Charity: Managing to maintain margin

The managed sector of the pub industry stands at around 10,000 pubs and has had, in comparative terms, a relatively stable year.

In years past, lower-take managed pubs have tended to be sold or converted to lease.

Operators have been hugely mindful of the start of the smoke ban in Wales and England last year and, in previous years, had set about deciding which pubs were suitable for a smoke-free era.

In most cases, this has meant selling or converting to lease those pubs that didn't have solid food trade or that risked having their wet sales excessively damaged by the ban.

So, for example, Mitchells & Butlers (M&B) sold 101 pubs to tenanted operator Trust Inns in October 2006 and a little earlier Marston's moved 90 managed pubs to its tenanted division.

The smoking ban and its impact is a defining theme for the performance of the sector. The main focus for the sector is on mitigating lost wet sales by driving up food takings.

This is the key growth area, with Mintel forecasting 6% annual expansion between 2007 and 2012. But in the meantime the first half of 2008 will see every major managed company struggling to maintain like-for-likes. Food sales will be up for all quality operators while drink sales are damaged by the double whammy of a smoking ban and a consumer slowdown.

A deeper examination of the strategy of each of the major companies provides better insights into the managed market's key dynamics. M&B is, without doubt, the most precisely-segmented player in the market.

Its mid-market brands such as Harvester and Toby Carvery have seen sales growth slow down while its 175-strong Vintage Inns is being re-invented with higher food quality after seeing "format challenge" - increased competition from a range of other players investing heavily in mid-market food.

M&B has also been signalling that mid-market customers are experiencing a squeeze from higher mortgage interest rates and other higher living costs.

Growth for M&B is coming from its blue-collar, heavily-wet sites where food offers have been bolstered.

Wet-led division boss Mike Bramley believes food sales as a percentage of turnover will jump from less than 20% to around 30% in his division within a couple of years (the figure is heading towards 40% in the pub-restaurant division).

The strategic gearing up for greater food sales is perhaps best exemplified by M&B's Pub & Carvery brand, a brand that plugs a "value" carvery - £3.99 during the week for roast and limitless vegetables - into a wet-led pub.

Some are hitting 5,000-plus covers a week and there are plans to expand the segment further.

Spirit has set about placing its 887 sites into four segments. There's a clear divide between food and wet focus, with 348 sites in two of the segments reporting food takes at 50% or more of turnover.

The other two segments, making up a combined 488 pubs, take far less money - £13,000 per week each compared to £20,000 per week at the foodier sites - but are far more profitable on a pound-for-pound taken basis.

Profit conversion is around 40% at these wet-led pubs with 20% food takings compared to slightly less than 30% at the food-led sites. It's a reminder of how labour-intensive food pubs are and how busy beer pubs still play a big role in the sector.

Key challenge​

A key challenge for 2008 is maintaining margin while increased food sales make up some of the lost wet sales inevitable after a smoking ban.

Greene King, like Spirit, is largely unbranded. It has chosen to divide its managed pubs into wet-led and dry-led.

Its lead brand, Hungry Horse typifies the sector's stress on providing consumers with a value proposition.

The acquisition of Loch Fyne, the seafood chain, in June 2007, showed Greene King's keenness to build on its food credentials and provides a food solution for a number of its under-used pubs.

JD Wetherspoon reported overall sales down 3.2% in its most recent period. Believe it or not, it's a good result as far as JD Wetherspoon management is concerned with sales down just 1% in England and Wales since the smoke ban began on 1 July.

A few years ago, the company feared large single-digit sales declines. Now it knows from Scotland that declines reverse after the first year and it can expect strong food-sales growth (already happening).

All 60 pubs in England and Wales that banned smoking early are still in positive territory.

It is seeking to capitalise on growth trends. Coffee and tea sales hit 500,000 a week over the two-week Christmas period, up from 400,000 a week. Surveys have shown not a single managed operator managed liquor volume increases over Christmas.

But focus can make a difference. Wetherspoon managed a 25% increase in cask-ale volumes during its autumn beer festival, selling 2.2 million pints.

Marston's has reported a 13% increase in food sales as it has expanded its value-based food offer.

Laurel Pub Company, owned by property magnate Robert Tchenguiz, has shifted rapidly in the past 12 months to embrace a food-led future. Wet-led bars are being converted rapidly to Slug & Lettuce, which boasts a revamped menu with such delights as a Thai chicken curry served in banana leaves.

Its La Tasca tapas brand, acquired in May last year, is cannibalising yet more poorly-positioned wet-led venues.

Orchid is investing heavily in its former Spirit pubs, with a strong emphasis on family dining. A modern take on the traditional carvery is its major thrust, with slightly higher price points and much higher design standards.

The underlying philosophy holds true for the sector - a great-value food offering in the unfussy but still smart environs of the traditional pub can drive growth.

The acquisition of pub company Brunning & Price by The Restaurant Group shows, again, one other key theme: the convergence between the restaurant sector and the foody parts of the managed sector.

Three major challenges for 2008​

1.​ Building market share at the same margin against a backdrop of increased overall marketplace supply. Large amounts of new capital investment in the food market are coming from Whitbread and Orchid, in particular. Spirit, Punch's managed division, is also investing in a way not so evident when the company was under private-equity control. Mitchells & Butlers is driving its white-collar food offers hard while

re-investing margin in "quality" at some

of its mid-range offers.

2.​ Service standards: there is a chance that a consumer downturn will see customers "trading down" from mid-price restaurants to value-driven pub alternatives. The key to retaining these customers will be about improving often poor service standards. To give an example, it's hard to imagine the detritus of uncleared plates that you regularly see in major managed chains being tolerated in mid-market restaurants.

3.​ Learning from the independents: why are most of the best pub meals served at independent tenanted pubs? Is it impossible to serve food to the same quality without radically investing in improved chef skills? Entrepreneur Paul Salisbury's Farm pub near Birmingham, a Mitchells & Butlers franchise, is offering a combination of great design standards with great-value food. His "free" salad bar with all main courses oozes freshness and offers far more interesting things than appear in, for example, the Harvester salad bar - couscous, sweet potato wedges and freshly-minted potatoes, for example. It's genuine innovation that the managed-pub sector could do with more of in 2008.

Major managed pub companies by size​

The major managed operators are, in size order:

•M&B (over twice the size of its nearest competitor and expecting to see average takings per site of £20,000 per week within two years)

•Spirit, the managed division of Punch Taverns, with 887 sites (food sales are 39% of overall turnover with Chef & Brewer its best-known brand)

•Greene King