Peter Marks, chief executive director of the Luminar Group, tells Dominic Walsh how the nightclub operator is remodelling its estate through a programme of investment, after it was rescued from administration in 2011
Dominic Walsh: OK, Peter, first things first: how did Luminar find itself tumbling into administration?
Peter Marks: It’s fair to say that youth unemployment was an issue. Oversupply in the market was an issue. Those were the external factors. Internally, two things caught it out. First, the banks were very willing to lend money, so it ended up with too much debt. Then there was the investment programme. While there’s no doubt that the smoking ban, the economy and late-night licensing were all part of it, the real issue was that it had a lot of managers running uninvested businesses. The average age of the estate was 6.5 years. It’s very difficult for a manager to run a club that hasn’t had any money spent on it for 6.5 years. That was average. Some were two or three years, but some were 12 or 14.
DW: So what does your investment programme look like?
PM: We have a three-year cycle. When brand new bars open up against you they’re going to hurt you. They’re not hurting you because they’re bars or because they’ve got late-night licences; they’re hurting you because you’re uninvested and they’re invested. It’s pretty simple really.
DW: So how’s trading been?
PM: There’s no question there are towns and cities that are struggling, and a lot of the businesses in those places, be it us, Stonegate or Walkabout, are struggling. But we’ve had some fabulous results, and the investments are, on the whole, working very well.
DW: Right, Peter, let’s get a few basic facts out of the way. How much did you pay for Luminar when you bought it out of administration two years ago?
PM: The deal was £34m on a debt-free basis. There are long-term shareholder loan notes, but no external debts or covenants. The £34m was pretty much the value of the freeholds. Nineteen of the 55 sites were freeholds.
DW: And who funded it?
PM: Three high-net-worth individuals. Paul Evans, the removals tycoon who used to own Interdean; Steve Cloran, an aviation sector entrepreneur; and Alan Fall, who led a buyout of Healthcare Logistics in 1997 and sold it in 2005. Alex Geffert, my chairman, director Joe Heenan and I also have equity in the business. Alex and Joe were instrumental in bringing the deal to the table.
DW: I thought the rumour at the time was that your mystery backers were Irish?
PM: Ha ha. That was because our advisers were BDO Northern Ireland. There was a bit of disinformation going on there. It was partly tactical because we didn’t want anybody knowing who we were. In an administration you’re in a race to the finishing line. It suited us to be under the radar.
DW: How did the lease assignments go?
PM: It’s painful in an administration because landlords are always going to look at alternatives, and rightly so. We had to make decisions about whether we felt we could operate a business with the existing rent, in which case we were fair and right and proper to the landlord, or whether we needed to drop the rent to something sustainable. There’s no point in just signing a whole bunch of leases that are going to put you in trouble moving forwards.
DW: So what kind of rents have you ended up with?
PM: I have a loose rule for most leisure businesses – that you can generally afford your rent to be about 10% of your turnover. With Luminar, on a blended basis, about 8% of our turnover disappears off to the landlords. It’s taken nearly two years to finish the whole lot.
DW: I know you didn’t take every Luminar club. Presumably everything’s hunky dory with the ones you’ve taken and they’re all turning a nice profit?
PM: We’re not without our challenges. We have three freeholds that are in difficult towns, where we’re working hard to turn them around. We’re not losing money, but its hard work to make much money.
DW: What’s your investment programme?
PM: Our investments are self-funded from cash. We spent about £4m in the year to 28 February 2013 and we’ll do about the same this year. We’ll be through the estate by 2015, then we’ll start going round again.
DW: What’s your investment strategy?
PM: We’re fixated on one thing: return on investment. The biggest return on investment gets done first. It’s that obvious. There are no vanity projects any more. We’re focused on value for money. The refurbished clubs look fantastic, but on a much lower budget than Luminar would have spent historically – less than half, I’d say.
DW: And what sort of thing are you doing?
PM: Some are straightforward: carpets, paint, soft furnishings – so it’s a good offer. Those are ones where the business isn’t broken, just to keep it going. Then, next time, it will have a larger investment. But some of them, where the business is broken, need a complete rebranding, such as York, Aberdeen and Bristol, where the club has been rebranded as Pryzm.
DW: On the theme of branding, what’s the future of Lava & Ignite?
