Fuller's buoyant as bold statement reaps reward

It's a full nine months since London brewer Fuller's added

Gale's 111-strong pub estate to its London-centred business. One senior pubco boss recently told me that the consolidation process leaves many companies with just two options at the moment: "Have lunch or be lunch". Firms are having to think radically and galvanise themselves for the challenges ahead. For fellow London brewer and retailer Young's, this has meant a joint brewing partnership with Charles Wells to allow it to free up funds from its Wandsworth brewery sale for pub estate expansion.

For Fuller's, buying Hampshire-based Gale's was an equally bold statement of intent. It was a clear indication that it had the confidence to swallow up a smaller company in the belief its shareholders would see benefits across the board. It's no easy task to increase your pub estate by around 45% and maintain forward momentum in your core pub estate and elsewhere.

Remember what happened to Slug & Lettuce operator SFI Group when it tried to increase the size of its estate by this quantum in a single year. Admittedly, SFI was and, hopefully will remain, a unique case.

But the smallest hint of integration problems and Fuller's share price will have suffered. Any dip in Fuller's share price will have heightened takeover talk. The first nine months of this year, therefore, have been a key time for Fuller's.

Could its management prove it had the skills to swallow the Gale's acquisition without signs of indigestion? Well, the signs so far are very positive. Recent results show like-for-like sales were up 4.2% in its uninvested managed pubs after similar gains the year before. It's a

top-drawer performance, superior even to Mitchells & Butlers at its uninvested sites.

On the tenanted side, there was 8% like-for-like profit growth. (One City analyst, Panmure Gordon's Douglas Jack, credits Fuller's with a kinder approach on rents to its tenants than many a pubco. Theoretically, at least, it leaves more room for upward increases than for most). In brewing, Fuller's achieved volume growth without the benefit of acquisitions thanks to what some regard as the most successful beer launch of 2005, Discovery.

When two businesses are bolted together the occasional clunk of gears meshing is inevitable. But this merging of estates seems to have gone smoother than most. For example, the 42 managed Gale's pubs had sales in positive territory on acquisition. In the months that have followed, crucially, sales growth at these sites has not weakened.

Fuller's has discovered an extra £500,000 of synergies on top of the £3m a year it promised when the deal was done. A chunky £600,000 is being invested in the Gale's estate's first EPoS system, allowing managers more control of their units. It's the sort of investment that was impossible under Gale's ownership due to cash constraints that often prevail at smaller businesses.

A small number of Gale's managers, (seven I understand), have decided their future lies elsewhere. But some managers bridle under the pressure of adaptation to a new retail culture. Fuller's approach to the business seems to have been highly respectful of Gale's heritage. Its beer brands remain, of course, on the bar, but are supplemented by new products such as, inevitably, London Pride and the seeming star-of-the summer, Magners.

This week sees the first sizeable refurbishment by Fuller's of a Gale's pub - the Wyvern in Gosport, Hampshire, which has struggled for the past few years, is seeing a £200,000 investment and a change to Fuller's branding. There will be others where appropriate.

There's been a lot of Fuller's focus on up-grading cellar refrigeration across the Gale's estate. The obvious success in bringing Gale's on board leaves Fuller's executives hungry for fresh deals. It's an open secret that Fuller's is bidding for some of the London trophy sites being sold by Punch out of the Spirit managed estate.