Is it worth buying shares in the big pub groups?

A cut in draught duty was met with cheers in parliament during Rachel Reeves’s budget, but knocking a “penny off a pint” will not save pubs from higher national insurance contributions, more expensive wages and possible closures.
Some of London’s biggest listed pub operators have already felt the pinch, with shares in the likes of JD Wetherspoon, Mitchells & Butlers and Young & Co’s Brewery falling sharply since the chancellor spoke at the dispatch box. So which ones are best positioned to survive the latest crunch?
The heart of the problem is that soon it will become much more expensive to hire staff. From April, the national living wage is being raised by 6.7 per cent, or 16.3 per cent for 18-to-20-year-olds. The employer national insurance contribution (NICs) will increase from 13.8 per cent to 15 per cent and crucially the threshold at which companies must pay the tax has been cut from £9,096 to £5,000, which effectively translates to a per capita increase of £614 for employers.
Among the most vulnerable are businesses with a high number of relatively low-paid service staff and thin margins. For pubs it has been out of the frying pan, into the fire and back into the frying pan again, having survived the pandemic, a period of exceptionally high inflation and now a big jump in employment costs.
Bullish investors are hoping that pubs will be able to pass on these higher costs to consumers. Sir Tim Martin, the founder and chairman of Wetherspoons, has certainly set the scene, telling investors last week that “all hospitality businesses, we believe, plan to increase prices”.
Wetherspoons says it will try to stay as competitive as possible, but whether customers will be willing to put up with even more price rises is not certain. Analysts at Deutsche Bank believe that the budget measures could require price rises of more than 5 per cent, compared with forecasts of 2.3 per cent broader inflation next year.
Wetherspoons’ biggest single cost is its staff, which leaves it very exposed to these new price rises. With 42,208 employees it is one of the largest employers in the sector. Its wage bill has grown at a compound annual growth rate of 7 per cent over the past five years, according to analysis by Deutsche, and its model of table service for diners means it may have less wiggle room to compromise on how many staff are working in each of its pubs.
Wetherspoons estimates that the annualised impact of the budget is £60 million. This is expected to translate to an 8 per cent drop in earnings per share from 47.4p to 43.5p for its 2025 financial year and a 14 per cent drop from 49.7p to 42.6p in 2026, Deutsche has estimated.
The pub group’s scale means that it should be able to absorb some of the costs, especially as it values being one of the cheapest propositions on the market, particularly on its “key value items” such as fizzy drinks and coffee.
Slimming down its estate could be one way to handle higher costs: Wetherspoons hit a peak of 951 pubs in 2015, compared with 797 as of November 3. Martin has previously suggested he wants this number to hit 1,000, although there is no official target date, so for now disposing of some of the worst-performing pubs could help to push down costs.
Its bigger rival Mitchells & Butlers, with a market capitalisation of £1.4 billion, is more of a food-centric chain, though it is similarly labour-intensive. It employs roughly 50,000 people across more than 1,700 pubs, bars and restaurants. In the past, the company has mitigated some wage costs but the labour-to-sales ratio has still increased from 26 per cent in 2016 to 33 per cent last year. Meanwhile, a rise in energy costs has meant that its adjusted cash profit margin has dropped by 4.6 percentage points since 2019.
Post-budget costs mean that there could be a 12 per cent drop in earnings per share from 27.6p to 24.1p in 2025, and a 21 per cent drop from 30.56p to 23.9p in 2026, according to estimates from Deutsche. Mitchells & Butlers has not yet officially updated its investors on what it expects. Analysts at Peel Hunt, the broker, think that the employers’ NICs increase will cost Young’s £4.6 million from next April, with the wage bill adding a further £1 million. Full-year results landing at the end of this month are likely to paint a picture for the year ahead.
The company raised prices by 1.8 per cent earlier this year, when the management said that it would expect pricing to return to its more typical range of 2.5 per cent to 5 per cent across the market. The top end of this range now looks much more likely.
The hospitality industry is risky ground for investors, especially as pubs have such notoriously weak profit margins. Mitchells & Butlers is the weakest at 4 per cent, compared with Wetherspoons and Young’s, both at about 7 per cent.
It is perhaps no surprise then that shares in M&B are the cheapest, trading at 10.5 times expected earnings for 2026. Young’s trades at 13.3 times, while Wetherspoons trades at 18.5 times expected earnings for the 2026 financial year, despite its shares losing roughly a fifth of their value since the start of the year.
There is some potential upside for these big operators, as they may be able to take market share from independent pubs which are not able to keep up with higher costs. But next year will be tough as business and consumers adjust to higher prices. Wetherspoons and Young’s should be able to absorb more of the costs and benefit from rising volumes if competitors raise prices by more, given that their operating profit margins are roughly twice as high as M&B.
Advice Hold JD Wetherspoon, Young’s, Mitchells & ButlersWhy Thin profit margins mean pubs must adjust quickly to new higher costs