PM: The brand will eventually go. Some have been done, but we’ve got a couple that are trading very well and only when they need refreshing will they be debranded. We’re quite happy to run unbranded clubs.
DW: What about Oceana? What are you doing with those?
PM: That’s a different matter. When a club breaks we want it to be a Pryzm. Oceana was Steve Thomas’s response to the late bars: he put five bars and two music rooms into an Oceana. Our view is that it’s more important to have music than five bars. We’ve taken the view that we will have a third music room. Which means that in addition to mainstream music and cheesy/retro ’70s and ’80s music, we’ve got a third room offering something that’s a bit more credible, and a bit more aspirational, that appeals to a slightly older age group. That’s worked very well – in fact, we’ve another business in Bournemouth (Dorset) that, while it isn’t a Pryzm, has four music rooms. We could have made it a Pryzm, but it’s a unique building and not quite the same.
DW: Peter, simple question for you: brands in nightclubs – do they work?
PM: They work from a management and marketing perspective. But I don’t think a customer at the Oceana Watford (Hertfordshire) is really going to go to Brighton (East Sussex) regularly and decide to always go to Oceana Brighton. Mind you, Oceana does generally enjoy a good reputation wherever we are. It’s still successful. We’re doing amazing numbers in Watford, while Southampton (Hampshire) is having its best year in five years. Those don’t need replacing at the moment. But in Leeds (West Yorkshire) the brand has been overtaken by other operators and it’s time to rebrand. It’ll become a Pryzm next year. Brighton too – it’s a fast moving town and I think we need to move it on.
DW: And what are you going to do with the Liquid brand?
PM: We are devising the new Liquid, so when they start coming through the refurbishment sausage machine, they will end up with a new name. But we won’t have one name for all the Liquids. We are likely to choose from three or four names and, in some cases, we might just pick something with a local twist. So it won’t be a straightforward rebrand with one name as we are doing with Oceana.
DW: So, eventually all the brand names from the old Luminar will go?
PM: Yes, and I think that’s right. Let’s face it, there aren’t any Tiffany’s or Cinderella Rockafellas any more. They’ve been and gone. It is an emotional thing. We often speak to our customers and staff about names. A lot of people would like to see the old names return. Lava & Ignite Preston (Lancashire) is now Evoque, but we considered calling it Tokyo Joe’s because a lot of older people said it was where they’d met husbands or wives or partners. But the kids didn’t think that, so that’s why we didn’t roll back to the past.
DW: What shape will the new Luminar take?
PM: It’ll be 25% Pryzm, 50% new Liquid and 25% unbranded. By the end of 2015 we’ll have spent £15m on sorting out the estate. By then we’ll have completed the catch-up investment and be on a reduced spend on the existing estate and looking at what else we can do with the money.
DW: Presumably that means acquisitions?
PM: We’ve made three acquisitions so far – in Guildford (Surrey), Dundee and Chelmsford (Essex). We’ve got the systems, the infrastructure, the head office – all of which can be leveraged. But we must not do anything that’s going to slow down the refurbishments. If you’re the manager of a club in the north of England and you’ve had no money spent on your club for seven or eight years, you’re not really going to want to hear about the new big fandango club in Chelmsford. You want to know when your refurbishment is happening.
DW: What sort of returns are you looking for on investments?
PM: Our requirement is two years.
DW: Given what you’ve seen, it sounds like lack of investment was the biggest failing at the old Luminar.
PM: If you look at the history of Luminar, it was investing according to a 10-year refurbishment cycle. I’d suggest that was not sustainable and what happened was predictable. Its demise was simply hastened by too much debt and the market changing.
DW: Do you think Steve Thomas stayed on too long?
PM: You have to say that Steve did ever so well building a massive company, but I think in the end, it’s difficult for anybody to come up with fresh ideas the whole time. And he would probably admit he was not the guy to carry on for ever and a day. There are very few people who can do that.
DW: Just about every nightclub of any scale has gone bust in recent years. Is there really a future for a proper nightclub business?
DW: Go to Watford, Southampton, Brighton, Bristol, Preston, Nottingham. Many of our well located and well-invested businesses are having their best numbers for five or six years, which tells us there’s not a structural problem per se with nightclubs, though there are towns, particularly in the Midlands and the north of the UK, that are struggling.
