As the co-founder of Loch Fyne, the restaurant chain, which Greene King acquired for £70m in August 2007, Mark Derry was well versed in some parts of the pub sector, but it took until last year and the start of the group’s push into the market before he really came across “the dark arts of the tie”.
With £13.5m of new funding recently secured and a target of 20 new pubs to be achieved over the next three years, he knew that coming up with a different version of the traditional lease agreement was key to the company’s success in its new marketplace. In his words, the issue of the tie had become a “big issue” for the planned roll out of the brand.
“Now I know it has had a lot of stick, but, my God, it is an extraordinary thing for a restaurateur,” Derry says. He criticised the fact that the person who “handcrafted” the beer and the “guy who had to do 290 transactions to sell it” are “third and fourth on the list of people who make money out of it”.
In response, Derry, who operates two White Brasserie sites — the King’s Head in Teddington, south-west London, and the Queen’s Head in Weybridge, Surrey — has designed a lease that includes a “fixed element” and a “turnover element”. He says: “In return for that we are striking some deals that require a little bit of investment from the landlord and a lot of investment from us. That means that the estate is improved. We get leases that have residual value rather than tied leases, which are severely marked down, because it’s an open valve to price increases.”
Derry says that the new lease is “designed to give a share of the upside in everything that we do, so it is not just tied for beer” — especially as beer sales are “only going to go one way”.
The group has secured the investment that will be used primarily to develop the White Brasserie pub concept, which will be operated alongside the group’s 19-strong Brasserie Blanc estate, from ESO Capital Group, a firm that specialises in providing tailor-made capital solutions to small and medium-sized companies across Europe.
Derry says: “Our aim is to open at least 15 to 20 new sites over the next three years, of which pubs are the primary focus. We’re bullish about the potential for our pubs and actively looking for new sites that we can develop.
“Now that we have new finance in place we want to work with pub owners to acquire new sites using our new leases.” He is currently in the process of recruiting a managing director to oversee the pub vehicle.
The new funding solution has left the company with no bank debt and fully financed to expand. Derry says: “The funding option from ESO is suited to our growth plans. We need access to funds on a flexible basis to boost our development plans and we are delighted that ESO has chosen to support the business.”
He says that at least 85% of the 20 sites the group is seeking will be inside the M25 and that the group is currently in negotiation and planning on five units. “Some of these might take a year to come to fruition because they’re all requiring development,” he says.
“We should go on-site on the first in Orpington, south-east London, a Spirit lease, within the next couple of weeks and it should open in four or five months when we’ve done the building work.”
The group is also thought to have a fourth site in the south-east, another Enterprise lease, in the immediate pipeline and Derry is reluctant to hang around.
“We want as many White Brasseries as possible. We spent a lot of time raising this money and we haven’t been focusing on building the pipeline, so we’re working hard at that now.”
The group’s two current sites are in fairly affluent areas and Derry says the group will try and follow that model through its development.
With the group’s existing sites at Teddington and Weybridge believed to be consistently out-performing the average UK pub with an average weekly turnover of circa £35,000, Derry is understandably confident about the potential for rolling out the company’s pub concept. “Weybridge and Teddington have been in constant growth since the day that we opened them. We’ve taken these pubs from just £8,000 a week in turnover to £35,000 to £40,000 turnover. We like businesses that are predictable and not fashion driven.”
Derry is not the only experienced restaurant operator tapping into the tenanted pub sector. Innovation in the tied model and the need to tap into the operational know-how of experienced operators is allowing new businesses to be created (Pesto in a Pub and Mezze, for example) and others to grow, as in the case of Derry’s peer and friend James Horler and his Ego brand. Others are sure to keep a close eye on how they perform before deciding on a similar move.
He says: “The basis of this business is a pub offering brasserie-style food, utilising skills and knowledge developed in Brasserie Blanc with a significant drinks-led element. We believe that transferring our skill for running profitable premium casual-dining restaurants is the key to success with the pubs, which we think have considerable growth opportunities.”
History highlights why Derry is so keen to go down that route again. When he sold Loch Fyne to Greene King, about 25% of the group’s 36 restaurants were located in former pubs and it had identified a strong pipeline of conversions for more openings.
Derry’s successful track record in introducing a restaurant offer into a pub environment points to him repeating the trick with White Brasserie and, in the process, adding further momentum to the rebirth of the UK’s pub sector.