After a difficult few years, consumers are now ready to indulge because they have money in the bank
Kaylie Pferten believes that the UK leisure industry is in the best position to make money.
Share: Copy link Facebook X Linkedin Whatsapp Pinterest Flipboard Share this article Join the discussion Follow us Add us as a preferred source on Google Newsletter Subscribe to our newsletter The massive services sector, which makes up about 80% of the UK GDP, includes the leisure sector. The latter includes everything from professional services like accountants and solicitors to eateries, coffee shops, banks, and everything in between. Consequently, there is some sort of connection between the consumer and the entire industry. The services industry and consumer and leisure spending go hand in hand, whether it's the waiter at the restaurant or the well-paid accountant who works for a US investment bank and purchases a fifteen-dollar lunch every day. To put it numerically, consumer spending makes up roughly 60% of the UK's total output, with the majority of this being classified as non-discretionary spending on goods like food and beverages.
The "discretionary" leisure sector, which includes establishments like restaurants and bars, hotels, travel agencies, gyms, and other similar businesses, employs about 10% of the UK workforce. A significant portion is the travel industry, which is estimated by the government to be worth about 70 billion annually, divided roughly in half between domestic and foreign tourists.
Difficult years for the UK's leisure industry.
The UK leisure industry has had a difficult year and a half. The consumer's financial and confidence-related well-being is a major factor. The majority of data and surveys indicate that they are prioritizing non-discretionary spending as they become more frugal with their finances. When consumers believe their discretionary income is growing, they tend to spend more. Customers stop spending when they believe that to be declining, which is detrimental to the leisure industry.
According to Barclays' most recent data, consumer card spending decreased 1.1% year over year in Novemberthe biggest decline since February 2021. According to a survey conducted by the trade association British Retail Consortium, spending at large retailers increased by 1.4 percent annually in Novemberthe least amount since May. According to Deloitte, consumer spending on leisure was largely steady prior to the pandemic before plummeting in the first quarter of 2020. Spending and sentiment improved in 2021, but since May 2020, rising costs, stagnant wages, and political unpredictability have made consumers wary. Analysts predict that this pattern will persist. The Office for Budget Responsibility and the Institute for Fiscal Studies predict that until the end of the decade, consumer discretionary income will increase by about £100 annually.
Costs have continued to rise while spending has stagnated. Over the past three years, energy, tax, and wage costs have all significantly increased, and it doesn't appear that this trend will stop anytime soon. The chancellor declared in the Autumn Budget that the hourly national minimum wage would increase by 8.5 percent to 10.85, and the national living wage would increase by 4.1 percent to 12.70 per hour in April. This came after the national living wage for workers over 21 increased by almost 10% in 2024. This, along with an increase in employers' national insurance, caused labor costs in the labor-intensive service sector to soar.
The Autumn Budget's changes to business rates will also result in a higher tax burden for companies in the upcoming year. The UK Hospitality trade association predicts that an average pub will pay 12,900 more over the next three years, while an average hotel will pay 205,200 more, despite the government's claims that it is keeping the increases for the hospitality sector down by phasing them in over three years. Whitbread, the company that owns the Premier Inn chain, announced a few days after the budget that the changes would increase expenses throughout the company by 7 to 8 percent, giving investors a glimpse of what the industry can expect in the upcoming year.
It should come as no surprise that the sector's stocks have dropped by an average of 1.6 percent so far this year, while the FTSE All-Share index has returned 7.6 percent. On a deeper level, though, businesses appear to be managing in spite of the gloom. Operational efficiencies and the adoption of new technologies have maintained trading and increased margins. According to Panmure Liberum, the sector is therefore less expensive than it was at the beginning of the year, trading at an enterprise value to Ebitda ratio of 6.4 times as opposed to 7.4 times at the beginning of the year and a p/e ratio of 11.8 times as opposed to 13.5 times. Additionally, as the new year approaches, there is mounting evidence that consumers are in a much better position to spend.
Regardless, consumers appear to be spending.
On a busy street in central London, shoppers pass well-known retail establishments.
Despite not spending as much as the leisure sector would like, the average UK consumer has a solid balance sheet. The Office for National Statistics reports that the percentage of disposable income that is saved rather than spent on consumption increased to 10.7 percent in the second quarter, surpassing the three-year pre-pandemic average of 5.6 percent. Therefore, consumers are free to spend their money as they please. As the world has recovered from COVID, there has also been a change in how consumers wish to spend their money over the last three years.
