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Morning Briefing for pub, restaurant and food wervice operators

Mon 21st May 2012 - Joe Lewis, M&B and Vapiano

Story of the day:

Joe Lewis goes into burrito overdrive: Tavistock Restaurants, the US restaurant chain owned by Mitchells & Butlers (M&B) shareholder Joe Lewis, oversaw one of the US market’s most dynamic brand expansions in the most recent year. The company expects to have almost tripled the size of its Freebird estate within three years by the end of 2012. His Freebird World Burritos concept added 36 sites to the estate of 35 venues it ran a year ago. The company will add at least 30 new openings in 2012 and is expecting to end the year with more than 90 Freebirds in California, Texas and Oklohoma. Head of marketing Jeff Carl told Morning Briefing: “Being privately held, we don’t publish financial reports. However, we can say that we are continuing with an aggressive development plan and have signed our first franchise deal to develop multiple franchised restaurants in Kansas, Missouri and Nebraska.” He added: “(We) provide each guest with one-to-one service so that we can help the guest fully customise their burrito to their very own personal flavour profile.” The brand has the tagline “Freedom to Choose” and features the Statue of Liberty riding a full size Harley Davidson motorbike whilst holding a burrito. 

Propel Opinion by Paul Charity: M&B shareholder Joe Lewis is proving that it’s possible to expand a brand very quickly indeed. Within three years, his Freebird burrito concept will be almost half the size of 200-strong Harvester. On Friday, M&B executive chairman Bob Ivell told City analysts that opening 50 to 55 sites each year – the current target - should “not be a problem for a business of our size”. His largest shareholder, Joe Lewis, would certainly agree.

Ten things worth knowing from the M&B results on Friday:

1. M&B regards package acquisitions as not on the agenda: M&B will focus on growing its existing brand portfolio on a site-by-site basis, with mergers and acquisitions not on the agenda. Finance director Tim Jones said small package acquisitions like Ha! Ha! Bar & Grill inevitably had “less good sites” and the company was still working on improving the performance of these sites. The best investment returns were being achieved from leasehold sites – around 20 per cent - compared to freehold acquisitions – turning in 14 per cent Ebitda return. Openings going forward would be around one-third freehold and two-third leasehold – but with cash investment spread evenly across the two.

2. Avoiding retail parks in favour of retail/leisure parks: The early days of opening Toby Carvery and Harvester venues in new leasehold sites had found retail parks provide lower returns than parks that have both retail and leisure dimensions. Said executive chairman Bob Ivell: “With retail parks there’s great through-put during the day, it’s not so good at night.”

3. Browns and Miller & Carter working well in new environments: The bar brasserie brand Browns has opened in sites away from the usual university town and historic building settings – and are trading well. A Birmingham Bullring site is taking £35,000 per week, a site in Bluewater shopping centre is taking £54,000 a week and a venue in Newcastle, the most recent opening, is taking £60,000 per week. The company is taking its Miller & Carter steak-house concept, now at 26 sites, to a more sophisticated market position. A former Old Orleans site, in Epping Forest, is taking £48,000 per week and a site in Hockley Heath is turning over £29,000 per week.

4. Re-investing in service and training: Ivell said that there had been no wine training at All Bar One, which is a wine driven business, for two years. He had also found managers were being sent warning letters if they exceeded their weekly hours’ allowance. Sites had been starved of cutlery and plates - and limited to one maintenance call-out a week. The company has invested £2m in providing extra training and staff hours. Ivell said this was needed because Empathica feedback had shown customers were complaining that service was not good enough, especially at weekends.

5. Changing the culture: Ivell has found managers drowning in administration and centrally driven tasks. Now central operations had been turned into “Air Traffic Control” to focus on operational planning with ten brand operations directors having “top to bottom” control accountability for their brands. A successful Ways of Working (WOW) trial had devolved more power to site managers with a focus on teams being “guest –focused”. The programme will be rolled out to the rest of the estate within a year or so.

