Shepherd Neame – executive interview

In this interview, Shepherd Neame’s CEO, Jonathan Neame, and CFO, Mark Rider, discuss the company’s FY26 results, the outlook for trading and the key priorities for investors. Topics include its ongoing pub refurbishment programme, the strategic review of the Brewing and Brands division in response to declining beer volumes and rising logistics costs, and the impact of consumer confidence and wider economic conditions on trading. They also explore the outlook for cost inflation, the company’s pricing power, the potential benefits of government policy changes and the implications of the forthcoming leadership transition, with Jonathan becoming executive chair and Mark taking on the role of managing director.

What is the background to the Jamaica Wine House, and what has the refurbishment involved?

Jonathan Neame: We’re just off Cornhill, in the alleys and passageways between here and Lombard Street. The Jamaica Wine House is one of the most iconic pubs in the City. It’s the home of the London insurance market and the first ever coffee house in London, and it has been an establishment since 1658 – full of character and personality. We’re downstairs. We’ve created the Jamaica Clubhouse, and we try to bring a very opulent, rich, velvety design here for functions, for events and for overspill. Already it’s proving very, very popular.

Why has Shepherd Neame launched a review of its Brewing and Brands division?

Jonathan Neame: For the last two or three years, we’ve been signalling that the market is quite challenging for drinks, and we’re not the only ones. Everybody else in the sector is in the same position. If anything, beer is doing rather better than spirits and certainly better than wine. We highlight three particular issues that we’re dealing with.

One is the high cost of logistics. We did have a very favourable logistics agreement for 10 years. That expired. The new agreement is more expensive, and we’ve had a lot of inflation – over £1m in the last year.

The second is declining volumes, and that’s particularly acute in what we call national markets – the off-trade and the on-trade – and in the category where we’re most exposed, which is ale. So, the combination of declining volumes and increased logistics costs has meant a margin squeeze in our profitability. We’ve seen profits decline, which in part masks a very good performance in our pubs.

The third issue is that a lot of our plant in the brewery is reaching the end of its life and needs investment. So, these are the perfect circumstances in which a review needs to take place. The review is ongoing. I’m not going to be drawn on the outcome of that review, but we do make the point, because it’s important, that brewing is integral to our identity and ultimately to our prosperity as a company. That review is ongoing, and we will announce the results when it’s concluded.

What is driving Shepherd Neame’s stronger recent trading, and how much is temporary versus a genuine underlying improvement?

Jonathan Neame: It’s a really good question, and, of course, none of us will know accurately, but we have had good trading. Our retail like-for-likes were up 6.7% for the last 13 weeks, from the end of June to the end of September, which is great. I think the most interesting thing that I notice in there is that trends, which have been quite adverse to us for a while, have started to improve. Specifically, there was a big gap in last year’s performance between inner London, which has been strong throughout, and outer London, outside the M25. In the last 13 weeks, that gap has closed. There’s still a slight gap, but it’s negligible.

The second thing is that our food and particularly our accommodation trends have improved and are in positive territory, and I think we feel quite optimistic about both those sources of income. Prior to that, in the last year, it was a drinks-led retail performance inside the M25, and now it feels much more broad-based. That can only be related, I think, to a wider consumer. There are plenty of people in London who’ve got disposable income, higher job rates, higher average earnings et cetera. But if that sense of confidence spreads outside, where the savings rate is very high, and people are willing to spend again, that’s very good for our business. So, one swallow and all that, but I think we should celebrate a shift that I don’t think we’ve seen for the last five or six years.

Following the business rates reductions, what else would Shepherd Neame like the new government to do to support pubs and hospitality?

Jonathan Neame: The first thing to say is that the business rates announcement was almost the first thing that the new prime minister said. I think that is testimony to the power of the industry’s lobby, and the campaign we ran and, indeed, testimony to the prime minister for recognising that this sector is chronically overtaxed. But it’s important too, as a sector, for jobs and so on. So, he announced a 20% reduction on top of an existing 15% reduction from the business rates revaluation that came out just before Christmas last year. He’s also announced a further fundamental review in 2029. We need more clarity on that. He said lots of good things about supporting high streets and pubs. We need certainty so businesses can plan – point one.