Customers want to spend money on experiences, and they are more than willing to pay for a special, one-of-a-kind experience that is impossible to duplicate. Additionally, they seem more prepared to spend money on expensive experiences and events. 38% of people are dining out less than they did a year ago, according to the October YouGov GB Dining Out Report. That figure is 29 percent even for diners with higher incomes. However, according to a recent Bloomberg report, high-end Michelin-starred restaurants and Hawksmoor and Gordon Ramsay restaurants are seeing bookings that are significantly higher than those from the previous year, sometimes by as much as 30%.
Additionally, it is evident from reading the most recent trading statements of businesses in the industry that consumers are increasing their spending when they do put their hands in their pockets. In the lead-up to Christmas, Mitchells and Butlers (LSE: MAB), JD Wetherspoon (LSE: JDW), Fullers (LSE: FSTA), and Youngs (LSE: YNGA) reported like-for-like sales growth of 3.8%, 3.7%, 4.6%, and 4.2%, respectively, all ahead of the market. Given that they are more of a premium offering than the rest of the market, Youngs and Fullers stand out.
Next, there is the information from On the Beach (LSE: OTB), a travel agency. It stated that it anticipated a record summer in 2026 with 8 percent year-over-year growth after 11 percent growth in 2025, along with its results for the year ending in September 2025. According to the report, reservations for winter 2025 forward were up 15%, with four- and five-star vacations now making up 80% of the total. According to EasyJet (LSE: EZJ), 80% of its reservations are sold for 2026, with double-digit price increases. In 2026, it anticipates a 15% increase in clientele.
Although the UK box office was "weaker than expected" in the fourth quarter, Everyman Media Group (LSE: EMAN), the operator of upscale theaters, reported higher spending per person among patrons. Tickets and food and drink expenditures per person increased by about 6% annually during the 26 weeks that concluded on July 3, 2025.
Often regarded as the UK retail industry's bellwether, Next (LSE: NXT) has exceeded its own growth projections this year. Full-price sales increased by 10.5 percent over the 13 weeks ending October 25, exceeding the forecast of 4.5 percent. Although full-price sales in UK stores increased by 4.3 percent and online sales by 8.7 percent, international expansion was helpful. Data even indicates that consumers are willing to pay more for necessities. One of the priciest supermarkets, Ocado (LSE: OCDO), concluded its half-year to the start of June as the UK's fastest-growing grocer over the preceding 12 months, according to Which magazine. The average value of a basket of goods increased by 0.7 percent to 124.19, while revenue increased by 16.3 percent, ahead of the market, and weekly order volume increased by 14.7 percent.
Investors are unable to disregard the hard, cold sales data. All of these businesses are experiencing strong growth, which contradicts the general narrative that the media and surveys present. This implies that rather than being a true reflection of spending trends, some of the pessimism surrounding the UK leisure sector is motivated by sentiment and confidence. It might be time for investors to jump in.
The price of leisure stocks is dropping.
Black Horse pub and Marston's brewery.
The good news for investors is that some of the most appealing leisure stocks are currently trading at steeply discounted multiples, which is probably a reflection of consumer spending and the industry's negative sentiment. This implies that if the environment is worse than trading updates indicate, the names already have a sizable margin of safety built in, limiting the downside.
One particular company that sticks out is Marstons (LSE: MARS). With a forward p/e multiple of seven for 2025 and 6.4 for 2026, it would appear that the company is having difficulties with both growth and long-term financial viability. However, its most recent preliminary results showed a 71.3 percent increase in profit before tax. On a like-for-like basis, sales rose by 1.6 percent, and its Ebitda margin increased by 140 basis points. As a result, the company's net debt and interest expenses have significantly decreased over the last two years, with borrowing currently at 4.6 times Ebitda as opposed to management's target of four. For the first time in recent memory, shareholder returns are firmly on the radar due to free cash flow of about £50 million. The pubs and bars group has already stated that Christmas reservations were up 11% from the previous year at the end of November, but it is anticipated to report its Christmas trading in January 2026. If the market starts to recognize the stock's growth potential, valuation, and turnaround story, it may see a significant re-rating.
Making money with salad.
Self-help initiatives are always a catalyst for the re-rating of undervalued stocks and help unlock value for shareholders. With several levers to unlock value, SSP Group (LSE: SSPG), which has a sizable international business and sits on the edge of the UK leisure sector, is worth taking into consideration. The company, which owns franchises like Burger King and M&S and brands like Upper Crust, operates concessions primarily at travel hubs across the globe and is the second-largest operator in the industry. The most recent trading report from SSP showed a 6% increase in revenue, with particularly good results in North America and poor results in continental Europe. Recently, management has commissioned multiple strategic reviews of the portfolio, one of which is a review of its long-standing underperformer, Continental European Rail. Additionally, the group owns a 50.1% share in Travel Food Services, an Indian joint venture.
