Subjects: Galvanising managed operators, alcohol science and property déjà vu

Authors: Paul Charity, Paul Chase and Neil Morgan

The managed operators gear up for the next stage by Paul Charity

Sector guru Peter Martin has described the current out-of-home foodservice scene as the most competitive era ever. The large companies have all come to the party in the half-decade since the arrival of the credit crunch. Each of the large managed pub companies have been using their scale ever more effectively to drive ever more value and quality into the customer experience. The increased focus has seen them largely out-perform their pure restaurant cousins - as they should given their scale benefits and the advantage of collectively owning the best portfolio of property assets. The past year has witnessed the next and unavoidable step for the large managed operators - looking to squeeze costs out of the business to ensure they are hard to beat in terms of value on the plate. This step has meant a long hard look at central overheads and whether these can be trimmed in the name of greater efficiency. The efficiency focus was evident first at Mitchells & Butlers, driven by executive chairman Bob Ivell’s belief that its Fleet Street headquarters had become bloated with administrative and support staff – and the legacy of its Bass history still hung too heavily over the company. Industry sources suggest Ivell found that M&B had more administrative staff than his former company Scottish & Newcastle Retail employed in operations. The outcome was the largest reduction in head office headcount that the company has seen since it demerger from Six Continents, with 90 staff leaving. For Ivell, the thinning down was vital to challenge the “culture of bureaucracy” that he thought had crept in at the managed behemoth – with the medium-term objective of “freeing up the guys who run the business”. For Ivell, the prize has been about galvanising M&B, to push the business from “good” back to “great”. Sources report that Ivell believes M&B staff had become a little complacent, which manifested itself in an unwillingness to recognise how much progress large managed rivals like Greene King, Marston’s and Spirit had made in recent years.

Ivell has also been keen to cut out unnecessary cost at M&B, and some of the symbolic fripperies like chauffeur-driven cars were early casualties of his tenure. M&B’s efficiency drive and re-ordering of its culture in the name of more dynamism is a trend at the other large companies. JD Wetherspoon quietly went about a similar paring down of head office count in the Spring of last year. The company’s sales performance has certainly been galvanised in the past six months (former M&B chief executive Tim Clarke used to say: ‘Never underestimate JD Wetherspoon’) but the company continues to surprise observers in being content to grow sales at the expense of margin. One seasoned City observer told me: “We all know that you can buy like-for-likes with lower prices but the strange thing here is that JDW seems to be raising prices and still seeing margin erosion. Unlike Greene King, where site expansion is leading to operational gearing working in a positive way with margins +100 bps, it would seem that maybe JDW’s more recent openings are dilutive. I think the group’s strategy is one way of resolving the cost inflation issue - just sell more stuff and make the same money after cost inflation. But it will worry investors more if JDW is the only group suffering in this way.”

But the retail offer at Wetherspoon seems to me to be in the process of a step-change in the right direction. Like M&B and Wetherspoon, Marston’s is currently involved in a 30-strong reduction in head office count and this week Spirit revealed 17 head office staff would be leaving. Chief executive Mike Tye send staff a rousing call-to-arms that spelt out the nature of the future challenge in the clearest terms. It amounted to a metaphorical marching of the staff into the quadrant outside its Burton headquarters and making them do star jumps. (“We know times are tough at present; and, as a result, some people may be lacking the energy and excitement right now that I want to see and feel in the business. But I don’t feel this way. I’m actually looking forward to what lies ahead. I see today as an opportunity - a new beginning.”) Gone, he argued, should be a mindset that views a company like Spirit as only competing within a pubs-only context. Spirit will, from now on, set a goal of becoming the “UK’s Number One Hospitality Company”. The changes among the large managed pub companies in the past year have been about ensuring they are match-fit for the next half-decade, re-energising themselves to succeed against an ever more inventive competitor set. Let battle commence. 

Paul Charity is managing director of Propel Info

Alcohol science and the ever-moving goalposts by Paul Chase

In my last article for Propel I reported on the history of ‘sensible drinking limits’ and the latest moves to revise them downwards yet again. But this is not the only recent example of how the public health lobby moves the goalposts when the facts change in a way that is inconvenient for their argument. 

