W&DB prepare to take on the nationals

Mark Ludmon looks at how Wolverhampton & Dudley Breweries has spent the two months since taking over Marstons - and what it has planned for the future.

Is it too much for one company to brew beer and run pubs at the same time or should everyone follow Allied Domecq, Whitbread or Morrells and put all their eggs in fewer baskets?

This was the question at the heart of Wolverhampton & Dudley Breweries' (W&DB) battle over rival regional Marston's. Despite the City's official line that focus is the key, it was W&DB's vertically integrated pub and brewing strategy that won over the City institutions.

The industry is moving rapidly towards the majority of pubs being owned by a handful of companies, with Whitbread bidding for Allied Domecq's outlets, Greene King bidding for Morland and Pubmaster bidding for Vaux's tenancies.

W&DB has to prove that remaining as a vertically integrated regional brewer will set it up for the future and not just allow it to cling on to the past.

It has begun the complicated process of combining one organisation built up over 165 years with its own 159-year-old business.

The key date was April 3, when the £285m Marston's takeover went through, and over the past two months W&DB has wrenched the two businesses apart and put them together as one.

Managing director David Thompson said: "We're making excellent progress and have a clear focus as an enlarged regional brewing and pub retailing group."

It has sold 63 managed houses and 102 tenancies to Greene King, along with a depot in Winchester, Hampshire, for £71.7m, and closed a second depot in Wrexham, east Wales.

It has already attracted interest for another 18 managed houses and 282 tenancies, which are due to go on the market through Christie & Co this month, hopefully raising another £50m.

With all this cash, W&DB is able to get to grips with the rest of the estate based in the Midlands, North and Wales, casting a very focused eye on its segmentation.

It intends to settle for a portfolio of about 1,500 pubs, equally split between tenanted and managed.

This year it is putting up to £50m into branded pubs, including its most high-profile chain, Pitcher & Piano. Roll-out of the chain has not been as rapid as expected since Marston's bought it three years ago for £22.5m and W&DB doesn't intend to put its foot on the pedal.

It already has five sites opening this year, which will bring it up to 28, but Thompson said expansion would "depend on quality, turnover and return on capital".

It aims to breathe new life into the brand, claiming that the chain's operating profit of £2.1m for the year to March should have been better.

However, Thompson has always been dismissive of the Marston's Via Vita café-bar chain which is being put to sleep, with all five sites being sold or converted.

Other Marston's retail brands are also being killed off, including the nine-strong Thirsty Scholar chain which lost out in the battle to W&DB's similar Varsity concept. This chain is being rolled out from 12 to 16 sites this year.

Customers are being consulted as part of a market research project to work out how to merge the two bundles of pub-restaurants, W&DB's 23 Milestone Restaurants and the 42 Tavern Tables from Marston's.

It also plans limited investment for its more clearly branded food pub concepts, Taverns and Poachers Pockets.

However, W&DB's wet-led pub formats, Merchant Stores and Tap Houses, are to continue with their gradual roll-out, swallowing up sites from the rest of the group's estate.

W&DB is currently investing limited sums in its managed and tenanted community pubs but is concentrating on upgrading existing outlets, although it has five new ones planned in the North East, Cardiff, Bristol and Derby.

Like other regional brewers — and a few foreign banks — W&DB has realised the value of a tenanted estate with a steady income from rents. Last year the current combined estates turned over £18.6m.

Finance director Ralph Findlay said: "Our community pubs are a significant generator of cashflow for the rest of the business."

Thompson said the Marston's estate had suffered from a lack of investment since its owners were expecting to sell them in a securitisation deal.

"There had been minimal repair and maintenance and, while we found the tenanted business was performing better, it needs fundamental underlying investment," he said.

"There was no doubt that this was an area that had not attracted significant management attention."

He was also critical of some of the lease agreements which Marston's had signed, particularly for Pitcher & Piano sites, believing his property team could have done better. Although they run for up to 25 years, W&DB intends to move as much as possible towards freehold sites rather than leasehold.

But when it comes to brands, it is the beers that have given W&DB an incredible product range for the future.

Marston's Pedigree is in the top 10 of national ale brands and is number two in cask ales, according to the latest Publican Brands Report. But this is not enough for W&DB which has launched a battle to force Draught Bass off the cask number one spot — although it recognises the importance of the Burton tradition and is not considering to come up with Banks's Pedigree.

It doesn't intend to leave its own beers out in the cold. The Banks's beer range is currently number six in the rankings of national ales while Banks's Bitter is number 14. The aim is to push the whole brand up to number five and the bitter into the top 10 by winning new customers in the Midlands and the North.

Other tiny products have been dropped, such as Russell's Mild, allowing a focus on national brands and major regional brands, such as Camerons.

Sales director Derek Andrew said: "We're putting more marketing spend behind fewer brands to give us more clarity."

However, the beer business has been boosted by its licences to brew international lager brands, Kronenbourg 1664 and Harp Irish, and manage Heineken.

W&DB has blamed extra costs from the minimum wage and the working time directive for the end of a two-year price freeze for its beers at both retail and wholesale level.

A pint of Banks's has risen from £1.27 to £1.32 while an average Marston's Pedigree has been put up from £1.66 to £1.70.

However, the integration of the two companies has gained savings of £20m, £3m more than originally predicted. Another £4.5m is expected to be made this year from other economies of scale, such as increased buying power.

Last month W&DB revealed the new group had a total combined half-year turnover of £166.5m, up by nearly 20 per cent.

Thompson said: "It's clear that consumers are much more confident than they were and the South East is particularly robust."

W&DB is now confirmed as the leading regional brewer in the UK, closely followed by Greene King which is fighting to regain its number one spot through a takeover of Oxfordshire brewer Morland.

They are aiming to prove that it is possible for regional brewers to face up to the nationals if they have good retail brands, have focus — and a clutch of the UK's leading beers.