Business Opinion
Ultimate moves to shape-shift
One key theme of the past year in the pub trade has been shape-shifting. Operators have been deciding that it is not enough to grow organically. Many have been buying businesses that change their operational footprint by providing access to greater food sales or tap into the growing accommodation market.
Ultimate Leisure is a pretty good case in point. When Mark Jones arrived as Ultimate chief executive in August 2005, less than 1% of total sales came from food. The acquisition of four Bel & Dragon gastropubs and the 13-strong Living Room brand this week will help boost food sales to about 20% of turnover.
At the point of Jones' arrival, the Ultimate business was heavily focused on the nightclub market, where the new licensing regime was about to make life a lot harder by allowing thousands of pubs to open even later.
For those companies without the very best-positioned and invested sites, a torrid time was in store. Ultimate was one such company, and it leaked sales in the new licensing era.
One strand of its strategy has been about stabilising sales in its core existing sites whilst ditching peripheral venues where investment could not be justified. Meanwhile, it persuaded key shareholders that more cash would allow it to broaden its traditional trading profile - it has £75m to spend this year. The Living Room deal is by far the most significant for Jones so far. It's about to become the company's drive brand, with a target set to treble the number of venues within five years. Jones has been following the fortunes of Living Room for more than two years. Yates Group, where Jones was chief executive, tried to acquire the brand in early 2005 but lost out to Restaurant Group, which bought a majority interest. In May 2005, Robert Tchenguiz added Yates to his expanding Laurel business, and Jones moved on.
The opportunity to buy Living Room now seems to have arisen, in part, because of a clash of cultures between Restaurant Group and Living Room founders Tim Bacon and Jeremy Roberts. One rumour is that Restaurant Group was far less keen to expand the Living Room than the founders.
Buying Living Room has more risk attached to it than most deals. Its founders have a track-record of selling businesses that wither on the vine without their unique talents. This is an entirely leasehold estate, which has a strong bar element in its sales where the vagaries of fashion can strike in a faster and more devastating fashion than is likely in foodier brands such as Strada, La Tasca and Pizza Express. It could be argued that the sale price, at 4.5 x earnings compared to 10 x earnings for some recent restaurant deals, reflects this greater degree of innate risk.
However, since the brand was founded in 1999 it has shown remarkably consistent sales performance - its original Manchester branch still turns in the highest sales and profits within the group.
Most of the roll-out has come in the past three or four years and with sales of about £43,000 a week per venue it is clearly hitting customers' soft spots, based on their demand for quality food and service rather than more narrowly-based fashion-led operating principles. I ate recently at the Living Room in Liverpool and thought the food quality was exceptionally good. Ultimate is also minimising risk by buying the company, rather than the brand - thus retaining much of the key operational management.
This busy period of acquisitions has left Ultimate as a comparatively widely-ranged company. It's not exactly Mitchells & Butlers (M&B) in terms of its spread, but might qualify as having the broadest spread of the smaller listed operators, taking in gastropubs, bars and nightclubs. The trick will be to create a management structure that allows the key decisions for its three main operating strands to be devolved down to divisional heads and their mini-teams rather than made centrally. It's the structure that has served M&B so well. It also needs to restart the site pipeline so that it can spread the operational overhead.
l Ultimate acquires Living Room - p13
