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Tue 24th Nov 2015 - M&B – we’ve been hit by fast-casual competition and must change
M&B – we’ve been hit by fast-casual competition and must change: Mitchells & Butlers has admitted that more than half of its Toby Carvery and Harvester sites have been hit by competition opening nearby – and must now build better balance of brands and increase innovation to withstand competition. It reported like-for-like sales growth of 0.8% for the year to 26 September, which has moved to 1.6% down in the eight weeks after the year-end. Total sales were up 6.6% to £2,101m and a final dividend of 5p has been recommended. Chief executive Phil Urban said: “In the last year we have increased our earnings by 9.5%, and I am delighted to announce the resumption of the dividend. Since joining Mitchells & Butlers in January I have seen first-hand the potential within the business. The market remains highly competitive but I have identified our key priorities to realise that potential. We will build a more balanced business; instil a more commercial culture; and increase the pace of execution and innovation. We are confident that with this approach we will drive sustained profit growth and enhanced shareholder returns.” The company stated: “Like-for-like sales started the year well but softened over the last quarter. The weather in the summer was generally poor, such that beer gardens did not see the benefit of any sustained period of sunshine. The market is becoming increasingly competitive, and we have seen this sales weakness persist into the early weeks of the current financial year. These are challenges which we are addressing. Against this modest sales growth we have continued to generate value for our shareholders through our focus on costs and trading margins. We have delivered 9.5% growth in adjusted EPS, whilst continuing to de-lever the business, with net debt to adjusted Ebitda falling to 4.3 times. FY 2015 also saw the completion of the EPOS systems projects, with new payment systems, tills, handheld devices and kitchen management equipment now rolled out across the estate. We have also continued the integration of the Orchid business, completing the closure of the head office and executing the conversion programme with encouraging results. Unconverted sites have now been integrated into our business within Heartland and are operating very much as business as usual.”

The external landscape: “The environment in which we operate remains competitive and dynamic. New supply into the market has been widely reported, consumer trends are evolving and becoming ever more demanding, and we are facing a dramatically changing cost landscape with the introduction of the National Living Wage next year. However, such challenges are not new to the industry or the group, and we will respond with energy and urgency to each.”

Market supply: “In recent years the UK eating and drinking out market has changed significantly. We have seen the number of restaurants increase, with net new openings of around 1,700 in the year to June, and close to 5,000 from 2012 to 2015. Over that period there have been more than 3,500 restaurant closures, and many pub closures, highlighting the ongoing structural change in the market and the competitive environment in which we are all operating. The composition of the market has changed: independent restaurants and tenanted pubs have reduced, with growth coming from the branded sector and casual dining. Much of the new competition in the sector is ‘fast-casual’, with operators often single-brand focused, with a relatively small number of outlets and flexibility to keep offers fresh and up-to-date. In several of our outlets we have seen the direct impact of competition opening in close proximity. More than half of our Harvester and Toby Carvery sites have been impacted by direct competitors opening in their immediate catchment, with several of those seeing multiple new openings nearby. This clearly has an impact on short-term trading, and presents a challenge for us to meet. However, we recognise the strength of our brands and that these new entrants have the effect of growing the market over time, and present an opportunity for the strongest and best executed offers to grow.”

Consumers: “The changing competitive landscape is a direct response to a more demanding consumer. Expectations are rising on quality, environment, value and the range of offers available. Value continues to be important, although crucially this does not just equal low price. Consumers are now increasingly looking to explore and broaden their horizons for eating and drinking out. There is also a greater demand for personalisation – the mindset of having “what I want and when I want it” continues to strengthen. Consumers’ lifestyles are also changing. Alcohol consumption is reducing, and there is a broad trend towards health consciousness, although very much still retaining a willingness for the occasional indulgence in ‘guilty pleasures’. Finally, the impact of technology is ubiquitous. Consumers are increasingly digitally connected in all aspects of life, with implications for how we communicate with and serve them.”

National Living Wage: “The introduction of the National Living Wage is highly significant for our industry due to the relatively high proportion of employees paid at or close to the minimum wage, with earnings supported by gratuities. As a large employer, with more than 44,000 employees, we need to respond to what will be an impactful cost headwind. With consumers as focused as ever on value and service, we do not believe it will be possible for companies in our sector to simply ‘control’ their way out of the National Living Wage. Our approach must therefore be rounded and must consider the long-term horizon: we recognise that it is a cost headwind but also that it potentially presents some consumers with higher incomes. We continue to consider productivity and efficiency opportunities, including technology and reviewing brand service models. We will also continue to look at opportunities to increase guest spend per head. This may mean tactical price opportunities to the extent we feel it is appropriate for certain brands, but also offering our guests the opportunity to trade-up the menu. Finally, we must respond to changes in consumer demand that arise, and therefore must continue to monitor the relevance of our offers. These processes will remain iterative throughout the coming years.”

