Business Opinion
Cains pioneers new business model
The story of the rise of Cains began a new chapter last week when the reverse takeover of managed operator Honeycombe Leisure won the backing of shareholders. Cains owners Sudarghara and Ajmail Dusanj have an enviable reputation for turning around businesses.
When they bought the Liverpool brewer in 2002 it was losing about £2m a year on turnover of £14m. The brothers set about restoring cash flow by recapturing lost canning contracts. In the last four years turnover has risen to £26m and last year they recorded a small profit of £57,000. In publicity terms, Cains has been out-punching its weight virtually since the day the Dusanj brothers bought the brewery. The canny brothers must have produced as many press releases in absolute number terms as any of the major brewers - and a lot more in one or two cases. The brothers have banked considerable amounts of goodwill and reaped plaudits throughout the industry for their determination to innovate. Cains premium 8% abv lager Double Bock was described as "superb, stunning and brilliant" by the MA beer guru Roger Protz.
Cains move to take over Honeycombe is driven by a need to find a route to market that offers better margins than its existing business. The vast majority of Cains' turnover comes from low-margin contract and canning business. Branded sales in the on-trade account for just 5.6% of turnover with a further 5.7% of turnover coming from branded sales in the off-trade. About £2.9m of revenue comes from 10 canning-only contracts. Even more significant are six own-label contracts involving brewing and canning for supermarkets and four brewing and canning contracts for major wholesalers, which, taken as a whole, produce sales of £16.7m - a full 70% of total Cains sales.
What is clear is that Cains' sales increase has been driven by higher volumes of lower-margin own-label products, which produce a gross profit margin of just 6%. By comparison, sales of Cains beer to third- party pubs achieve a gross profit margin of 27%. The increasing volumes of own-label product coming out of Cains has meant that its gross profit margin dropped by 5.4% to 13.5% between the end of August 2003 and the end of August 2005. In short, Cains has managed to return a small profit by achieving much greater volumes of low-margin business. The strategy involves adding to this side of the business with more contracts. But the purchase of 100 Honeycombe pubs gives Cains a channel for much more of its high-margin branded beer.
The strategy also involves capturing synergies by re-locating Honeycombe's head office from Preston to the Liverpool brewery and removing other duplicated central overheads. Stockholdings can be reduced and more buying power achieved. There's a retail strategy that involves investing in sites and turning over unbranded Honeycombe sites to a cohesive estate bearing the Cains brand. It's worth noting one characteristic that makes this deal unusual in industry terms: with nine leasehold sites of its own and 67 leaseholds in Honeycombe, Cains becomes one of the biggest multiple lessees in the sector. It's hard to think of another brewer running an estate of leased sites as big as Cains'.
Multiple lessees of this size normally rely on exceptional retail skills to earn a margin once the rent bill is paid and the on-site manager's salary is met. Cains will move to find tenants for a number of the leased sites that are currently directly managed, effectively sub-letting them. The company has already experienced this with seven of its nine existing sites, which are all held as leases and sub-let to tenants. The Honeycombe deal brings decent freehold content - a total of 25 pubs. Nevertheless, Cains three-quarter leasehold content means it's pioneering a new kind of business model - it has become a vertically-integrated multiple lessee. It will be interesting to see how much difference selling one's own high-margin beer products can make in leased sites.
