Inside track by Mark Wingett
There are many ways to skin a cat. At present long-time rivals and, if perennial rumours are to be believed, acquisition targets, Greene King and Marston’s are living up to this saying by showing the pub sector and the wider world that two different strategies, although with some overlapping, can prove successful against the economic headwinds.
As November became December, the Rooney Anand-led Greene King posted H1 revenues of more £1/2bn for the first time, a performance driven by its managed division, which has been boosted to varying degrees by its acquisitions of Realpubs, Capital Pub Co and Cloverleaf, and food sales.
A day earlier, the Ralph Findley-led Marston’s reported a 9.4% rise in pre-tax profits on revenues up 4.8% in the year to 1 October 2011, with its new build programme, the growth of its Retail Agreements and, again, food sales, credited with being the engines for this growth.
Let’s take the Bury St Edmonds-based operator first. Over the past 11 months, the group has spent c.£180m acquiring the 11-strong, north-west based Cloverleaf; the London-based, 14-strong Realpubs; and the 34-strong, London-based Capital Pub Company.
The acquisition of Capital in July meant the group had added 60 pubs to its managed division this year, achieving 30% of its target to add 200 managed pubs to reach an estate size of 1,100 pubs over the next three years. Maybe more importantly just under 48 of its acquisitions this year sit inside the London micro-market, which is outperforming the rest of the country.
At the same time, all three acquisitions have recorded growth: Realpubs up 3%; Cloverleaf up 5%; and showing that London-influence, Capital up 12%. This is before the full benefits of the transactions and the group’s investments feed through. Regarding Capital it expects to start capturing the anticipated £2m of synergies in the second half of this year, with the full benefit by April 2013.
The group plans to open a further nine Cloverleaf sites by April 2013 and said that initial trading at the first Greene King conversion to the Realpubs format, the Maynard Arms in Crouch End, has been “encouraging”.
Ebitda per pub across the group’s tenanted estate for H1 increased by 3.3% to £25,800, as the overall quality of the estate increases with disposals at the tail. The company has stepped up its efforts to apply managed pub disciplines across its tenanted estate, with 193 pubs (target 300) under new style agreements. This should leave around 200 sites to sell off the bottom.
The group has followed Marston’s down the franchise route, with its recently accredited Meat & Eat scheme. It aims to have 40 sites operating under the agreement at the year end, with up to 100 sites eventually being targeted the firm said. Of the 14 sites currently operating under the new agreement, average turnover increased from £3.2k to £8.3k.
While Greene King has looked at the acquisition route to fuel its managed estate growth, at Marston’s, which ditched its M&A strategy a number of years back, its all about the new build and land grabbing, making it more the “Tesco of the pub industry” in terms of growth strategy than JD Wetherspoon.
Aside from the good news of a new bank facility having been agreed to May 2016, the group’s new build programme and the rollout of its “ground-breaking” retail agreement again grabbed headlines.
Around 50 new-build pub restaurants have been opened by the group over the past five years, achieving an average ebitda return on capital of 18%. Each new site costs c.£2.5m. The target of opening 25 new-build sites a year will continue “for the foreseeable future”, with 100 under review.
While Greene King has expanded its presence in the capital, Marston’s has steadily taken a step back from London, witness a number of its sites now operating as restaurants, such as the new format Café Rouge in Villiers Street. The focus is clearly on growth in the regions, a bold move but one that is paying off.
The group now has 337 franchise-style agreements in place - the aim is to have 600 sites converted by the end of 2013, with around 200 planned in 2012. Once the conversion is completed, annual profit from the 600 pubs is expected to increase by at least £6m, against pre-conversion profit, to £14m.
On the new build and retail agreement strategy, Geof Collyer, leading analyst at Deutsche Bank, said: “We estimate that this six year investment programme has delivered post-tax returns that are comfortably above the group’s weighted average cost of capital (WACC) compared to its £600m M&A programme over the past decade which has delivered post-tax returns that we estimate are below WACC.
“It is easy to understand why the group is so keen to extend the new build programme given these superior returns, and post the successful early refinancing of bank facilities, it now has the capital to deliver over the next four years.”
Both groups now face favourable year-on-year comparables as this year closes and 2012 begins. The momentum gained already should place them in the perfect position to ride out what is sure to be another tough, perhaps the toughest, six months ahead.
