Mercury rising

The Old Coach House, a destination pub owned and operated by Mercury Inns, stands in the picturesque village of Ashby St Ledgers in Northamptonshire and recently marked its first anniversary as a revamped local for the community.

A leased site from Charles Wells - Mercury's second with the Bedford brewer - the pub is one of the group's stable of eight sites and is performing as planned, according to Mark Butler, Mercury group's joint managing director.

On the up

The place is certainly on the up after a long period when it was a run-down boozer taking little more than £1,000 a week.

Following a £600,000 refurbishment - which saw Charles Wells putting up £400,000 and Mercury stumping up the balance - the pub serves both residents of the obscenely pretty village of Ashby, birthplace of one Guido Fawkes, and customers who hail from further afield. It is now grossing between £17,000 and £18,000 a week.

"There were few gastropubs in the area," says Butler, "and the place was crying out for something like this."

And contrary to what many feared at the end of last year would be a turgid start to 2009, the pub's trading in recent months has been pretty buoyant, he adds.

Yet however good trading is, Butler is certain of one thing - no more doling out cash for leasehold properties for his company.

"Would we do this sort of thing again? No. Lease premiums have vanished," says Butler, who adds that Mercury's original plan was to build a portfolio of 10 leasehold pubs while it has ended up with only three leaseholds out of eight pubs. "Banks have gone off leaseholds. Their appetite has just disappeared."

But on the plus side Butler says trading is good, despite the recessionary conditions. "Good pubs like the Old Coach House are showing resilience and we seem to be seeing the light at the end of the tunnel," he says.

"People are still looking for value, and they are certainly spending less, ordering two courses where before they would have gone for three, going for a glass of wine rather than a bottle."

But Butler stresses that good pubs run by good retailers can be profitable. "We've had a good start to the year," he says. "The smoking ban hurt when it came in, but that's history now. The world did stop spinning last summer, when we were seeing like-for-likes down 15 per cent year-on-year. Things bounced back around Christmas and despite the odd hiccup things have improved since then."

Butler says Mercury Inns "effectively can't grow any more", and the business is shying away from borrowing any more money from those banks that are willing to lend.

Where he does see an opportunity is in freeholds. With this in mind Butler and his team are looking to create a pub investment fund with some equity house partners.

"Our plan is obviously to buy as near to the bottom of the property market as we can," says Butler.

The fund, which will be similar to an Enterprise Investment Scheme, will be anywhere between £10m and £20m, Butler says, and should be ready to rock in a matter of months.

"Now is a fantastic time to buy freeholds," he points out, "with prices down between 20 and 50 per cent on two years ago. And the level of capital uplift from something like this should prove attractive to investors."

Recovery division

Investing in and running its own pubs is one string to Mercury's bow, while another well-publicised activity is trading pubs on behalf of other operators through its recovery division, Mercury Liquid.

Butler says that the pubcos "have had a good 10 years, but the last 18 months will have been a shock to the system". He believes large companies such as Enterprise Inns and Punch Taverns have to work harder with lessees, but adds that they will be "so much more user-friendly if you're open with them".

Mercury Liquid is in the middle of re-opening around 30 food-led Enterprise sites, getting them back up and running - in some cases from a standing start to sales in the region of £10k a week.

"We get them to a reasonable level of trade under the terms of a management deal, and then Enterprise finds a lessee," Butler says of a process that can take up to three months to see through.

Contrary to a number of the model's critics, Butler believes the leased and tenanted path is still a good, cheaper route into the pub game for some people. The proviso, he adds, is that landlords need to be more sensible, ensuring that potential licensees can do the job.

The days of fractious relations have to be consigned to the past, he believes. "It actually has to be a partnership," says Butler. "Companies can't just say it is and then in reality behave like it isn't. Most now realise they can't just carry on screwing the tenant."