Wolverhampton & Dudley's Pathfinder division has big plans for its managed estate, including the 63 pubs it acquired from Wizard Inns last year, managing director Derek Andrew tells The PMA Team
The Bell and Compass in London's Villiers Street has undergone a £500,000 makeover that would make any cappuccino-swigging urbanite happy. Formerly called the Griffin, it is one of the 63 Wizard pubs that Wolves bought for £91m just over a year ago. Now it boasts full-length windows, comfy leather seats, a classy food menu and a wide choice of unusual beer and wine brands and takings are up by 30%. It's the first of half a dozen former Wizard town-centre sites that will see the stocking policies and design cues of Wolves' Pitcher & Piano brand filtering down.
'We saw an opportunity to develop some of Wizard's unbranded town-centre bars, says Andrew. 'We've taken some of the elements of Pitcher & Piano and shaped them for this kind of operation. This is the next generation of a better- defined offer for the target clientele here. It's a modern bar with clean design lines and a range of brands over and above our normal offer, keeping pace with current trends and innovations at Pitcher.
The acquisition of Wizard Inns 12 months ago was the biggest influx of managed pubs at Wolves in the past five years. (Interestingly, Wolves beat Robert Tchenguiz, showing his first interest in managed pubs, to the Wizard package.) The deal provides Wolves with a managed platform in the south east, allowing it to lay claim to a national presence. For Andrew, the major opportunity in the Wizard estate was the chance to invest in some well-located sites and improve the food offer; food accounts for 30% of turnover in the Pathfinder estate, whereas the Wizard figure on takeover was about 15%.
'The big difference in performance in these days is between invested and uninvested businesses, he says. 'Wizard has some very good sites, but there had been a lack of the significant investment in some that would take them to the next level. I think it's also fair to say there wasn't a consistent food offer across the Wizard estate. We've found unexpected gems in Wizard and a few pubs ready for investment. Overall, we're very pleased.
Breathing new life into Pitcher
On the whole, Wolves' managed estate of 536 pubs is about as traditional as they come, with 85% classified as 'community. Pitcher & Piano is the only retail brand the company operates and its only real exposure to the bar circuit. In many ways, though, its rebirth in the past two years typifies elements of the Pathfinder success story in the years that followed the traumatic battle with Pubmaster for the future of Wolves in 2000 and 2001. Wolves was close to selling Pitcher & Piano to Regent Inns for well in excess of £60m in 2001. A change of strategy at Regent led to a withdrawal of the offer and a distinct shortage of other buyers willing to meet price expectations.
Wolves set about reviving Pitcher & Piano, which had been starved of investment for some time. Mike Dowell, former managing director of Costa Coffee, was recruited to spearhead the Pitcher turnaround in a project codenamed Darwin. Success has resulted from judicious investment in the best sites and the sale of poor leasehold sites such as Chiswick and Wandsworth. Wolves has been underpinning Pitcher's future by acquiring freeholds as and when it can freeholds in Nottingham and Swansea have been bought this year. Confidence in the brand is now so high that a number of Wizard sites are expected to be converted to Pitcher & Pianos and the first new-build site for five years is opening in Southampton this month. (There are also rumours of a fantastic site in Brighton on the way.)
Betting on freeholds
Says Andrew: 'We're increasing our batting average by coming out of smaller leasehold sites and increasing the freehold mix, which is now about 40%. You'd have to be an incompetent operator not to do well in a site like the Pitcher & Piano in Nottingham's Lace Market.
'Where you get a sniff, like in Nottingham, that the landlord wants to check out, you're looking at a fantastic long-term bet if you acquire the freehold. We want to be in more affluent parts of the circuit with Pitcher where there is a more aspirational clientele. We're not in any kind of headlong rush, but we think there are opportunities to buy good freehold and long leasehold sites for Pitcher in town and city centres. This is a brand with amazing resilience and we think there are gems out there in the way of sites to be found.
Careful expansion at Pitcher reflects the policy in the more traditional parts of the estate. Pathfinder has a target of 20 openings a year and is one of the few pub companies opening greenfield sites in the middle of new housing estates. Andrew reports little competition here.
'We're pretty unique in having a community pub capex plan, he says. 'These are the sites that sit alongside the Spar shop, the chippy and the dentist. Part of the DNA of local communities is going to the pub, and provided there is enough housing, the key for us is the demographics, not the geography.
Pathfinder identified the market for new community pubs two years ago and Andrew would prefer his openings target was met by 20 of these new-build sites each year. However, planning and pipeline issues do not always allow this. Buying free-trade pubs with 60 or so parking spaces and the potential for conversion to a Pathfinder trading format such as Service that Suits or Bostin Local is the favoured option for making up the openings number. He says: 'These are the sort of pubs where you pay £1m for the freehold and invest a further £400,000 to £500,000. It's very rare that you can buy a free-trade pub and just run it.
The addition of 40 or so managed pubs with the acquisitions of Burtonwood and Jennings, aside from the 63 Wizard pubs, has blown growth targets out of the water this year.
'It's definitely a case of feast rather than famine, says Andrew. 'Who could have predicted three acquisitions in a year?
Maintaining healthy margins
Inevitably, though, as in every managed estate, there has been a steady stream of pubs, hit by ever-increasing costs, being handed over to Wolves' tenanted arm, Union. Pathfinder pubs have an average house Ebitda (earnings before interest, tax, depreciation and amortisation) of £184,000 on average turnover of £608,000 a year. Andrew pinpoints £100,000 a year Ebitda as the figure below which questions are asked about the viability of individual pubs as managed houses.
But the division has had remarkable success at maintaining margins in the face of the relentless cost pressure, obviating the need to pack too many pubs off to tenanted boss Stephen Oliver's division. Andrew says Pathfinder's community pubs are in the top quartile on price. In these sorts of non-discount pubs, if sales can be increased, there's a chance that margin can be maintained and increased costs absorbed. There might even be more profit. Last year, like-for-like sales were up by a healthy 3.2%.
'We have been pretty unique in being able to maintain our margins, he says. 'We had the second-best like-for-like sales increases in the market after Mitchells & Butlers. And in the past five years our margin has been maintained at 21% despite an £18m rise in the division's cost base. It's an enormous credit to our operational team, area managers and pub managers. One of the keys to our success has also been a stable management team on the Pathfinder board in the past five years.
Derek Andrew on:
The challenge of improving service:
'The service issue is the biggest single issue facing us. The challenge for us is to take a business that is well invested and well run to the next level. The service culture in this country still has a lower bar than it could have.
Buying Wizard and Burtonwood:
'If the Wizard auction happened now, we probably wouldn't get it because multiples have changed. If there was an auction now for Burtonwood we might not