A profit warning this week from JD Wetherspoon brought to mind a question that’s been bothering us for a while: does the UK’s best-known pub landlord make more on its gambling machines than it does on drinks or food?
In many ways, it’s a stupid question. The slot machines couldn’t exist without the pub estate. They’d get wet when it rains. Wetherspoons, justifiably, doesn’t break out profit by segment in its financial statements. A pound in the puggy is treated as complementary to a breakfast muffin deal and a pint of Worthington’s Creamflow.
On the other hand, gambling terminals are exposed to a different set of risks to Spoons’ core business of booze and burgers. The possibility of the profit they generate being regulated towards zero, however distant, gives us a reason to separate them out from the whole.
As befits a stupid question, nevertheless, we’ve put very little work into finding an answer.
We’re focused on ’Spoons for no reason other than it publishes data: none of the listed peer group (Youngs, Marston’s, Fuller’s, Mitchells & Butlers) makes gaming revenues a separate line item; the rest (Stonegate, Greene King, Punch Taverns, Admiral) are privately owned. We sought guidance from sector analysts but haven’t run our numbers past the company, so there’s a non-zero chance of this post provoking a rebuttal in the next issue of Wetherspoon News. The estimates that follow have very, very wide margins for error.
Starting simply, here’s a chart showing Wetherspoons’ revenue mix.
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Revenue from gaming, though pretty small in group terms, has been a useful source of growth. Ignoring pandemic disruption, machine takings have grown by approximately 11 per cent each year and last year accounted for 3.4 per cent of group revenue, up from 2.5 per cent in 2019.
Wetherspoons’ most recent profit warning blamed cost inflation on sales that were “marginally lower” than expected in the fiscal fourth quarter. From the research we’ve seen, the guidance appears to have knocked about £21mn off consensus revenue forecasts for 2026YE.
It seems as good an approach as any to take food and drink sales estimates for 2026 down by £10mn each, then knock £1mn off machines. The back-of-envelope approach to forecasting gives us something like this:
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Profitability is a whole other matter.
Wetherspoons reports a single operating margin before separately disclosed items (meaning estate disposals, finance income, that kind of thing). Last year the operating margin was 6.88 per cent. This year, it’ll probably be nearer 6.6 per cent, then back to just below 7 per cent in 2027 after the cut announced yesterday in pub business rates takes effect.
There’s not much information around about the profit margin on gambling terminals specifically, but it’s reasonable to assume it’s quite a bit higher than the group average. ’Spoons’s machines are leased, meaning no associated labour, debt or central cost. The revenue figures it reports have gaming duty already deducted, presumably by the company doing the leasing. In effect, it’s a profit-share agreement whereby ’Spoons sublets its space for a clean cut of takings while the supplier does all the work. It’s a capital-light bit of a very capital-intensive business.
Wetherspoons first rolled out casino-style digital gaming machines in 2018. Its investor presentations at the time suggested to analysts that the new machines were generating about a quarter of group profit, on 2.5 per cent of group sales, which implied an operating margin of approximately 55 per cent.
Punching that number into the spreadsheet, then putting the rest of the business on 5 per cent, spits out a group operating profit trend that looks in the right sort of ballpark to what Wetherspoons has reported. We’ve no confidence that the approach is reasonable or fair, however, so the chart below lets you choose your own ex-machines margin assumption:
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Based on these very rough figures, if we were to assume a 4 per cent ex-machines operating margin, ’Spoons might be making more from gambling than food. You’d have to assume a 3 per cent ex-machines margin for the gambling rake to overtake bar takings in the current financial year. It’s all very tight though, as you might expect for a pub operator whose whole point is that it undercuts the competition:
So have we just wasted your time and ours? Yeah, probably. The one prop we can fall back on is regulatory risk.
Most pubs including ’Spoons offer what the UK Gambling Commission calls Category C gaming machines — meaning terminals offering a maximum £100 return with a £2 maximum bet. The standard-rate tax on these machines is 20 per cent of net takings.
Public opinion has tilted towards raising machine duties, but the focus has been on higher-stakes Category B machines found in bookmaker shops rather than pubs. The last loud call for an across-the-board tax rise was just under a year ago, when the Institute for Public Policy Research and former Prime Minister Gordon Brown campaigned for Machine Gaming Duty of 50 per cent. (Tax Policy Associates did a good cost-benefit analysis.)
Could similar proposals resurface? New PM Andy Burnham has tended to vote in favour of gambling regulation. Earlier this year he co-signed an open letter by Labour MP Dawn Butler calling for reform of planning laws that forces councils to issue new gambling licences for betting shops, adult gaming centres and casinos irrespective of the potential community harm.
There’s been no suggestion that gambling reform is high on the new government’s agenda. Nevertheless, the announcement yesterday of a tax break for pubs and entertainment venues might draw fresh attention to a significant money-spinner for the sector that companies like Wetherspoon have rarely sought to highlight.