Point two, we all dream of a lower rate of VAT. Fascinatingly, Scotland has come out in favour of a 10% rate of VAT in the last few days. England is the only country in Europe that has not supported a lower rate of VAT for hospitality. The specific reason is that less VAT equals more jobs. Our trade is incredibly elastic at creating young people’s jobs: 50% of the people we employ are under 25. Lower VAT will resolve the NEET [Not in Education, Employment or Training] crisis. It’s as simple as that.

In the same vein, the third thing we want is amendments to the national insurance changes, which came in two years ago. I think the evidence now is overwhelming that they’ve created the NEET crisis. Simple amendments, such as raising the threshold or, indeed, having a targeted carve-back for under-21s or under-25s, would create more jobs.

Fourthly, we would like to see the differential between draught beer duty and packaged beer duty increase, because if you drink in pubs, it’s much better for the economy, the country and society.

What are the key takeaways for investors from Shepherd Neame’s FY26 results?

Mark Rider: I’ll probably focus on three things in this set of results. The first is the strength of our pub results across the board. We’ve seen like-for-like sales of 3.8% in our retail estate, like-for-like income in our tenanted estate up 2.7% and profit growth of over 4% across both those pub estates.

The second point I’d come to is our Brewing and Brands division. We’ve seen volume decline in that area and profits down. That area has a review of strategy underway, which we’ll report back on when it’s complete.

The third piece I’d focus on is our strong free cash flow generation in the year. Free cash flow was up to £20.2m, and what we’ve done there is invest in growing dividends by 3%, invest £14.1m in the existing estate on projects like the Jamaica here and bring debt down from £83.7m to £82m.

What is Shepherd Neame’s outlook for cost inflation, including energy, labour and interest rates?

Mark Rider: Inflation for us and most people in the sector has been quite a challenge over recent years. In the results we’ve just announced, we’ve signalled the level of labour inflation that we’ve had and the level of logistics inflation we’ve had as we’ve transitioned to a new agreement. Those two elements added up to £2.8m in the results we’ve announced.

Looking forward, we don’t see the logistics inflation we’ve seen over the last two years continuing, as we now fully transition to this new agreement. But going forward, I think our three key areas of focus are energy costs, labour costs and the follow-on effect on interest rates that comes from that.

On energy costs, we’re very well hedged going into the new financial year. We’re largely fully hedged – 100% – across the brewery, so we’re well positioned to withstand some of those direct energy inflation pressures. We’ll obviously be keeping an eye on some of the indirect ones, as that energy then feeds through into things such as food coming forward.

In terms of labour, we’re well versed now in labour inflation. It’s been coming through year to year. We don’t have forward guidance as yet, but we would expect the government to continue at similar levels to what we’ve seen. Broadly, that equates to between about £1m and £1.5m of extra labour costs each year, depending on where the National Living Wage gets set. We’ve got a number of ways of dealing with and mitigating that, as we’ve tried to do over recent years.

Going through to interest rates, clearly the Bank [of England] is signalling some uplift in interest rates in response to this inflation. Again, we’re pretty well set. We’ve got net debt of £82m at the year-end. £55m of that is on fixed interest rates that are long-term dated, so we’ve got a little bit of exposure on the balance of that going into the next year if rates do go up.

How will record diesel prices affect Shepherd Neame’s business?

Mark Rider: It’ll affect us directly in one way and indirectly in other ways. Directly, we have distribution to our customers and to our pubs, so there’s an element of lorry cost that goes with that, where we will see an element of diesel. It’s part of the cost base; it’s not all of it. Clearly, we’ll have to look to try and offset that with other cost savings across the supply chain.

The other way it will start to feed in over time is as one of these indirect impacts of energy, where we’ll start to see the cost of delivered products increasing, and anything that’s linked to diesel coming up as it goes through the year. But I’d see that phasing in through the year rather than from the start of the year that we’re now in.

What will change as Jonathan becomes executive chairman and Mark becomes managing director?

Mark Rider: Clearly, it’s an area of continuity going forwards. I think, as these results are showing, our strategy around our pub estate is very strong. It’s given us continued growth across the piece, and the idea is to continue to make that strategy happen – so continuing to upgrade our pubs, invest in our pubs, recruit the best teams across those pubs and deliver growth. Clearly, the Brewing and Brands business and strategy are under review, and we will come back to that once we’ve completed the review later this year.

This transcript has been lightly edited for clarity and readability. Verbal fillers, false starts and minor repetitions have been removed from the interviewee’s responses only. Punctuation, spelling and formatting have also been standardised in line with Edison house style. No substantive changes have been made to the meaning of the discussion.