liquid shooting up in price?
According to a follow-up chat with Proactive, Martin said his 816-strong trading estate wasn’t, necessarily.
“Our sales per pub are higher and margins are lower… about half that of Mitchell’s and Butlers or Greene King (LSE:GNK) when I last looked,” said Martin, naming two of Wetherspoon’s main competitors.
“Our costs are quite high. We pay more in labour and repairs than others, I believe,” he said, pointing to £2 billion of sales in the last financial year against just under £43 million of pre-tax profits reported on October 6.
Crunching the numbers, that implies a razor-thin 2% operating margin.
Such is the burden of running a famously cost-competitive pub chain like Wetherspoon’s.
By design, Wetherspoon's benefits from economies of scale.
"Compare our average sales per pub to others...therein lies the key to understanding," said Martin. Fair enough!