Our priorities: “We are addressing these challenges by continuing to work towards our strategic goals. In order to generate consistent and sustained shareholder value we have identified three priorities, focused on: building a more balanced business, instilling a more commercial culture, and increasing the pace of execution and innovation.”

Build a more balanced business: “Our well established brand portfolio is an area of great strength for the business, with national presence and enduring guest appeal. This is evident from high levels of sales and the strong returns on investment we have generated from converting Orchid sites to our brands. We need to continue to ensure that all of our brands have a clear and targeted proposition, and that they remain relevant to our guests in a dynamic market. We must also ensure that we have the appropriate balance of brands, and number of sites within each brand, according to demographics and changing consumer needs. For example, we have Miller & Carter: a successful premium brand with only 36 sites but the potential for many more. We also have Harvester: a mid-market brand with more than 200 sites. The Harvester brand remains powerful, as evidenced by the strong sales seen in our Orchid conversions. However, it is susceptible to new competitors due to its size and positioning. Therefore we need to invest in protecting our more mature established brands and accelerating the expansion of our most successful smaller brands, with a view to having a better balanced business in the longer term to deliver more predictable and sustainable shareholder returns.”

Instil a more commercial culture: “We will instil a truly commercial edge to our business, with a focus on driving profitable sales day in and day out. We are not looking to generate higher like-for-like sales at the expense of profitability, and therefore our approach to driving sales must vary according to our different brands and their various life-cycle stages, finding the right balance in each case. We have also worked hard on getting back to basics with management targets and performance data, ensuring that our balanced scorecard approach is focused on managing our P&L, and continuing to convert sales to profit. We have installed a sales function to apply a structured approach to maximising opportunities from some of the under-utilised space we have at our disposal. We recognise the need to increase the pace at which we operate and the speed with which we react in a dynamic marketplace. Simplicity throughout our business is vital. We see the house manager role as critical in our organisation: they need to be leaders, taking ownership for every aspect of their business and every aspect of the customer journey. Our area managers are the front line support to the house managers, and as a wider business we need to be set up to focus fully on supporting these key roles. We are therefore simplifying the business and focusing on clear metrics, to allow our area managers the time to be in their businesses, focusing on the standards of the operation and on truly delighting our guests. We also recognise the need to capitalise on our team of outstanding people, by ensuring we are a company that the best people want to work for. We need to identify those with the most talent and highest potential, and ensure they are offered the right career plans and development paths to remain with the business and take it forward in the long term. We see applying these basic principles as the key to unlocking the potential of the high-quality team we have at our disposal, and to creating a results-orientated culture throughout the business.”

Increase the pace of execution and innovation: “We need to approach innovation with urgency and from all angles: new product development, the use of technology to improve efficiency, and digital innovation to drive the best engagement with our guests. Given the competitive environment, we will increase the level of trial activity that we undertake, and accelerate the rollout of those which are successful. This will help us to improve the return from our existing assets and to exploit further market opportunities through new product development. In the last year we have invested in our Heartland estate with two new concepts. Sizzling Pizza & Carvery provides an innovative solution to move our Crown Carveries business forward, and Sizzling Pub & Grill is an extension of the existing Sizzling Pubs offer. A small number of these formats have been trialled, with results exceeding expectations so far, and we are planning to accelerate the roll-out. Our guests are increasingly digitally connected in all aspects of their life. This provides a significant opportunity for us, to communicate with and reach our guests in a variety of new ways, to engage with them with new offers, and to get a deeper understanding of consumer preferences to further drive insight. Our focus on innovation is critical for us to maintain our competitive position in a rapidly evolving market.”

Outlook: “Sales in the first eight weeks of the year have been soft, with total sales down by 1.3% and like-for-like sales down by 1.6%, reflecting an increasingly competitive market. As we face these challenges we have a clear set of priorities going forward. We are continuing with our strategy whilst retaining a flexible approach across our extensive portfolio of pubs and restaurants, seeking sustained and balanced profit growth rather than purely the pursuit of sales. Through this we are confident we can deliver strong shareholder returns.”

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