Equity markets have fought something of a phoney war with the economy in recent months. There were those who said it would all be over by Christmas – meaning that institutions would have reweighted cash in equities by the calendar year-end and then the proper fighting would begin. The gutters of the world’s stock exchanges were expected to run red in the new year.
In reality, the killing never started. Actually, it’s less of a phoney than a phantom recession. There are few who dare to say it, but we might actually have got away with a soft landing and prospects, if not exactly buoyant, are far from dismal.
This leads me to wonder whether the bellwether of the economy, the drinks industry, will enjoy a reprieve. Last September, I noted how prospects looked grim for the on-trade as Whitbread, owner of chains from Dome to Bella Pasta as well as pubs, reined back on a 400m expansion programme and Bass downgraded profits by five per cent, knocking 15 per cent off its market capitalisation.
The industry blamed a poor summer and a lousy World Cup, scapegoats that replaced the real culprits – the people who failed to get the marketing right. My line, then and now, is that the British pub trade spends too much time looking back to Victoriana, rather than forward to a millennial, continental style of licensed catering.
With a recession that, with any luck, has turned out to be a chimera, prospects for this industry should turn out to be rather better than expected.
We’ll have to wait and see as the interim and full-year results emerge this year. But one situation in particular intrigues me. I believe the time is nigh for a long-awaited shake-up at Allied Domecq, the combine that has never quite shaken off the unhappy ghost of Allied-Lyons.
Last autumn, bucking the trend that I have just described, prospects began to brighten for Allied. The company was in high spirits, as its Beefeater-to-Ballantine’s spirits division recovered to make a sound 11m trading profits contribution to an annual one per cent rise in overall pre-tax profits of 625m.
But optimism was short-lived. Chairman Sir Christopher Hogg issued a profits warning in the new year, arising from the disappointing performance of the 3,700-outlet pub chain. Those miserable Victorian pubs have caused trouble again. The shares, which had been as high as 646p in the past 12 months, dropped to the 450p mark.
If ever there was a paradigm of Britain’s boring old pub trade, Allied is it. The market is as flat as its beer. Allied’s Firkin chain conjures up pictures of men in beards with T-shirts bearing unwitty slogans – very Seventies. And Irish theme pubs, such as Allied’s Scruffy Murphy’s, hark back to a golden age that never existed and so can’t be expected to last longer than, say, the Titanic craze.
Although I’m no fan of Bass’s All Bar One chain, which is altogether too bare-boarded and reminiscent of a refectory for my liking, it is at least more modern in approach than the Firkin chain.
On-sales have declined by between two and four per cent across the country, but Allied has indicated that profits from the division will be even worse than that.
One should be reluctant to personalise this issue, but it does begin to look as though at least one head will roll. And the obvious candidate for the chop is Allied’s chief executive, Tony Hales, who may be invited to spend more time with his football club, Aston Villa, where he is a director.
It has not gone unnoticed in the City that last October’s results were accompanied by the appointment of Philip Bowman as finance director. Bowman has garnered something of a reputation as an operator at Bass. He is no simple number-cruncher. He is a man who gets things done – and things definitely need to be done at Allied.
One of those things could well be the long-discussed disposal or merger of Allied’s spirits division. One of the hoariest old rumours around is that Canadian drinks-to-movies conglomerate Seagram is the obvious partner. Seagram claims to have grown bored with the theory.
In any event, it has problems of its own. Seagram’s foray into the world of the big screen and entertainment, which still has a touch of chief executive Edgar Bronfman’s self-indulgence about it, is proving something of a millstone. Last week, it reported a $266m (166m) deficit for its first quarter as a direct result of charges accrued from the purchase of
PolyGram and exposure to poor cinema performance through Bronfman’s other plaything, Universal Studios.
A merger with Allied’s spirits division could generate fresh earnings from an industry that Seagram knows and whose distribution channels are proven. That ball is in Seagram’s court.
Meanwhile, something needs to be done in a hurry at Allied. Seagram knows it and will realise that a stand-off can only improve the deal. Otherwise, Allied must find other partners with whom to unbundle some of its shareholder value.
That’s quite a challenge and if it is to be accomplished, a large degree of confidence is necessary. It is likely that the task will fall to Bowman rather than Hales.