MCA speaks to Punch chief executive Duncan Garrood on the back of the group’s financial results for the year to 20 August. He discusses the long-term potential for the Retail contracts division, the company’s plans to raise £100m from developing excess land, its investment plans for 2017 and early learnings from the implementation of the pubs code.

Trading

Punch recorded total underlying revenue for 2016 of £406.8m – with the core estate providing £358.8m and Mercury contributing £48m. The total was made up of £302.1m of drink revenue, £92.7m of rent and £12m from machines or other unspecified incomes.

Garrood said trading patterns in the first part of the current financial year had broadly followed the patterns seen in 2016 and stressed that there had so far been no discernible Brexit impact.

He said: “We have seen good weeks and softer weeks, like anyone else. But we certainly haven’t seen that our customers are immediately tightening their belts.”

Value

Garrood said value remained a priority for Punch’s core customers but that this did not mean its audience was not willing to trade up.

He said: “People will pay more for a beer in an environment like (drinks-led community pub format) Mighty Local, where there has been investment in the surroundings and the service, than they would in a purely value-driven proposition. It’s about the experience they are being offered. Their trip to the pub is not only about what’s in their glass.

“We have to remain highly competitive in the market but that certainly doesn’t mean you have to be the cheapest.”

Community pub market

According to Garrood there are significant opportunities for Punch presented by the weaker competition in the drinks-led community market.

He said: “There is tendency – and I understand where it comes from – to focus the discussion on pubs around the higher end of the market, the cocktail bars and the gastro pubs. That’s where the bulk of investment goes. But the vast majority of Punch pubs – and the majority across the country – are in the mainstream, value, community and often predominantly wet-led pubs.

“The heartland of pubs is in regular drinkers going to their local and that’s where a lot of our focus is. We are investing in making sure our pubs are welcoming environments that people actually want to spend their time and that the trading format is right for them.”

Investment

In 2016 Punch invested £60m in its estate. This was made up of £22.5m of the first £60k spend in core pubs, £28.6m on investment above £60k in core pubs. In Mercury there was £3.5m spent on investments under £60k and £2.9m on projects over £60k. There was also £2.7m on development of unlicensed properties.

In the current financial year, Punch has pledged to spend £57m, including £22m from the disposal of 100 non-core pubs. In total, around 50% of FY17 capital investment is expected to be targeted towards the rollout of retail contracts.

Retail contracts

There are currently 109 pubs operating across the Punch estate under Retail contracts, with 133 identified for conversion and an expectation that a total of 150 will move over to the division in 2017. The heartland of the Retail contract is currently the Midlands – with 45 sites operating and a further 27 identified. However, 2017 will also a concerted push in the south east where there are currently 20 Retail contract sites and 38 identified for conversion.

Asked why the company had upped the rollout target from 120 a year to 150, Garrood said: “Ultimately this is about improving standards and a division of responsibility that gets the balance just right, in my opinion. The pubco takes the burden of a lot of back-of-office tasks, which in turn frees the publican up to do what they do best and deliver great hospitality and manage their team.

“Publican feedback is that this model allows them to do the things they joined the pub industry to do.

“The feedback from our mystery guest visits is running about ten points above the average in leased and tenanted.

“We are seeing 20% to 25% uplift coming from those pubs and we are seeing the kind of ROI we wanted to, so we are pushing forward.”

On the ultimate scale for the division, Garrood said: “At the moment we are pretty much on line with what we previously advised which is roughly a third of our renewals going over to Retail contracts. Over the course of the next year I think we expect that to say around the same. Over time we will learn whether this contract can extend to more than that third but for the moment we have plenty to deal with.

“For the next two, three years to expect a third is about right.”

Mercury

Punch’s 3,276-strong estate is now split into two categories – with 2,581 core pubs and 695 in the Mercury estate.

On the plan for the Paul Pavli-led Mercury, Garrood said: “As we set put at the start, Mercury has a more intensive management relationship with each publican. We have also spent what we would describe as localised investment. These are relatively modest sums but we are working with the publican to target them at the areas that need them most. It is very powerful to have that direction coming from the publican, who understands their customer inside out. We have seen volumes improving.

“We don’t have any plans to add more sites at this stage. We will take a review in a year or two’s time on whether we re-allocate pubs again. Clearly we want to see performance up to those levels of expectation before we move forward.”

Excess land

Punch has identified the potential for £100m of additional value in non-trading parts of estate identified, with £11m realised so far.

Garrood explained: “This is typically excess land – car parks, outside areas, upper floors or sometimes unused buildings that are currently excess to the offer in the pub.

“We have done a variety of things. We have taken excess land and put some houses there. In the past we probably would have sold the land and taken the one-off cash amount but what we’re now doing is working with the developer and in some cases taking a rental from the tenant of that property. In other cases we take a development overage.

“Another example is where we built 16 student flats, resulting in an annual rental income of £150k a year. The property value also lifted £1.5m.”

Pubs code

Since the pubs code came into effect in July, 40 publicans have requested MRO comparison figures, of which 21 are currently under review

Asked if the appetite for MRO had been over-estimated, Garrood said: “None of us knew how MRO would go. I’m still not sure if the numbers we are seeing today are reflective of the interest going forward.

“There’s a lot of learning and we are very likely to see that attitude towards MRO change. That could be up or down.

“Of the rent events – about 25% have asked for MRO. And of those about half have decided to take a new tied deal or it has lapsed. The other half are still deciding. “

The regulations have had an inevitable effect on the speed of lettings but Garrood said work was underway to mitigate this.

He said: “We are now looking at opportunities to make the process as smooth and as quick as possible, without compromising compliance.”

Priorities

On the key goals for the group going forward, Garrood said: “Becoming a more customer-centric organisation has been a big priority of ours.

“It’s vital to treat customers as customers and make sure we treat them accordingly. I think we’ve made a lot of progress on that over the past year.

“We are increasingly understanding what our customers in different segments want from their local pub and meeting those demands.

“When you do some work to understand what your particular customer wants from their pub and work with the publican to provide that, there is a great appetite for the great British pub and a great deal of support for it. Pubs can thrive on that.

“We should recognise that we have done a lot of work to be compliant with the pubs code. We are embracing the pubs code as a positive change and hoping we can build from that.

“Investment both in our pubs and in people has been something we are highly encouraged both by the reaction from consumers and from our staff. We’ve seen this in our Retail Contracts division and it has encouraged us to carry on investing. We have committed to investing a further £57m in our pubs next year.”

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