6. The power of social media: Toby Carvery now has over 300,000 Facebook fans, with total Facebook fans across the company’s brands at 627,000 (28,000 in 2009). Mobile subscribers stood at 950,000 (77,000 in 2009), and online bookings in the half-year were 655,000 (none in 2009). The company is targeting 1.5 million online bookings for the full year. Ivell described social media as “powerful” and described the number of Toby Facebook fans as “quite staggering”.

7. A new chief executive is on the horizon: Ivell teased analysts by beginning his presentation with the words, “I’m pleased to announce”, before adding, “I had you worried there for a moment”. He said the delay in naming a new chief executive was down, in part, to candidates’ “timing”, suggesting lengthy notice periods and other candidate-based priorities might be a problem. The Times suggested on Saturday that the search had narrowed down to Alistair Darby of Marston’s and Steve Richards of Novus Leisure – the latter is currently overseeing a re-finance. On Friday morning, Morning Briefing recalled that back in January this year Ivell had reported “good progress” in recruiting a new chief executive. Talking to analysts last Friday, a few hours after publication of the Morning Briefing, Ivell, referring them to press reports that morning, told them the company was making “very good progress”.

8. M&B will not convert all its pubs to brands: Ivell told analysts that you “can have good pubs” rather than having to fit all sites into brands. He gave the example of The Rocket pub in London’s Euston. When he arrived the company planned to spend £650,000 converting a pub that made £350,000 Ebitda a year into a Nicholson’s. Instead, the company spent £80,000 on an unbranded refurbishment and it will produce £425,000 Ebitda this year.

9. Bottom-end brands face the toughest competition: M&B top-end brands, Browns, All Bar One, Nicholson’s and Castle, as well as its middle-market brands, Toby Carvery and Harvester, are performing well. Its bottom-end brands Sizzling Pub Company and Crown Carveries are “under pressure” because a “lot of people tend to play at the bottom end”, said Ivell. Margins are tighter and deep discounting is more of a feature among competitors. Ivell said the company might have “slightly shot itself in the foot” by pushing too hard on food sales at community pubs like the Sizzling estate. The company is now focused on segmentation of its community pubs. He described a decision to undertake television advertising of Sizzling in 2010 as “absolute madness”. Ivell gave the example of Ember Inns as a brand where the company had been too hide-bound – it had now allowed children on the premises. The no-kids policy had changed and the company is “doing very well with it”.

10. Both food and alcohol sales are actually down across the estate in volume terms: Food sales are down by 0.7 per cent in volume terms and drink sales are down by 3.7 per cent in volume terms. Like-for-like prices are up 2.9 per cent for food, with a further boost from mix and range to produce a 3.4 per cent like-for-like increase. On drink sales, like-for-like prices are up by 4.8 per cent and there’s been a 1.4 per cent lift from mix and range to produce an overall 2.2 per cent sales increase. Finance director Tim Jones said there was a “much deeper structural decline in drinking” and the company was simply “not able to absorb duty increases”. 

Free Report: Paul Charity has written a report on menu trends, the drivers of US dining occasions, the franchise business model and other key areas of the US foodservice market and their significance to the UK market. The report, based on a visit to the National Restaurant Association show in Chicago, is produced in conjunction with the Association of Licensed Multiple Retailers and sponsored by CPL Training. It is free and is available by e-mailing Paul Charity on

Weekend catch-up:

Haringey set to curb fast-food outlets: Haringey in north London is poised to become the first local authority in Britain to limit the number of fast food takeaways. It wants to use planning powers to curb takeaway numbers after finding there are up to six times more outlets in poorer areas, with life expectancy in these parts of Haringey nine years less that wealthier parts of the borough. New takeaways will also be banned with 400 metres of schools. 

Irish pesto out-selling Italian at Selfridges: A pesto sauce that is produced in Ireland using fresh ingredients is out-selling the Italian version in Selfridges by nine to one. The Fresh Irish Basil Pesto, priced at £6.99, is made using Irish-grown basil and regato, an Irish hard cheese, plus a Spanish olive oil. Selfridges claims the oaky taste of the parmesan-style regato, together with the larger-leafed Irish basil, produces an enhanced flavour.