The latter is trading at a higher valuation than its parent company, K Hospitality, after going public in India last year. SSP may sell a portion of its stake in the upcoming years to release funds for investors, as Indian listing regulations mandate a 25 percent free float within three years of listing (it listed with a 13.8 percent free float). Potential catalysts for the stock, which is currently trading at a forward p/e of just 12.4, include the sale of the company's underperforming businesses and the release of funds from Travel Food. That is also reasonably priced for a business that makes an 18.7 percent profit for every dollar invested in the enterprise, according to the pre-tax return on capital employed.
Tortilla Mexican Grill (LSE: MEX), on the smaller end of the spectrum, is worth checking out. The company is the fastest-growing in the UK's casual dining and leisure sector, but its market capitalization of only 16 million makes it probably unsuitable for every investor. In its most recent trading update, the company reported like-for-like sales growth of 7%, which is more than twice the market average. As its store roll-out continues, it is quickly approaching sustainable profitability. The business, which produces "freshly made, award-winning California-style Mexican burritos and tacos," has been catering to UK consumers' desire for nutritious fast food. Over the summer, it introduced a new menu with items like salad and protein pots. Demand has been strong, with sales of protein pots reaching 100,000 in the first eight weeks and salad volumes rising by 133%. There are plans to expand into new markets and add more new menu items. In addition to opening new kiosks, it has started a franchising program with SSP.
But it's having trouble assimilating Fresh Burritos, a French company it bought for £3.9 million in July 2024. Tortilla now has a platform for growth in Europe, but the overhaul of the acquired brands is running behind schedule and costs are rising. Panmure Liberum anticipates that the company will make its first profit of £1.6 million next year as these expenses decline, increasing to £4 million in 2027 as store openings continue. For a company that earns a return on capital employed (Roce) of 24% on its established UK arm, this would put the shares on a forward p/e of just five, which is extremely cheap.
Another operator with lots of levers to pull to spur growth is On the Beach (LSE: OTB). As mentioned, holiday reservations are rising significantly year over year as customers become more willing to spend more. Along with city breaks and cruises, the company is expanding into new markets like the Republic of Ireland to support its core beach-holiday business, which currently accounts for 92% of its revenue. The demand in this market was demonstrated by the new city-breaks arm, which contributed 2% of the group's overall 11% increase in total transaction value in fiscal 2025. Although the On the Beachs cruise industry is too new to judge just yet, it is a tried-and-true market where the company should be able to take advantage of its current brand recognition to increase its wallet share with current clients. Due to these efforts and rising consumer spending, Berenberg analysts predict that the company's sales will increase by 14% in 2026 and 16% in 2027. Simultaneously, they have planned to increase Ebit's margin from 24.7% in 2025 to 27.7%. When all of the aforementioned factors are combined, the bank has projected a p/e of 10.1 for fiscal 2026 and 8.1 for fiscal 2027.
Using AI.
Hostelworld Group (LSE: HSW), the top online booking platform for hostels worldwide, is a tech company disguising itself as a leisure stock. The company is now halfway through a plan to increase its exposure to customers earlier in the planning phase of their trips, leveraging the growing demand for travel experiences, after building a strong growth platform over the previous five years.
In order to achieve this, it recently purchased OccasionGenius, a business-to-business event discovery platform based in the United States. In order to produce marketing-ready content for its clients (such as hotels, dating apps, and airlines), the platform uses artificial intelligence (AI) and technology in conjunction with a human oversight layer to aggregate resources, including national ticketing sites like Eventbrite and Ticketmaster and thousands of "micro" sources, such as local calendar sites and social media.
Although it is not anticipated to have a significant immediate impact on the group's financial performance, Hostelworld has outlined plans to double OccasionGeniuss exposure. Sales are predicted to rise from 95 million to 118 million and Ebit from 15.3 million to 22.5 million by 2027 due to expansion and increased booking demand. But the group's cash generation is truly noteworthy. In contrast to its current market value of 155 million, the group is anticipated to transition from a net debt position to a net cash position of 21.4 million by 2027. As a result, the stock is trading at a sub-ten forward p/e ratio on a net cash basis.
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