Bullish M&B tighten the screw

In May, Mitchells & Butlers (M&B) boss Tim Clarke was talking about the mounting pressure on middle-class incomes.

At results last week, he conceded that the consumer slowdown had intensified. In this context, there was a degree of bullishness about his presentation, arguing at one point that M&B made its biggest market share gains during periods of consumer slowdown.

M&B's long-term strategy, combining value with volume, has moved up a gear at a time when polarisation of the pub market is happening "at a rapid rate". "Have you ever seen so many pubs boarded up?" Clarke asked me.

M&B told analysts there was an opportunity now to out-perform the market further as it pegs prices to drive volume, attracting new diners as the rest of the trade copes with the 8% volume falls of September and October. For a while now, M&B has been stressing the potential of food at its traditionally "wetter" blue-collar sites.

There was a particular slide highlighting the long-term performance of Pub & Carvery, now at 50 or so sites and due to move to 80 within the coming year. Since 2004, the average spend per head has dropped by 15% from £4.71 to £4.01, while average covers per pub per week has climbed 64% from 1,800 to 2,950.

From each percentage-point drop in the price charged, cover volumes have climbed 4%. Average profit per pub is up 29%, with drinks sales at a highly profitable 42% of total sales. It's the epitome of the M&B value/volume model - better and better value driving through more and more customers, which allows, eventually, incremental sales to drop straight through to the bottom line.

In respect of Pub & Carvery, Clarke admitted the result has been ahead of all expectations. M&B's other two blue-collar segments, Sizzling Pub Company and Cornerstone are to be expanded, with Pub & Carvery, to about 300 sites by the end of 2008 - about 15% of the total estate. Average sales, post-conversion, shoot up £7,000 per week as food volumes (and wet sales) increase, moving from about £10,000 to £17,000 per week. One analyst suggested that this has all the ingredients of a price war.

It's clear that M&B wants to intensify pressure on its competition. But M&B's long-held strategy has been to allow a large price gap to open up between itself and the tenanted trade - there's a 35p per-pint gap on standard lager. The turning of the screw is evident in the middle-income pub-restaurant offer. M&B is re-investing 2% of margin - £10m - in quality and value. Harvester and Toby Carvery have still been seeing sales increases of about 3%.

But the company's Vintage Inns offer has been flagging for about a year, with an unprecedented 4% drop in sales. The middleclass income pressures had combined with revived food offers at independent pubs and the rise of the gastropub outside the M25 to end 10 years of sales growth at Vintage. In the summer, new restaurant boss Adam Fowle realised the spring menus had not delivered the leap forward in quality and value that was needed.

Three intensive months were spent on a new menu, launched at the start of November. Clarke says that November food sales have moved forward across the pub-restaurant division, with Vintage showing the biggest turnaround of all.

More generally, M&B management will have been feeling the heat arising in the past four months from protracted efforts to release value from its freehold estate by some sort of hive-off. The focus now is on the possibility of a real estate investment trust, an idea arising from activist investor Robert Tchenguiz.

It was clear last week that this plan is in an early stage of investigation. One interesting comment came from Clarke on the controversial operating company/property company split that is envisaged. There was no need for worry about the operating company not having "the freehold featherbed" in a downturn. Any M&B operating company, he said, would still have the "best sites, formats and skills" in the industry.