Managed operator Mitchells & Butlers (M&B) is out-performing the rest of the managed sector. PAUL CHARITY looks at
Chief executive Tim Clarke thinks that food sales at Mitchells & Butlers will surpass beer sales at some stage in the next two years. Food sales, up by a mighty 9% in the 28 weeks to 9 April, now make up 31.4% of entire turnover only slightly behind beer sales at 33%.
It is M&B's pub restaurant brands that are providing turbo-charged growth in the eating-out market. Unglamorous as Toby Carvery and Harvester may be, diners are enjoying an average of 1,700 main meals a week at each and every venue in the 575-strong pub restaurant division.
Clarke has also revealed that a hitherto unknown pub-restaurant brand in the M&B stable, Pub Carvery, operating across 34 sites, is selling an average of 2,400 main meals a week.
Overall, food sales now account for 55.9% of total sales in the pub-restaurant side of the business.
Continuous menu development
"Through increasing the variety of dishes and extending the range of tastes, we have been enhancing choice and attracting a wider customer base," says Clarke. "Sales benefited from continuing menu development, combined with drinks value and range enhancements."
A table of prices over the past seven years for a selected number of menu items (see box, right) shows the degree to which M&B has been offering customers increasing value.
Food-sales growth is almost matched by wine and soft drinks, adding 8% in sales. By contrast, Clarke believes that the decline in beer sales in the on-trade may be "accelerating" M&B estimates that on-trade beer volumes have fallen by 3% in the first quarter of 2005. The company, by contrast, has grown beer volumes by 2% at the expense of competitors it is claimed by extending range and keeping prices pegged (they have remained broadly flat during the past 12 months).
Managed rival Spirit revealed recently that increased regulatory costs had hit margins. M&B is facing the same intense pressure on costs they have risen by £10m in its first half. It does, however, appear to be having more success at maintaining its margins by using its buying power and keeping an ever-tighter grip on staff rosters employment costs have stayed at 24% of sales.
Further momentum on the pub-restaurant side of the business is coming from conversion of unbranded sites Clarke plans between 20 and 30 new Pub Carvery venues in the next couple of years. "The long-term positioning of the business is increasingly orientating the company towards the higher-growth segments of the pub and pub-restaurant market, offering good value for money," says Clarke.
The high-street story is mixed
The story in the company's high-street pubs and bars is more mixed. Like-for-like sales rose by 3.1% as good as anyone in the sector but operating profit dipped by 2.3% because increases in sales were not enough to offset increased Sky, energy and regulatory costs.
London was a bright spot in the performance stakes, with All One Bar and Nicholson's powering away. But no one who owns high-street circuit venues M&B owns O'Neill's, Flares, Goose Reflex and Edwards is immune from the extreme competitive pressures. Clarke thinks, though, that the pricing environment has now stabilised. "It was toughest in the run-up to Christmas," he says.
Performance in the company's unbranded local pubs can be directly linked to the strength of the food offer (food sales overall in the Pubs & Bars division stands at a middling 13% of overall sales).
"Our unbranded local pubs, with a lower food-sales mix, were more exposed to the beer market declines," says Clarke. "Our branded local pubs in residential areas, with strong food offers, and our central London pubs, performed very strongly."
For the 28 weeks to 9 April, turnover was up 5% to £864m, while profit before tax was up 4.9% to £86m. Earnings per share rose 20.4% to 11.2p.
Innovating to accumulate
M&B is innovating across a range of projects. Its metropolitan, professional format, stylish upmarket bars aimed at urbanites, is being trialed in the provinces at two or three sites. Its premium country dining format a corporate take on the gastro pub now operates at a dozen sites, with takings rumoured to average well above £30,000 per venue.
One the most interesting innovations involves the development of a business franchise under Peter Thomas, the first managing director of Punch.
So far, 103 Mitchells & Butlers pubs have been turned over to his fledging division. Another 25 pubs are set to be transferred to the franchise in the next six months.
Many industry observers believe that M&B is doing the sensible thing in mitigating the effects on profit of increasing costs at the bottom end of its estate by creating what amounts to a tenanted division.
M&B franchisees pay a straight-forward market rent, plus a fee of around 5% of net turnover, on a 10-year lease supported by a 10-year trading agreement; the lease is assignable after two years but not in the last year. Net turnover is defined as anything that goes through the till, including accommodation and door money, but not machine income.
Thomas put the minimum franchisee in-going at £35,000. In return, M&B supplies a range of support, including an EPoS back-office system, "good" discounts on beer products, access to its supply chain and help and advice on a wide range of issues, like licensing and health and safety.
The first franchise site, the Lock Tavern in London's Chalk Farm, is an example of how a fresh entrepreneurial approach can breathe life into a struggling pub. The pub has been franchised to a team that includes disc jockey Jon Carter, husband of former Radio 1 presenter Sara Cox. They have introduced a music-based offer across the week. "They know exactly the market they're after and now have two other sites with us," says Thomas.
Another significant group are those who have taken a site and developed a specialist gastro offering. "We've got some very good food operators," he says.
Choice of which pubs are turned over to the franchise division is not driven by strict earnings criteria. Thomas mentions Leatherhead where it made sense to franchise one pub located opposite an Ember investment. "We were not going to build two Embers so as a test we put one site out to franchise," says Thomas. "We've found a very good franchise operator and we've actually grown our market shares (across the two sites)."
Thomas has been delighted by the range of people who have applied to become franchisees. "We've stayed away from the traditional lessee and seen a range of non-trade people apply. And I've been pleasantly surprised by some of the innovative design and food offers," he says.
M&B's business franchise is now British Franchise Association-certified. "We are the only franchised pub in the market. I didn't want to offer a standard lease," Thomas explains.
"Our franchised model adds the benefits of our skills as a managed operator to provide the franchisee with a competitive edge. The key issue for me is that we run pubs and we take what works on our managed site and pass that information on."
What the analysts are saying
Geof Collyer, Deutsche Bank:
"Notable within the mix has been the very strong performance of central London where like-for-like growth has accelerated and the continued strength of the residential and suburban brands. The performance of the different types of pub has also been notable, with the big residential food brands doing particularly well."
Mark Brumby, Oriel Securities:
"The company is doing virtually everything right. Like-for-like performance has been exceptionally good although tough Euro 2004 comparables are now upon us. It's tough out there but M&B will outperform."
James Wheatcroft, Investec:
"M&B is well positioned to cope with a consumer