Time was finally called on Slug & Lettuce operator SFI Group

It came as no big surprise when SFI Group slid into administration last month. This was a company that had been in intensive care since late 2002 when a £20m blackhole was discovered in its accounts. Its shares were suspended and de-listed and by the time the 2003 accounts were published the black hole had turned into a £58.8m canyon. Almost £60m in shareholder money had been spent in a headlong rush to open more and more high-street sites without creating a single penny of shareholder value.

Stuart Lawson, recruited to run SFI in June 2003, claimed at the time: 'Attention, I guess, was always on what's coming next, without the proper focus on doing things a little bit at a time. SFI's banks swapped £80m of debt in 2004 for a 75% stake in the company with the belief that its fortunes could be turned around in a three-year recovery plan. By the end of last year, though, it was becoming clear that SFI might not be allowed the full three years.

A number of its banks had sold their stake in SFI to debt-trading companies, not known for their patience in seeing a return on their money. A review of SFI's future resulted in a sale of its 99 best sites to Robert Tchenguiz's Laurel Pub Company for £80m.

The remainder of SFI was placed in administration with PricewaterhouseCoopers (PwC) looking for best offers on the 50 remaining venues. These 50 sites, one in three of the entire estate, were not wanted by Laurel because they are marginal outlets, often with onerous rents. The bottom line here is that SFI committed itself to poor sites or onerous leases over and over again.

In other sites, its brands were not strong or distinct enough to justify acquiring them. As Panmure Gordon analyst Douglas Jack says: 'SFI's downfall was due to its over-expansion being too dependent on undifferentiated chameleon bar brands that were incapable of sustaining their earnings in an increasingly competitive and specialised marketplace.

It's worth looking at these venues in greater detail to find out what kind of deals SFI was committing itself to in its headlong charge to expand.

Bar Med was SFI's weakest link

Bar Med is widely regarded as SFI Group's weakest brand almost since the day of inception. In 2001 former SFI finance director James Kowszun sent a memorandum to fellow board members warning of the greater operational risks of Bar Med. Last year Stuart Lawson conceded: 'It has run its course in some locations.

Laurel declined to buy 12 of the 22 Bar Meds operated by SFI. Of the dozen Bar Med sites passed to the administrator, just two are still being traded Golders Green (with an annual rent of £105,000 per anum) and Beaconsfield (with a mighty rent of £170,000 per annum). The average rent at the 12 Bar Med sites is £112,000 per annum with an average rates bill of £29,500.

Some of the Bar Med sites have rents to make your eyes water: £135,000 per annum at Nothampton, £170,000 in Oxford, £150,000 in Croydon and £122,000 in Bristol. Not surprisingly, all four of these sites are closed. At five of the closed sites, rent reviews are overdue.

In the case of Cheltenham (rent £85,000 per annum), the rent review is two years overdue. SFI clearly thought Bar Med was a brand with legs, signing up for leases at least 35 years long in 11 out of 12 cases the Liverpool Bar Med (rent of £73,200 per annum) has a 25-year lease. Many sites lasted less than five years before PwC decided that less money would be lost by closing their doors.

Harrogate, with a rent of £85,000 per annum, was opened at the start of 2001 with new leases signed on Birmingham, Croydon and Leeds since the turn of the century. To make these Bar Med sites work, SFI needed to be taking well in excess of £20,000 a week at each. A substantial drop below that figure meant they quickly became marginal.

Laurel decided there were just six Bar Med sites Guildford, Bournemouth, Reading, Crawley, Tor- quay and Shrewsbury worth buying (the remain- der of its acquisition list was made up of 38 Litten Tree venues, 44 Slug & Lettuce outlets, five Fiesta Havanas and a few individually-named pubs).

Of the 21 Litten Tree sites being sold by the administrator (from an estate of 59 sites), 11 have been closed for business. The average Litten Tree rent at the 21 venues is £86,000 with an average rates bill of £35,000. PwC has decided the Litten Tree venues in Swindon (£110,000 rent per annum), Macclesfield (£80,000), Colwyn Bay (£70,000), Staines (£105,000), Braintree (£62,000), Burnley (£65,000), Barnstaple (£70,000), Camberley (£85,000), Slough (£122,000), Croydon (£88,000) and Reading (£85,000) are not worth keeping open. Four of the closed Litten Tree sites were re-opened as recently as 2002 the year the company admitted overspending by £16m as it rushed into the final stage of its over-expansion.

Dozen Slug & Lettuces shunned

Even SFI's best brand, Slug & Lettuce, seems to have suffered from questionable site selection and investment decisions. Of the 56-strong estate, Laurel declined to buy a dozen sites. Of these 12 sites, the administrator has closed Kingston (rent of £231,856 per annum), Milton Keynes (£85,000) and Glasgow (£85,000). Aside from Kingston, there are two Slug & Lettuces still trading with mega-rents: Windsor pays £234,000 per annum and a site in St Martins Lane, in the West End, London, has an annual rent of £243,000. Overall, taking out the three mega-rents, the Slug & Lettuce sites have an average rent of £79,000 per annum.

Of the Slug & Lettuce sites still trading at least one, Newbury, is a converted Parisa cafe bar, the chain SFI acquired at the end of 2001. With a rent of £56,000 a year, the Newbury site is, arguably, just too small to trade as a Slug & Lettuce in the long term.

Overall, this group of SFI venues make it clear that the seeds of the company's destruction were sown some time ago. It is likely that many of these sites will pass to individual entrepreneurs who know their locality far better than SFI ever did.

SFI was merely a castle of sand

No doubt, they will be pressing landlords to offer rent deals at values much lower than those SFI were willing to pay. For those who bought SFI shares that are now worthless, these 50 properties represent the primary reason why this company turned out to be little more than a castle of sand. Over-rented sites lead to low profits and low leasehold capital values.

Stuart Lawson has blamed SFI's problems prior to his arrival on a failure to make the organisational changes needed to run a company that quadrupled in size in a few years. 'There was just an inappropriate way of doing things for the scale of the business SFI had become, he said last year. 'It was a business that had grown very quickly without the appropriate controls. A small entrepreneurial business will work differently to a large business, but the skill sets and processes have to grow with the company. I would suggest those things didn't grow with this company.

There's no doubting that SFI's finance department struggled to keep up with its expansion. But SFI was guilty of over-investment and poor site selection. Most companies will struggle if they open as many as one poor site in 10. With Bar Med and Litten Tree openings, SFI's strike-out rate appears to have been much higher.