Jamie Oliver writes to every MP: Celebrity chef Jamie Oliver has written to every MP demanding a volte-face over nutrition rules in schools after the education secretary Michael Gove refused to act on a report that found nine out of ten academies are selling junk food. The move was revealed on Oliver’s website which told his followers that if MPs didn’t act “you can safely assume that they don’t care about the well-being of our children and the future of our country”. 

Inflation set to drop: Figures from the Bank of England this week are expected to show a sharp drop in the Consumer Prices Index to 3.1 per cent from 3.5 per cent in March. The improvement is likely to have been driven by the last of two price cuts from the energy companies. Easter falling earlier also provided a longer post-Easter sales period and cheaper air fares. However, higher water bills kicking in this month is likely to lead to a bounce back for inflation.

MP calls for debate on “too strict” rules on beer adverts: Alun Cairns, MP for the Vale of Glamorgan, is calling for a debate in Parliament’s Westminster Hall on the stifling of creativity in beer advertising caused by rules that are too restrictive. He said: “So many beer adverts that people remember fondly, such as the Hofmeister bear, would just not be allowed today and it’s a real shame. Britain used to lead the world in its alcohol advertising and yet there are increasingly tighter controls on what they can do. We need to strike a balance to ensure the nanny state is drawn back and there is a return to a commonsense approach.” 

Company news:

Walkabout operator Intertain reports £6m of Ebitda; loss of £2.36m: Walkabout operator Intertain has reported operating profit of £1,237,000 and Ebitda of £6,009,000 on turnover of £63.3m in the 52 weeks to 28 January 2012. The company made a loss of £2,366,000, which included £1,662,000 of exceptional items, some of which were non-cash. The company sold the remainder of its Old Orleans dining business, which included three freeholds and nine short leaseholds, in September last year. It raised £2,906,000 from the sale of freeholds and £2,844,000 from the sale of its others restaurant businesses. The company reported: “Business performance in the 14 weeks subsequent to the end of the reporting period has been mixed due to adverse weather conditions in the first half of February, the unseasonably sunny weather for much of March, which encouraged customers to visit pubs with outside areas, followed by the wettest April on record. However, sport has continued to be a major driver of business with strong performances of both the English and Welsh rugby teams bringing significant benefits during the latter part of the RBS Six Nations tournament, and also interest in the Premier League sustained until the last day of the season.” Chief executive John Leslie told Morning Briefing: “A wet April was helpful to us and the sport has been great.” This year has seen major refurbishments in Temple, Hanley and Watford with Walkabout Liverpool due to complete this Friday (25 May). Last July, the company’s lending group swapped £29.8m of debt for equity leaving the company with outstanding debt of £35m.

Phil Sermon eyes roll-out of Vapiano: Industry veteran Phil Sermon has been appointed to run Vapiano in the UK with a brief to expand the two-strong concept with three new openings at least by the end of 2013. The new Vapiano UK managing director worked at JD Wetherspoon for seven years, served as operations director at Spirit Pub Company until 2010 and has most recently been consulting at Stonegate Pub Company and La Tasca. He told Morning Briefing that the company, which operates more than 100 restaurants in 25 countries, was “pretty close” to securing a third site in London. The first two sites are performing “extremely well” versus budget and on a like-for-like basis. Vapiano’s backer, venture capital firm Mayfair, is “very pleased” with the performance of the UK sites and “keen to invest in expanding the brand”, said Sermon. Key provincial cities will be targeted after a further group of London openings. Vapiano combines ‘fast casual’ and ‘casual dining’ elements, providing customers with a great range of quality fresh pasta, pizza and dolci, served in a contemporary setting. Its London restaurants are at Great Portland Street and South Bank.

O2 owner eyes HMV live music venue: 02 owner AEG has won preferred bidder status to buy HMV’s 13-strong live music venue division. The company, which bought the Millennium Dome in 2005, beat Sony Music and private equity fund Oakley Capital, to take pole position for the business, which is worth around £65m.

