As reported by The Morning Advertiser, City Pub Group's financial results for the 53 weeks ending 31 December 2017 highlighted a vital period in the company’s evolution.
Founded in late 2011, the group’s like-for-like sales grew by 3.8% across its pub portfolio – which currently stands at 34 sites across southern England and Wales.
At the end of October 2017, City Pub Company (East) Plc combined with City Pub Company Ltd to form the City Pub Group plc. It subsequently listed on the AIM on 23 November 2017, raising £35m in the process at 170p per share.
With five completed acquisitions to open on top of its current portfolio, seven openings earmarked for 2018, and a strengthened financial position revealed by the latest results, Watson described last year as a “pivotal” one.
"It was pivotal because when we started as an Enterprise investment scheme (EIS) start-up we always said that we would float the business at the end of the EIS qualifying period. The earliest we could have done that was November 2017.
"It's one thing floating a business but what was great was raising all that lovely money. We set out to raise £30m but, because of institutional demand, we actually increased that to £35m.
"We've now got a very ungeared balance sheet. We said we're going to double the size of the estate from time of float to around 65 by the middle of 2021.
“We've got a pipeline now that's guaranteed to take us to 41 sites, of which 40 will be trading by the end of this financial year. We've got other sites in the hands of lawyers, so we're hoping that that number will increase.”
Sticking to the group's 'comfort zone'
While the last year has seen leaps forward and changes for City Pub Group, for Watson, the start of the next phase of growth will likely mean sticking to comfort zones – geographically speaking at least.
"We're targeting the same sort of cities that we targeted when we originally set out – good, historic, cathedral cities, with lots of different markets whether it's tourists, students, locals, businesses, shoppers, lots of different markets coming to the pub at different times. Really just sticking to the values that we installed when we set out at the start of the business."
With much made of the decline of the high street – the Local Data Company found, from studying 500 British town centres, that 1,772 shops disappeared last year and the fewest number of stores opened since 2010 – it could be a tricky time to move into cathedral cities and market towns to make the most of tourists, students and shoppers.
However, Williams added: "We don't particularly like to be on the high street, we don't like to be in shopping centres or retail parks. We like to have more of a secondary location with a premier offer.
“We pick these market towns and cathedral cities because there are a lot of people there – a lot of potential customers to come and visit us.
“It's not just shoppers but we want to be close to locals, to businesses, students where there are universities, but if we're close to shops we're happy to have shoppers come and visit us as well."
Watson adds that making the most of existing locations will be key to the group meeting targets to double its portfolio size by 2021.
"We want to expand in the cities we're already in – London will definitely give us more opportunities as time goes on.
“We're very confident that 65 sites by 2021 can be achieved without going to areas out of what I'd call our 'comfort zone'.
“We're confident that, whether it's in existing cities, popping over to Wales, or maybe other centres on the south coast, we can find cities and get three or four pubs in each location."
Challenging market
However, in expanding their portfolio at such a rate, it’s inevitable that a broad range of cost pressures or, as described in their latest report, “well-trailed headwinds”, will play their part according to Williams.
"I think everybody's been facing them. We've got business rates increases which are unhelpful. We've got things like the apprenticeship levy, the minimum wage – there's lots of cost pressures and we've got to work hard to make sure we can mitigate those.
"What we did before we floated is we renegotiated our major contracts with our drink suppliers – that's going to give us a £1m saving over the next three years and has certainly help mitigate a large number of those 'headwinds'.
“The apprenticeship levy is a good thing, we're happy that we're putting money into a pot but that we're getting it back so we can invest it into our staff, get them trained up, and help to give them career prospects."
Watson adds: "Obviously we'll wait and see what happens with regards to potential employees coming over from Europe. That's why it's important that we do things such as profit share among employees – we share 3% of the profits – and that's massively important in terms of rewarding, but also retaining, staff.
"The market is challenging but I think that's going to feed through into softening pub prices. If business rates are going up it's going to mean that asset prices are going to come down. Given that we're an acquirer, that's not a bad place to be."
Keeping the group on trend
With expanding The City Pub Group’s portfolio comes the necessity to explore new revenue streams, according to Watson. He highlighted accommodation as a key growth area over the next 12 months.
"At the moment we've got 44 rooms across the estate – which isn't many – but by this time next year we hope to have about 100, partly because some of our new openings will come with rooms. Accommodation is definitely an area that we're looking at.
"Also healthy drinks, grab-and-go type food, proper, authentic vegan options on our menus – we're opening up a pure vegan outlet in Parsons Green.
“Like any focused, flexible retailer, we're always looking at making sure we stay on trend and keep up with changes in demographics among our customers."
Watson concluded: "I've been in the industry for 28 years, and I've never had such an ungeared balance sheet.
“We really are in a very strong position now – not just to deliver on doubling the size of the estate over the next few years, but doing so in a way that doesn't mean taking on lots of debt to achieve that.
“We have very manageable levels of debt, very conservative finance, very low rent as a percentage of sales – it's about 3.5% – so we don't have any financial or operating gearing. I think in today's market it's a good place to be."