The most influential piece of ‘alcohol science’ that has been published in recent years is the Sheffield Alcohol Policy Model, popularly known as the ‘Sheffield Report’. This is the mathematical model that the Scottish government, and various anti-alcohol advocacy groups like Alcohol Concern, rely on to justify the introduction of minimum unit pricing (MUP), and other measures designed to reduce alcohol consumption across the whole population. There have been various manifestations and revisions of the contribution made by social scientists at Sheffield University to the alcohol debate. The latest is a report published in ‘Alcohol & Alcoholism’ which is catchily entitled: ‘Adjusting for unrecorded consumption in survey and per capita sales data: Quantification of impact on gender and age-specific alcohol-attributable fractions for oral and pharyngeal cancers in Great Britain.’ Got it? Let me explain…

The fall in alcohol consumption and the falling percentage of people drinking above sensible drinking limits has evidently upset the public health lobby. They are further dismayed that declining consumption is not reflected in a fall in alcohol-related health harms, because a causal link between the two is how they justify interventions such as MUP. Given that their theory can’t possibly be wrong, there can only be one explanation – levels of alcohol consumption aren’t falling – they are being underestimated by surveys and by sales data!

The report states: “British sales data under-estimate per capita consumption by 8%, primarily due to illicit alcohol. Adjustments to survey data increase per capita consumption estimates by 35%, primarily due to under-sampling of dependent drinkers and under-estimation of home-poured spirits volumes…”

And the knock-on effect for cancers? The report also states: “It is possible to use external data sources to adjust survey data to reduce the under-estimation of alcohol consumption and then account for residual under-estimation using a statistical calibration technique. These revisions lead to markedly higher estimated levels of alcohol-attributable harm.”

Well, thank goodness for that - for a moment there you could have been forgiven for thinking that the changing facts had shot their fox, but not a bit of it! Alcohol consumption is rising not falling, we just lacked the necessary “statistical calibration technique” and “external data sources” to get the arithmetic right. But wait a minute… For a number of years the public health lobby were perfectly content with the previous counting methodology, because rising alcohol consumption was aligned with rising health harms. It is only now that the two are out of kilter that the data is challenged and this cod-science produced.

Alcohol science has a history of producing this sort of thing. Modern alcohol science began in the United States in the 1930s. The ‘father’ of alcohol science, EM Jellinek, employed a self-completed survey of less than 100 members of Alcoholics Anonymous to demonstrate that alcoholism was a disease that was characterised by descending stages of physical and psychological harm that could only be reversed by medical intervention. He illustrated the stages of alcoholism with a graph that came to be known as ‘Jellinek’s Curve’. Although Jellinek himself later repudiated Jellinek’s Curve he did so too late. The popular press and the moral entrepreneurs of the day seized upon it as scientific proof that alcohol caused a disease called alcoholism requiring treatment. Jellinek’s Curve was nothing more than the medicalisation of the old moral temperance concept of the ‘slippery slope’, whereby moderate drinking would always lead to heavy drinking and the physical and moral downfall of the drinker. 

When modern alcohol science began in the aftermath of the repeal of Prohibition, and in the middle of the Great Depression, science as a whole was in bad odour with the general population, which saw scientific and technological development as being responsible, at least in part, for creating mass unemployment. Alcohol science came along at just the right time because it was part of a move to demonstrate the social usefulness of science. Today we are in the midst of a systemic economic crisis in which all the post-war assumptions of the Welfare State are being challenged on the basis of affordability. Once again there is a need to demonstrate the social usefulness of science, this time in defence of public sector vested interests. 

Stoking the moral panic over alcohol is part of the effort to locate cost pressures on the NHS outside of the system itself – what better scapegoat could there possibly be than ‘Big Alcohol’? A subset of this vested interest is, of course, all those in the alcohol science industry receiving lucrative research grants to engage in serial problem inflation. So much for value-free social science.

