Inside Track by Mark Stretton
The eagerly awaited outcome of Mitchells & Butlers strategic review is little more than seven days away. It is a momentous event for the company and its chief executive, Tim Clarke, who in the past 15 years, has presided over the formation – from the remnants of one of Britain’s great old brewing businesses – of an eating and drinking-out powerhouse. Recent events culminating with the £275m post-tax hedging losses have given pause for thought, and it is time for the company to reinvigorate, and possibly re-invent, itself. But aside from the predictable sale of peripheral assets such as Hollywood Bowl, what plans will the company unveil? It is time to be bold. There is a sense that Mitchells & Butlers should become the Tesco of the eating and drinking out market. But it has some way to go before it can claim that mantle. It now has the opportunity to map out that process for investors. A quick glance at the company’s own market segmentation, available on its excellent website, shows where the company is possibly lacking. Of four quadrants, one – that of “high street restaurants” – is virtually empty apart from All Bar One and Brown’s. Why hasn’t M&B built long-term brand equity in the high-street restaurant market? At a time when its competitors have made hay and a clutch of new eating-out formats, such as Carluccio’s, Gourmet Burger Kitchen, La Tasca, Strada, Wagamama, have relentlessly focused on building critical mass, M&B has been a net closer and seller of sites on the high street. As a classic premium British bar and brasserie, Brown’s is surely one of the great success stories waiting to happen? Arguably, they should be plotting how to build it, not how to sell it. The reason the company has failed to grow All Bar One, Brown’s and out-and-out restaurant concepts, is because of its aversion to operating leasehold property. It seems a little ironic, given that last year it was close to signing a £4bn deal that would have put rents against practically the whole thing. It must overcome this. Brown’s at Windsor, for example, located in a prime riverside spot, is believed to make the best part of £1m profit per year. It is difficult to see how such a property could not wear a rent. Not withstanding some concerns about capacity, the company must back itself as an operator and join the restaurant party – whether through creation or acquisition. It must get also away from the mentality that if a restaurant hasn’t got a pub attached to its hip, then it is for someone else to run. There is a worry that it will merely focus on the freehold pub-restaurant market, and namely getting its hands on Spirit Group and the remaining pub-restaurants operated by Whitbread. This is too narrow. The company should try to buy Spirit – and it was a pity that not more could have been done to bring the two businesses together through recent discussions – but there are many other ways M&B can grow its business. Part of M&B’s plan will no doubt be to continue to emphasise the performance arbitrage between its own business and that of Spirit and Whitbread, gradually notching up the pressure on their respective owners to do the right thing, and sell. Some suggest that an acquisition of Spirit would require much post-deal surgery – for every pub that would fit M&B’s “super-pub” requirements, there would be another that would effectively enlarge M&B’s own tail. Aside from brands such as Chef & Brewer, Spirit has a stunning, largely unbranded, central London business, comprising around 170 pubs with weekly sales of about £15,000. With profit margins of about 40%, it makes more than £50m. It seems highly attractive but is now the time to be buying wet-led pubs? M&B needs to focus on growth markets in the widest context of the eating and drinking-out market. Perhaps it is also time to explore international markets? The next 12 to 18 months promise to be a fertile time for the market’s strongest operators to buy and build their businesses. M&B must seize the day.