Cains future in the balance

In the years since Sudarghara and Ajmail Dusanj bought the Liverpool brewer Cains, in 2002, the brothers have won many friends in the pub business. The two entrepreneurs were determined to revive the fortunes of Cains and set about doing it with the same vigour that had served them well in other businesses.

In 2002, the brewer was losing around £2m on a turnover of £14m. Over the course of the next four years turnover rose to £26m, and in 2006 they even produced a small profit of £57,000.

The company's plight last week — dependent on the mercy of its bank for survival after breaching covenants — prompted tremendous sympathy in Liverpool and the wider pub and brewing industry.

If unrelenting hard work and breadth of ambition was an automatic ticket to reward, the Dusanj brothers would not be struggling. But, in retrospect, the reverse takeover of Honeycombe Leisure in 2007 is looking like a step too far. In the six months to 28 April 2008 the business lost a huge £4.5m, which is the equivalent of about £170,000 per week.

What was clear from Cains' figures was that both the brewing and pub side of the business had a pretty awful time. Like-for-like sales in the pub estate had been down by 15% — a recipe for losing money in a multiple-leased estate. Trading has improved since then, but only in line with the rest of the industry, which would suggest volumes down by around 8% to 10%.

Meanwhile, brewery sales were also down by 14.9% to £10.7m for the six months. Admittedly, brewery sales have perked up and have been running at 17% ahead of the year before. But the company's bank, HBOS, which declined to renew facilities on Friday, appears to have been frightened by the sheer scale of Cains' losses in the year to date.

Writing on the wall​

Last week, it felt like the Dusanj brothers knew the writing was on the wall, making emotional pleas to their bank, through public forums, to take the long-term view. It was the sort of public reasoning you do when it's starting to look like the bank is proving impervious to behind-closed-doors discussion.

It's clear Cains has been undone by some of the issues that have been troubling many others — the smoke ban, rising costs, a consumer slowdown. But let's not forget that Cains was also pioneering an entirely new business model — it was the UK's largest vertically-integrated multiple lessee. The purchase of 100 Honeycombe pubs brought 67 leaseholds, the majority of which belong to large tenanted pub companies. It has 20 or so Punch pubs and 24 Admiral Taverns pubs within the estate.

The Dusanj brothers dreamed of replicating the business model of a Fuller's. The yawning difference was that the Cains' reverse takeover of Honeycombe placed it in a highly-leveraged position from the outset.

The hope was that supplying Cains beer through the Honeycombe estate would create some high-margin business on top of the previous low-margin contract and canning business — only 5.6% of Cains' sales had been through the on-trade prior to the sale. Its core own-label business produced a gross profit margin of just 6%.

Nearly all the pubs in the Honeycombe estate are free of tie. The downside of this, in a situation where beer volumes are in decline, is that rent remains a fixed cost while reduced beer income is entirely borne by the retailer — a good thing from the landlord's point of view, a really bad thing from Cains' point of view. To be fair to Punch and Admiral, I hear they were bending over backwards to support Cains through this particularly sticky patch. The handful of refurbishments undertaken by Cains so far have been showing good results.

Honeycombe deal​

When the Honeycombe deal went through in May 2007, I wrote: "It will be interesting to see how much difference selling one's own high-margin beer products can make in leased sites." On the face of it, the answer is not enough. But, to be fair, Cains ended up flying into the face of an economic storm that was unimaginable when this deal went through.

The start of the credit crunch, as it turned out, was only a few months away. It's a bad time to ask a bank for forbearance. On the face of it the game was up on Friday. But sources close to the brewer were heartened at the start of this week by ongoing discussions with the bank.

One Liverpool Post columnist, Bill Gleeson, writing as Cains waited to hear from the bank on whether its life support was about to be unplugged, wiped away the tears to give this view: "Cains would undoubtedly have benefited from a few years of improving business performance before taking on more ambitious and risky plans."