Paul Chase is a director of CPL Training and a leading commentator on on-trade alcohol policy

A sense of déjà vu prevails by Neil Morgan

At the end of 2011, and about the time Christie + Co was due to publish Business Outlook 2012’s review of the pub sector, we were overtaken by events somewhat as Royal Bank of Scotland’s sale of its ‘Galaxy’ estate to S&NPC for a reported price £422m, stole the headlines.

Imagine our sense of déjà vu, therefore, when as Business Outlook 2013 was being printed, the deal which saw American private equity investor Cerberus swoop for Admiral Taverns, took place. It is highly probable that the similarities won’t end there, however.

Twelve months ago we had harboured high hopes that the Galaxy transaction would lead, if not to a flurry of market activity (particularly in the tenanted lease sector), at least to some interesting transactions within the wider sector. Sadly, this did not transpire.

We should therefore be extremely cautious before we lead ourselves to believe that the Cerberus acquisition of Admiral Taverns is anything other than another isolated major transaction in an otherwise quiet time for major pub deals. After all, this latest transaction does have very unique circumstances.

Lloyds Bank was a special seller, having reluctantly taken a stake in Admiral Taverns in 2009 and, reportedly, written off around £600m of Admiral Taverns’ £855 debt. And Cerberus was a more than happy buyer, not least because of the massive write down of Admiral Taverns, but also because they were able to acquire the company with an obvious exit vision and with the existing and dynamic management team remaining in place to manage the estate they know so well.

The telephone lines from pub companies and lenders to private equity firms are almost inevitably going to be hot over the coming weeks and months as many anticipate the possibilities of a similar deal being done. One suspects, however, that future sale prices are unlikely to be so attractive for the likes of Cerberus!

Elsewhere in Business Outlook 2013, we were able to report on the continued rise of the freehold-freehouse sector, buoyed by the return to the fold of a number of experienced operators – tempted back by the availability of irresistible opportunities.

In all, some 75 per cent or more of freehold pubs Christie + Co sold in 2012 were acquired by experienced and, in many cases, returning operators – 70 per cent of those to localised buyers (living within ten miles). Their appetite for the freehold-freehouse sector is increasing by the year – as is the sector itself. According to the BBPA, there were some 17,700 freehold-freehouses in the UK in 2008. Based on our sales evidence, we estimate to sector to have increased to over 20,000 today.

And of all the pubs we sold in 2012, 62 per cent stayed for pub use, and an increasing proportion for some form of licensed use. Interestingly, there was a decline in the number of pubs being sold for convenience retail use – somewhat bucking the trend and giving the lie to the impression held by some media and proponents of the pub sector.

Sadly, this news is always overshadowed by pub closures and individuals who wish to hijack the story to air their highly personal views on the tied model. To them Christie + Co says the tied lease is not dead, but it will evolve – and, naturally, pub companies are increasingly prepared and are engaging with their tenants.

On the subject of pub closures, we still think the alarm spread every time a pub closes masks the truth of the situation. It’s not necessarily the village country pub that is closing but the ‘back-street boozer’ whose clientele disappeared with the decline of the manufacturing industries. Back in 1999, we stated that the pub sector was over-supplied to the tune of 10,000 pubs. As we enter 2013, 7,000 of those pubs are now closed – so there remains some room for the sector to become even more leaner and keener. There are considerable reasons for the pub sector to remain in good cheer – even in the absence of any further major deals in 2013.

The sector has good leaders, it has excellent and experienced operators, and an expanding small and regional army of pub companies. These are the ones increasingly snapping up some decent-quality pub stock.

We should be greatly encouraged by the return of the entrepreneurs to the sector, as we also should by the reasonable like-for-like sales figures being reported by the managed house operators. The managed estate of 9,000 pubs – more than half of which lie with the major operators – is where the investor appetite will remain especially strong, as will regional pubcos and family brewers.

My real hope for the year ahead is that we WILL see some further, notable and major, transactions – perhaps inspired by private equity – that will breathe still further life into this already vibrant sector.

Neil Morgan is head of pubs and restaurants at Christie + Co