Riding out a blip at H&H

It may recently have posted a profits warning, but that doesn't stop Hardys & Hansons chief executive, Tim Bonham, from believing that the company has a long- term, sustainable future. ANDREW PRING reports

For a few tense hours some weeks ago, the boardroom at Hardys & Hansons' Nottingham HQ was not an easy place to be. The highly-respected family brewer had just posted a Stock Exchange warning of year-end figures that would be 'slightly below market expectations.' And in no uncertain way, the hops hit the fan.

Over the course of that Thursday morning on 7 October, the share price plummeted by 11%. Events at Burtonwood, Jennings, Ridleys and Belhaven prompted the more feverish invest- ment websites to instantly brand the 173-year-old brewer a takeover target. Even sober commentators such as the brokers Peel Hunt felt compelled to note that H&H was 'exactly the sort of company Wolverhampton and Dudley has been adding.'

The fact that its very strong asset base would require any bidder to pay a considerable premium was doing nothing to dampen speculation. Nor was the absence of indications, let alone rumours, that the all-powerful family shareholders were looking to throw in the towel.

Surprised by the reaction

Looking back now, chief executive Tim Bonham admits to being surprised by the reaction. 'We'd never been in this situation before. There'd been a little blip in 1991/92 but since then we'd had a really good run.' So good that last year's results saw the company make an enviable £16m on its £76m of sales.

After that great run, it was a faltering display by H&H's 78-strong managed house division that forced the profit warning. Uninvested like-for-like sales growth of 3.6% in the first half of the year (to 1 April) had slid away to become a 1.6% sales decline in the second half - a fall of 5.2%, which analyst Mark Brumby at Oriel described as 'quite a spectacular performance'. To add spice to speculative froth, W&D's recent figures were rather healthier.

Explains Bonham: 'Things had clearly slowed down in our managed houses, so rather than take the City by surprise at final results in December and in order to keep our investors informed, we made the announcement.'

Though the initial flurry of excitement made for an uncomfortable morning at the brewery, life steadied after lunch. By the end of trading, H&H shares were just below where they had started the day. Even the Motley Fool website crew had calmed down. Wrote one member: 'Takeover? Unlikely. Look back over the years and nothing has changed at H&H except they have more pubs and make more money, so why would the same board of directors now look to sell out? The results are only marginally off in quite tough times and material only for those who have an interest in hyping up a takeover. I think we will be seeing a lot of these warnings as energy costs especially start to bite.'

Bonham couldn't have put it more succinctly himself. 'I don't think the slowing down in our sales was about us doing anything wrong,' he says. 'It wasn't as though people were suddenly saying that they didn't like going into our pubs.

'I just think trading conditions in the East Mid-lands have definitely got tougher. It's not a very affluent area and many people are operating to a tight budget. The economy is not looking very good and I think people generally are looking to pay back debt rather than spend as much as they were doing.'

He also points to the effect of rising company costs incurred through 'significant increases' in the minimum wage, utilities and business rates. And the five north-west and Yorkshire pubs, with their 194 rooms operating under the Premier Travel Inn franchise, which were acquired earlier this year, are soaking up investment in a multi-million pound refurb. 'These costs are all budgeted for, and we weren't expecting them to contribute fully until May next year - but it's a major spending programme.'

Concentrating the mind

So far, so reassuring. Yet ask him if he nevertheless feels Hardys & Hansons is a takeover target, and he answers yes. 'Everyone could be a takeover target. Of course, the family holding is very strong - it controls well over 50% of the votes. But times like this concentrate the mind. You've got to manage the business through the bad times as well as the good.'

To aid concentration, working parties were set up to review all operations. They're due to report shortly. 'We just want to make sure we're doing all we can to keep our customers happy,' he says.

'My first reaction, though, has been to say: 'Don't Panic!'. We're a very solid business. We shouldn't be looking to cut prices and slash our margins. That gets you nowhere. And we're not conducting any wholesale review of our managed houses. I'm just not minded to transfer a great swathe across to tenancy. We're always looking at this anyway: analysing which type of pub will make us more profit. So we're not going to do anything major here.'

Bonham also points to the traditional strengths of the family brewer. 'The good thing about the vertically-integrated business is that it has three income streams. It makes it easier when times get tough because we have a much more balanced business.' Since Bonham joined the company in 1990, after lengthy spells at Watneys and Whitbread, he's strengthened that balance further by developing its retail skills considerably. Then, there was no food in any of the managed houses. Now it accounts for 37% of turnover.

Nor were there marketing or IT departments when he arrived. Now there's a team of four marketeers, who, among other tasks, have compiled an invaluable and fast-growing database of 85,000 H&H customers, which is helping spread awareness of the brand in local communities; and five IT-ites with the latest software packages. Having on board as a non-executive director John Barnes, chairman of the Restaurant Group and former chairman of Harry Ramsden's, also helps raise the overall retail IQ.

If central overheads have risen, it's been necessary to support a much larger company. In 1990, the estate stood at 200, of which 50 were managed. Today, the 78 managed houses are complemented by 183 tenancies, and the geographical boundaries have widened in each direction, though within the M25 still remains a no-go area.

Many of the new managed houses are new-build and that trend continues on greenfield sites in Shrewsbury and Worksop, the first of which is due to open shortly and the second in late summer next year. Tenancies are now offered on much longer leases. And bedrooms and food are being encouraged in this part of the estate as much as in the managed side. What remains the same is the strong concentration on its heartland, community pubs and its avoidance of high-street circuits.

Brewing close to capacity

The brewery, which produces close to its 140,000-barrel capacity, is doing twice what it did five years ago. And it has been made as efficient as possible, with the new kegging line on-stream for a few weeks now.

Under production director Ian Masson, sales outperform the market and success with Dark, its mild beer, has made it the largest mild brewer in the country. 'Ironically,' says Bonham, 'we were about to pull out of brewing mild six years ago. But we put it in nitro, got some support behind it and haven't looked back.'

With these developments now firmly embedded, Bonham looks to have put H&H in as strong a position as possible to withstand the economy's current downturn and whatever may follow. 'We can't be immune if things deteriorate, can we?' he asks. 'But we won't be as badly affected as the high street.'

What's worrying Bonham more than macro-economics is the smoking ban. 'We have big non-smoking areas in many of our managed pubs - they'll be the least affected. It's the community pubs that will suffer.'

That said (and this interview was conducted be-fore the Government's intentions were declared) Bonham is optimistic for the future. 'People still have to enjoy their leisure time and go out to eat and drink. Some new people may start