A reduction in draught duty was celebrated in parliament during Rachel Reeves’s budget announcement; however, cutting a “penny off a pint” will not alleviate the financial pressures that pubs face from rising national insurance contributions, increased wages, and potential closures.

Share prices of some of London’s largest public house operators, including JD Wetherspoon, Mitchells & Butlers, and Young & Co’s Brewery, have already taken a hit following negative market reactions to the chancellor’s speech. The burning question now is which pub chains are best equipped to weather this financial storm?

The core issue lies in the impending rise in employment costs. Starting in April, the national minimum wage will rise by 6.7%, with an even steeper increase of 16.3% for individuals aged 18 to 20. Additionally, the employer national insurance contribution will rise from 13.8% to 15%, while the threshold for this tax has been lowered from £9,096 to £5,000, resulting in an average increase of £614 per employee for businesses.

Pubs, in particular, are likely to feel the strain as they often have a workforce composed predominantly of low-paid service staff and operate on narrow profit margins. The sector has navigated through the pandemic, faced extreme inflation, and now confronts a significant rise in employment costs.

Optimistic investors are counting on pubs to shift these increased costs onto customers. Sir Tim Martin, the founder and chairman of Wetherspoons, indicated last week that all hospitality outlets are expected to hike their prices.

While Wetherspoons aims to maintain competitive pricing, the adaptability of consumers to further price hikes remains uncertain. Analysts from Deutsche Bank predict that the new budget measures could necessitate price increases exceeding 5%, against a projected broader inflation rate of 2.3% for the upcoming year.

Soaring Wages Challenge Stability

Wetherspoons faces unique vulnerabilities due to its substantial payroll expenses. Employing over 42,000 individuals, it ranks as one of the industry’s largest employers. Its wage expenses have accelerated at a compound annual growth rate of 7% over the last five years, according to Deutsche’s analysis. Moreover, Wetherspoons’ strategy of providing table service needs more staff, limiting operational flexibility in workforce management.

The budget’s annualized impact is projected to cost Wetherspoons approximately £60 million. This impact is estimated to result in an 8% decline in earnings per share—from 47.4p to 43.5p in its 2025 financial year—and a 14% decline from 49.7p to 42.6p in 2026, per Deutsche’s estimates.

Thanks to its scale, Wetherspoons may be able to absorb some of these increased costs, given its commitment to remaining one of the most affordable options in the market, especially regarding key value items such as soft drinks and coffee.

Streamlining its operations by reducing the number of pubs may be another strategy to mitigate rising costs. Wetherspoons has reduced its pub count from a peak of 951 in 2015 to 797 as of November 3. Although Martin has expressed a desire to reach 1,000 locations, this timeline remains unofficial, suggesting that selling off underperforming venues could reduce expenses.

Mitchells & Butlers, valued at £1.4 billion, operates primarily as a food-focused chain and faces similar labor costs. It employs roughly 50,000 across 1,700 venues but has experienced an increase in its labor-to-sales ratio—from 26% in 2016 to 33% last year. Rising energy costs have further depressed adjusted cash profit margins by 4.6 percentage points since 2019.

Post-budget expectations indicate a potential 12% decrease in earnings per share for Mitchells & Butlers—from 27.6p to 24.1p in 2025, and a 21% decline from 30.56p to 23.9p in 2026, according to Deutsche’s forecast. As of now, there has been no official update from the company regarding these projections. Analysts from Peel Hunt predict an approximate cost of £4.6 million for Young’s due to the national insurance increase, alongside an additional £1 million from wage cost increases. Their upcoming full-year results are poised to provide clarity on future expectations.

Earlier in the year, Young’s increased prices by 1.8%, with management anticipating that market prices would normalize within the usual range of 2.5% to 5%. Given the current climate, they now appear more likely to approach the upper end of that range.

Are Pub Stocks Currently Valued Lower?

The hospitality sector presents a challenging landscape for investors, particularly as pubs are notorious for their slim profit margins. Mitchells & Butlers shows the lowest profit margin at just 4%, while Wetherspoons and Young’s are around 7%.

It is fairly predictable that Mitchells & Butlers shares are the least expensive, trading at 10.5 times predicted earnings for 2026. Young’s shares are trading at 13.3 times earnings, while Wetherspoons trades at 18.5 times the expected earnings for the 2026 financial year, despite experiencing a drop of nearly 20% in share value since the beginning of the year.

These major operators stand to gain market share from independent pubs that struggle to adapt to heightened costs. Nevertheless, the upcoming year will present challenges as both businesses and consumers adjust to new higher prices. Wetherspoons and Young’s are better positioned to absorb costs and profit from increased volume if competitors increase their prices disproportionately since their operating profit margins are nearly double that of M&B.

Advice: Hold shares in JD Wetherspoon, Young’s, and Mitchells & Butlers amidst the necessity for pubs to rapidly adapt to new elevated costs.