Starbucks UK makes a loss for the fifth year: Coffee giant Starbucks has made a loss in the UK for the fifth consecutive year. The company, which closed 12 sites in the year to September 2011, made a loss of £32.9m. The company blamed high rents - it has set about selling some of its highly rented stores in areas such as Oxford Street in favour of sites in side-streets.

Orchid boss Rufus Hall undertakes intensive manager face-to-face meetings: Orchid Pub Company boss Rufus Hall is undertaking a tour of company sites to get direct feedback from managers on ideas to improve the business. Last year, face-to-face meetings saw the introduction of a monthly staff newspaper, a staff discount scheme, and the setting up of more Facebook pages for its pubs – there are now 170. So far this year managers have asked for access to PowerPoint to help with staff training presentations and the circulation of area manager meeting dates in advance to allow them to book the lowest rail fares.

Jamie Rollo – Mitchells & Butlers is our top pick: Morgan Stanley analyst Jamie Rollo has issued a note naming Mitchells & Butlers as its top pick of stocks in the pub sector. He said: “We think it has strong brands and high asset backing, it is benefitting from solid eating out trends and consumers’ reluctance to give up “cheap treats”, its cost savings plan should allow it to offset external cost inflation, and the appointment of a new chief executive and beefed up Board should restore investor confidence. The shares trade on 8.0x 2012e P/E and 6.7x EV/EBITDA, a discount to its managed pub peers, on our estimates, and we remain overweight. It is simplifying its organisational structure, removing around 11 per cent of its support functions to speed decision-making and reduce bureaucracy, historic criticisms of the company. It is also upgrading its IT infrastructure to enable free Wi-Fi across the entire estate, improved table management systems, customer loyalty schemes, and faster menu development.”

Flagstone Cask & Grill to open pop-up bar: Flagstone Cask & Grill, the Enterprise Investment Scheme company set up by Gavin Drew and Ian Grundy, is to open a pop-up bar in partnership with pop-up performance company Theatre Delicatessen in the very large but unused BBC offices in Marylebone High Street. The bar should be open at the end of May or early June and be open for a year. Drew told Morning Briefing: “Aside from working with local theatre, arts and crafts groups, there is a big emphasis on the Summer of Sport - much of the area has been astro-turfed to create the feel of a picnic area or Wimbledon’s ‘Henman Hill’.”

Greene King signs up to The Cloud: Suffolk-based Greene King, has signed a deal with Wi-Fi provider The Cloud to bring free Wi-Fi access to all of its pubs, restaurants and hotels, including The Hungry Horse and Loch Fyne brands – covering 2,400 venues around the UK. A big increase in demand from customers recently has convinced the pub chain to extend The Cloud’s Wi-Fi service from the 300 pubs installed since the start of the year to all 1,000 of its managed premises. In addition, Greene King will also offer The Cloud’s free public Wi-Fi to its 1,400 leased and tenanted premises. The Cloud now has over 10,000 hotspots around the UK. An estimated four million people every day pass through The Cloud network by visiting one of its partners, including major brands like PizzaExpress, Caffè Nero, Eat, Pret A Manger and Wagamama, as well as First Great Western trains and Network Rail stations.

Punch begins bondholder discussions: Discussions have begun over giving bondholders control over the company in return for writing off of hundreds of millions of pounds of debt, according to The Sunday Times. The debt for equity swap would see shareholders retain a significant minority stake.

Whitbread makes £5.9m investment in Camborne: Whitbread has opened a £5.9m hotel and Table Table pub restaurant in Camborne, Dorset. The site incorporates efficient under floor heating, solar panels, LED lighting and electric car charging points.

Developer invests £3m on the High Tor Hotel: An unnamed developer is set to re-open a derelict inn near Matlock Bath after a £3m investment. The 14-bedroom High Tor Hotel, at Artist’s Corner, will offer boutique-style luxury, with a bar and 52–seater restaurant selling modern gastro–style food. The grade II listed building dates back to the 19th Century and is believed to have belonged to Admiral Nelson’s General Collingwood – named Collingwood Lodge. It was badly damaged by fire years ago and left in a derelict state right up until the unnamed developer started work on it three years ago.

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