DW: What’s your management ethos?
PM: I am a decentraliser by nature. We let the manager manage and we supervise them. Previously, to protect its brands, Luminar took all the decisions on price and promotion centrally. The problem is that what works in Watford may not work in Swansea (south Wales) and certainly won’t work in Burnley (Lancashire). The managers take all the decisions and they’re supervised by a regional director. That means the managers have ownership of the business – it’s almost like their own.
DW: How price driven are you?
PM: Midweek yes, but not weekends. We don’t use price promotions on a weekend – although if there’s an operator giving away silly drink offers, sometimes you have to respond. The midweek student market is price sensitive, though we try to keep it entertainment driven too. We always offer value product – we will end up with half a dozen drink deals at £2, or maybe less in some circumstances. But our liquor margin has grown over the past year as we continue tweaking the offers. The weekend is more about premium. Value but not cheap.
DW: So you flex your prices through the week?
PM: Yes. Take vodka Red Bull – we do a deal of about £2 on a student night, sometimes a bit less, and on the weekend we’re charging £4 or £4.50. At the weekend we probably sell drinks at about 30p more than a premium bar.
DW: How much say does a manager have on price?
PM: Three years ago the manager didn’t have a choice. The tills would suddenly change price half way through the night because someone at head office would have decided to do that. The barman would go to push the buttons on the till for a sale and, hey presto, there was a new set of prices.
DW: How do you balance responsible drinking and pricing?
PM: Sometimes a promotional deal is the only thing that may be working on a midweek night in a very price-sensitive town and, if you’ve genuinely tried everything else, you’ll try price – but nothing silly.
DW: Isn’t the £1.50 that you sell some drinks for irresponsible?
PM: £1.50 is not a price I like to sell drinks for, but 30 shots of vodka at £1.50 each, that’s £45 for a bottle as opposed to £8 in a supermarket. It’s not the price we like to charge, but it’s nothing like as irresponsible as nipping to the supermarket, taking a bottle of vodka home and drinking it with a friend before going out. One of our issues is preloading.
DW: Is preloading on the increase still?
PM: I don’t think people are preloading any more than they did last year, but our job as responsible operators is to have doormen at every club, and turn away those who have had too much to drink. You do your damndest, though somebody might get in.
DW: It all sounds very difficult. Given what the nightclub sector in general and Luminar in particular have been through, are you seriously telling me this business has a future?
PM: No-one’s come out unscathed from the past five years. But with what we can control, we think we have a viable business model and we know from the numbers that we’ve turned the corner. We had a business that was going south for five years. We’ve now got it going up.
DW: So what’s the plan?
PM: The plan is to maximise what we can get out of our existing estate, be opportunistic on acquisitions – which I think is still two years away – then we’ll look at what we can do and maybe go on the acquisition trail a little bit more, because when we’ve got all we can out of our existing estate, the requirement to spend money will have diminished and we’ll have more freedom.
DW: Could you buy something big?
PM: We wouldn’t do something simply for a story. We wouldn’t do anything risky. Everything we do is about de-risking the business and making it better.
DW: Do you think that Luminar could one day return to the stock market?
PM: If we show that we’ve got a really good, sustainable investment model that is predictable, then it could be floatable. We have common sense coursing through our veins and if we are sensible and don’t do anything silly, then who knows? It’s a simple business that is very cash generative and although there’s always the odd idea coming out of Government that might be a risk to our business, the reality is we know where we stand. In the past, we were guessing what was going to happen after a smoking ban and after licensing reform.
DW: How are your financial results for the current year shaping up?
PM: We are heading for a 40% to 50% EBITDA uplift, with a turnover of £85m, a bit of an improvement.
DW: Would you consider opening a club in London?
PM: We don’t see the value in London. It’s a great place to operate – the economy has hardly wobbled in the leisure sector – but you’re paying for it. We get offered a lot, and we’ve looked at a couple of things. We wouldn’t say no to London if we could jump our hurdle of getting our money back in two years and carrying on making money afterwards. There are some damn good operators in London, so the thing to do – if you wanted to get into the market – would be to look at a small group, but that’s not really in our thoughts.
Dominic Walsh is leisure industries correspondent at The Times newspaper
