Inside Track by Mark Stretton
Analysts tend to make company profit forecasts up to three years in advance. Three years ago they thought that Luminar would in the current year make around £60m in pre-tax profits. The actual number is going to be nearer £6m – about 10%. The gap tells you everything you need to know about the state of flux in which Britain’s biggest nightclub business, and the lion’s share of the entire UK nightclub industry, finds itself. Figures from CGA Strategy, the market analyst, suggest that in the 12 months to December 2009, UK nightclub numbers shrank 13% to 2,367 outlets – an extraordinary contraction. The equivalent in the pubs market would have been closures totalling more than 7,000 pubs. There is little doubt that Britain’s nightclubs have been the eating out and drinking out market’s biggest loser in this recession. The impact of youth unemployment on the sector is well documented. But this has also been a story of too much debt, too many steamy leases, too many marginal sites, and too much capacity chasing too few customers. The smoking ban and customers pre-loading on ever-cheaper supermarket booze has not helped. “Poor venues have been going to the wall,” says CGA’s chief executive, Jon Collins. “It is an utterly unforgiving market – what we’re seeing is Darwinism.” Part of the problem for clubs is that circuit bars have for the past decade been eating their lunch, or rather setting light to their sambucas and downing their tequilas. The proliferation of late licences, rubber stamped by the licensing act, means that clubs are no longer a distress purchase. To pull Joe and Jane Clubber out of Revolution or Yates, where the music is the same, the drinks are the same, the crowd is the same, and more often than not a dancefloor is available, and to persuade them to queue in the cold and pay a £10 door fee, the nightclub offer had better be extremely enticing. In too many instances, it isn’t. And once a nightclub starts to be anything other than rammed on key trading sessions, the experience starts to feel decidedly second rate. In this market the big room / big footprint nightclub format, whereby operators have just perhaps three big trading sessions a week, coupled with the savage intensity of capex requirements of these outlets, means the model is starting to look like most people’s poison. Compounding these issues is that fact that large parts of the market are “stuck” – owned by the banks or by private equity groups that paid the wrong multiple. Banks in particular don’t seem able to make a decision – they want the passage of time to wave its wand and restore yesterday’s multiples. The joker in the pack is Sun Capital, the monolithic private equity house that has just bought the 3D Entertainment business – what on earth is it up to? The evident structural issues and caustic trading environment has prompted many to ask: is the big room nightclub model dying? In the past 10 years Luminar has not so much overseen multiple nips and tucks to its estate, as undertaken several episodes of open-heart surgery. But despite being extensively rationalised from an estate that at one point totalled more than 300 venues to the current 85 or so – Luminar still has tail. With a new chief executive having only just joined the business, the talk – almost certainly premature – is of the group having to carry out a similar move to Regent Inns, in leaving the stock market, and emerging from a restructuring process a far leaner entity. My understanding is that the exercise at Regent Inns, which was pre-packed, dumping the bottom quartile and top-slicing its debt, has transformed the profitability of the group with ebitda doubling from about £6m to about £12m. Rather than merely just about being able to service its debt, the group – now called Intertain – now has the oxygen of cashflow that can be deployed into its estate. Unfortunately for Luminar shareholders, the chapter may offer a painful roadmap to future prosperity. Hopefully that isn’t the case. But the company is severely constrained – practically zero new openings and extremely limited funds for capital investment does not sound like a recipe for growth. Shareholders must brace themselves for another cash call. Is there any good news out there? The mandatory code should help remove some of the excessive, margin-eroding offers, and youth unemployment numbers have started to recede. The model of course isn’t dying, but many of the out-and-out nightclubs that operate it are. It would be no surprise to see a repeat of -13% in nightclub numbers in 2010. Those nightclub operators with a future are the ones that make it special, that focus on entertainment and differentiation. It’s easy to say and extremely hard to execute. “When nightclubs work they are wonderful places to be, but we need fewer of them,” says Collins.