Pubs group JD Wetherspoon’s (JDW) value credentials continue to shine through. According to fund manager Anna Farmbrough at Ninety One the company has doubled its average price advantage over competitors to 40% since the pandemic.

Farmbrough notes that a few years ago there were three pubs in her local area while today there is just a single Wetherspoons, demonstrating its ability to benefit as consumers trade down.

JD Wetherspoon was founded by Tim Martin in the 1970s, floated on the stock market in the early 1990s and today has an estate of just over 800 pubs.

An investor who bought shares at the IPO (initial public offering) in 1992 at a split adjusted 30p per share and held on through thick and thin would today be sitting on a 20-fold gain, comfortably outperforming the FTSE 250 index.

Shares sat down with executive chair Martin for a chat to find out how he built one of the UK’s most successful hospitality firms. As we reveal, in many respects Wetherspoon operates a differentiated business model.

Martin is just back from holiday and in good spirits despite traipsing all the way on foot from Victoria to the Metropolitan pub next to Baker Street tube station.

THE START OF THE JOURNEY

Every long journey starts with a single step and the Wetherspoon story started with a single pub in Muswell Hill in north London in 1970 which Martin purchased from an entrepreneur who had converted it from a bookies.

It may seem an unusual move for someone fresh out university with a law degree who also qualified as a barrister, but, as Martin explains, at the time there was a perception that the UK needed more entrepreneurs, so he took on the challenge.

Martin admits he knew nothing about running a pub at the time and because of the ensuing chaos he decided to rename the pub to Wetherspoon from Martin’s Free House.

The name comes from a teacher at a school he attended in New Zealand who similarly had trouble keeping order in the classroom. Although Martin says many years later when the story found its way back to New Zealand, checks made showed nobody by that name existed.

Martin is too honest to claim that he foresaw the ensuing success but, at the same time, the entrepreneur believed it was possible to build a business by offering good quality beer and food at a reasonable price.

Sam Walton, founder Walmart (WMT), the largest grocery business in the world became an inspiration for Martin after he read Walton’s memoir Made in America.

A guiding business principle Martin takes from Walton is giving frontline staff a big say in how the business is run, rather than leaving it entirely to senior management.

WHAT VALUATION DO THE SHARES TRADE ON?

At 608p and after a sell-off in the wake of Budget changes, which are expected to lead to a meaningful increase in costs, JD Wetherspoon trades on a PE (price to earnings) ratio of 12.2 times consensus forecasts for the 12 months to 31 July 2025. According to LSEG data, that compares with an average 12-month forward PE of 17.6 times for Wetherspoon’s entire life as a public company.

STAFF HAVE THEIR SAY

Wetherspoon is unique in the UK market in giving staff board membership with three seats currently occupied by area managers. The company gives free shares to employees. Since 2006 the company has paid out £520 million to employees in free shares and bonuses.

Martin is critical of the UK corporate governance rule which requires non-execs to retire after nine years, pointing out in practice this means that ‘no board director at a bank was there in the great financial crisis’, for example. He has coined the phrase GMII which he believes better describes the current system. It stands for ‘Guaranteed mediocrity (by) institutionalised inexperience.’

Forty-five years after opening his first pub Martin still visits 10 pubs a week on average, so that he keeps in touch with the issues affecting front line staff and the business. Amazingly, given the size of the estate Martin manages to remember the names of individual members of staff.

Wetherspoon staff are among the most loyal in hospitality with over 11,000 staff having worked for five years or more and almost 4,000 having worked for more than a decade and 632 people who have been at the firm for 20 years.

The second Walton principle Martin has embraced is a relentless focus on customer service and providing it at the best price. The Wetherspoon 10-minute rule is a good example of this type of thinking, with customers often getting served within this timeframe.

As touched upon earlier by Anna Farmbrough, Wetherspoon is always looking to widen its price advantage against competitors, providing a sustainable advantage.

A perhaps lesser-known differentiator of Wetherspoon is that it was won more than 200 design awards. The company is proud of transforming old and often iconic buildings into vibrant pubs.

Martin says he has a sense that the new spaces create a relaxed atmosphere where customers feel at home. Where a building has a history which resonates with the local community, the renovation and new design also serves as a connection to the past which brings the community together.

INFLUENCED BY BUFFETT

When doing some research ahead of the interview Shares was struck by the similar format of a financial table which appears at the front of every Wetherspoon annual report and one which appears in every Berkshire Hathaway (BRK-B:NYSE) annual report.

Martin confirmed that the similarity was not a coincidence, and he is an admirer of Warren Buffett and his late business partner Charlie Munger.

Martin is fond of quoting other entrepreneurs he respects and offered up one from Bill Marriott: ‘The four most important words in the language are:

“What do you think?”’ Martin interprets this in relation to hospitality industry. ‘In general, boards don’t know much. People on the front line, pub managers and staff, know much more,’ he says.

When asked for the most important financial metrics for investors to monitor Martin pointed to sales growth and generating free cash flow. In November the company revealed sales growth had outpaced the industry average for the 25th consecutive month.

Since the pandemic sales per pub have increased by 21% which has contributed to sales topping £2 billion for the first time, despite the number of pubs shrinking from 950 in 2015 to around 800 today.

The company plans to increase the size of the estate back towards 1,000 and Martin says he believes there is scope to expand by a further 200 pubs across the UK.

Despite a strong recovery in sales, most pub groups have yet to regain the level of profitability they enjoyed before the pandemic. This is more than reflected in share prices which sit well below 2019 levels.  

DEALING WITH HEADWINDS

Looking out to 2025, hospitality faces yet more headwinds after the Labour Government’s Budget which increased employer’s national insurance contributions with another increase in the national living wage in the offing from April 2025.

These measures could cost the quoted pub groups a combined £130 million in extra wage costs and push up the cost of a pint. Martin said he believes all hospitality businesses plan to increase prices, adding, ‘as always, Wetherspoon will make every attempt to stay as competitive as possible’.

When asked about the possible changes the pandemic may have on the future of hospitality Martin says he is a strong believer in people being ‘creatures of habit’.

Pubs may have evolved over the years, but they have been a staple of British culture for nearly 400 years and look set to remain as relevant today as ever. With its distinctive and differentiated offering Wetherspoon looks well placed to prosper for years to come.

Tim Martin plans to be part of that future and when asked somewhat impertinently if he was thinking about retiring anytime soon (he turns 70 in 2025), the question brought out his inner Buffett: ‘I plan to retire five years after I die,’ says Martin, repeating the Sage of Omaha’s famous quote.

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