Success is sweet

The Honeycombe pub model is proving a winner in today's industry, as Andrew Catchpole explains.

Ever since the dissolution of the brewing fiefdoms brought about by the beer orders of 1989, the industry has fragmented and reformed in a seemingly endless cycle of mergers, acquisitions and disposals. The result has been an unprecedented growth in specialist operators, quick off the mark to exploit newly created niches. One such beneficiary is the ambitious Honeycombe Leisure group.

At a glance, this North West-based pub company resembles many small regionals up and down the country. It has a core estate of 58 community pubs, owning the freehold on 33 of these predominantly wet-led houses. However, this is where the similarity ends.

When Honeycombe's joint chief executives, Bryan Wardman and James Baer, carved out a strategy for expanding their company on a nationwide scale they opted out of the more usual -and more costly - property-led expansion which is driving the market. Instead, they identified the increasing separation of pub ownership and management as a niche for growth. And, so far, it's proving a canny call.

"We set up Honeycombe Management Services to reap the benefits of a rapidly changing and consolidating sector," explains Bryan. "As the big pub companies get bigger they have huge power in terms of acquiring sites, but not necessarily the management resources to keep up with their acquisitions.

"Because these operators are competing hard for properties, prices remain high and so they have to demand more and more from each site they own to deliver the returns needed to stay locked in this cycle."

Management services​

This, says Bryan, is where Honeycombe can step in. The AIM-listed company's Management Services Division already runs 37 pubs, either under its Nectar banner and the Ma Hubbard brand (in a deal with the Great English Pub Company), or for companies including Punch, under its growing Management Services wing.

Nectar Taverns, which was set up under a government-backed Enterprise Investment Scheme, has so far delivered a 20 per cent return on capital since August 2002. And with its core freehold pubs delivering sound returns expected from a well-invested mature estate, Bryan and James have been actively courting both established operators and individual licensees to grow the management side of their business. Of course, third-party management services are nothing new. Many companies exist which offer to step in and manage under-performing sites for pubcos with large and varied estates. But Honeycombe believes it has a winning formula based on both the flexibility and ambitious nature of its offer. It focuses on unbranded sites and, adds Bryan, there is plenty of room for growth.

"Ten to 15 per cent of pub stock in the UK is in urgent need of loving care," claims Bryan. "This accounts for 6,000 pubs which are under-run, neglected or boarded up. Whether owned by a multiple operator or individual freehold licensee, our specialism is to take over the management of these properties and deliver a good return."

Business picked up so far from large companies - including the Punch pubs - has been with sites that in themselves have the potential to be good earners, but don't fit with the broader management model of the owning company.

"It's because of our size and our understanding of managing individual businesses that we can bring the best out of each site," explains Bryan, who says the ability to be flexible in every different situation is key.

This flexibility includes stepping in to run pubs during a transition period from managed to tenanted, undertaking to boost an ailing business before it is sold on, or signing up for the medium term to manage the venue as part of an ongoing contract with a larger pubco.

As property-backed acquisitions continue to send prices spiralling upward in the sector, the Honeycombe model provides a neat vehicle for growth without incurring increasing debt burden. But this company - whose ambitions spill far beyond its Lancashire heartlands - has been careful not to hang all its business on one line. At its core, it remains a company with its own freehold properties and a further option to buy out the Ma Hubbard sites when its management contract comes up for renewal. Monies generated through its Management Services arm can and will be used to gradually expand the core Honeycombe-owned estate without incurring significant extra debt.

The continued growth of main tenanted operators, coupled with a diminishing number of sizable managed house operators, leaves the Honeycombe board confident it is operating in the right niche. But, just in case, the company is hedging against a downturn in any one area through having several facets to its business. As James puts it: "Why put all your eggs in one basket?"

Honeycombe overview​

• Honeycombe is a wet-led company with drinks accounting for 75 per cent of sales.
• Honeycombe operates 58 venues and community bars, centred on entertainment and big screen sport, plus 37 Inns and Taverns in market towns and tourist spots.
• Its own estate comprises 57 sites, of which 33 are freehold.
• A further 38 sites are under the Management Services division, with 14 Punch pubs, 17 run under the Nectar EIS-backed division, six food-led Ma Hubbards (with a buy-out clause when the management contracts come up for renewal), and one Jarvis site.

Pictured: Honeycombe chiefs Bryan Wardman (left) and James Baer.​