McMullen's looks to

its people

The traumas of a threatened break-up of the business are now behind McMullen's, and MD Peter Furness-Smith is focusing on people and quality. ANDREW PRING reports

The McMullen's traditional summer party a few months ago was, as ever, a jolly affair. More than 300 licensees and their partners enjoyed the former chairman's hospitality in the sunlit gardens of his Hertfordshire home. Board members and senior management patted backs. And the band of the Grenadier Guards went through their paces on the lawns.

But as the AK ale slipped easily down at this timeless quintessentially family-brewer gathering, no-one present was under any illusions that life at McMullen's was proceeding unchanged.

Far too much has happened at the Hertford brewing business in the past three years for that to be so. The dramatic upheavals of 2003, when disagreement between family members threatened a break-up of the 1827-established brewer, are still fresh in the memory.

And although McMullen's, to the relief of its many drinking fans, remains an integrated brewer, it is having to work its pubs harder to return £38m of loans it undertook to buy back £43m of shares from disaffected shareholders. All the more so as threatening economic omens bear down increasingly upon the licensed trade.

Steered through the crisis

Peter Furness-Smith, sole managing director for the past two years, has steered McMullen's through that crisis - jointly, he would point out, with David and Fergus McMullen and the chairman they share with Gale's, Charles Brims.

At the company for seven years - he came in as joint MD, running retail - and with a background encompassing Whitbread, Morland and the Army (the band on the lawns were from his old regiment), Furness-Smith, 52, has a clear vision of how he wants to develop the company. At the heart of that is a focus on people, and how they can best be developed to their own and McMullen's benefit.

'We can invest in good pubs and aim for high, consistent quality in the way we run them, but the only way we can achieve this is by focusing on our people,' he says. And that applies as much to the licensees of McMullen's 53 tenanted pubs as it does to its 80 managed outlets.

'We believe success is all about good people and rewarding them. Internal staff development is fundamental to what we do. We spend a lot on training. We've invested more than £200,000 in a new training centre at the brewery, and that includes a development kitchen, which is proving very exciting and valuable for tenants and our managers.

'Partly as a result of this focus on staff, we've found that people are staying 30% longer with us than they used to. We firmly believe that the companies that invest in their people will do best.'

In preparation for transferring 18 houses from managed to tenancy, Furness-Smith and his team have devised a new six-year lease, with RPI rent increases, and an £80-per-barrel discount scheme - 'a genuinely commercial package that will enable us both to succeed'. 'We wondered at one stage if we were being too soft,' he reflects, 'but we're just not in that financial re-engineering game of some pubcos. We know we'll only be around in the future if we actually deliver a consistent, good quality offer to our customers.'

The new lease move is as far as McMullen's wishes to go at this stage. 'We're in this business for the long term, and we want to retain control of our assets. That means long leases are not for us. But we want to attract good licensees, and we feel six years rather than our normal three years offers them a real chance to make good money with people who've got their interests at heart.

'We're very keen, certainly, to get away from the old image of the ordinary brewer's tenant having all the results of their endeavours taken away by a rent increase.'

Although McMullen's transfers some smaller managed houses to tenancy (19 in 2003/4) and although running costs continue to rise and fixed-odds terminals take their toll, the company is still committed to running its own managed houses.

Pushing on with style bars

And it is pushing on steadily with the Baroosh style bars, a high-investment strategy in an area where some other family brewers have come a cropper. The fifth opens in Chelmsford early next year.

'You can follow the herd and transfer to tenancy, but if ownership of your assets is paramount - as it is with us - you have to take control and manage,' Furness-Smith maintains. 'And you can certainly make more money that way, rather than letting it out to tenancy.'

Disappointingly, the accounts for the year to October 2004, show McMullen's made less money from its managed houses than the previous year - like-for-likes were down by 2.2%. Comparisons with the fine summer of 2003 played their part, but 'the distraction of the many changes we have had,' played its part, the annual report notes.

Since the family crisis, it's become even more crucial for McMullen's that the managed estate bounces back. Some of the loan repayment is being addressed by the sale of non-pub assets, such as shops and offices. And the loss of that rental means, as Furness-Smith notes, 'we are now more exposed to our pubs' performance'.

Overall, pre-tax profits in the year to October 2004 slipped badly - from £10.15m to £6.64m, on turnover up slightly to £54.5m. Interest on the new loan accounted for £1.4m of that dip. Asset disposals of £10m pushed post-tax profits to £12.3m, against £7m. This year's results will not be out until January, but Furness-Smith says the managed pubs have slowed the decline in like-for-likes to 0.9%.

To help drive pub profits, the company places strong emphasis on customer research of its own and key competitors' outlets. 'We want to make sure that when you come into one of our pubs, you are treated in a warm and friendly manner, rather than as an inconvenience. I'm very happy to say that we're consistently doing 10% better on this score than our rivals,' he adds.

This should stand McMullen's in good stead as the trading climate toughens still further. Says Furness-Smith: 'After 10 good years, the on-trade has had a couple of difficult years and I don't see it improving quickly. Less money is being spent in pubs now: the on-trade is losing out to the off. And any growth now has to be at the expense of competitors. But I'm reasonably optimistic because of our approach to quality: good operators will do better.'

The new licensing regime and its possibility of extended hours doesn't play much part in that optimism, and not just because transition has cost McMullen's £250,000 and many painful and often tedious man hours.

The brewery is fundamental

'It won't reverse the current trends in trade, though perhaps there may be some benefit in the long run. Again, it all comes down to how you manage the individual pub, and those who do it well will prosper.'

Owning a brewery may not drive McMullen's profits to the extent of its pubs, but it is still fundamental to the company, insists Furness-Smith. 'It gives us a real point of difference. We looked at the operation in the round and asked ourselves two questions: do we want cask ale in all our pubs? And can we brew it cheaper than we buy it? The answer to both was yes.'

In the interests of efficiency, the large and uneconomic existing brewery is shortly to be replaced by a new brewery, where head brewer Chris Evans will have a hopback to practise his art. Speciality beers, including perhaps wheat beers, will be one result of this more flexible system as will the continued use of whole hops instead of pellets. Keeping within the progressive beer duty's 18,000-barrel ceiling means contract brewing is a thing of the past.

As to the future, family shareholders have no wish to dilute ownership, so funding of acquisitions will have to come 'from a mix of retained profits and borrowings' as last year's accounts note.

To keep the shareholders happy - and he, incidentally, is not one of them - Furness-Smith kn