M&C speaks to Greene King chief executive Rooney Anand on the integration of the Spirit estate during H1 and the strategy for the rest of the financial year. Anand explains how the company will halve the number of brands it operates over the next three to four years and reduce its tenanted and leased estate by c20% over the same period. He talks about the focus for the new chief operating officer of the Retail division and reveals a further change to the senior management structure. He also discusses the drivers for the 10% rise in daytime sales and why it is vital that all levels of the company remain connected to the customer.
Growth brands
Greene King announced this morning that it plans to reduce the 20 brands in the combined estate by half. Anand told M&C this would happen over a period of “at least three years, maybe four” and would not be driven by disposals but should be seen as a “brand conversion strategy”.
The company has identified five growth brands – two from Spirit and three from Greene King – which it plans to grow from 624 sites to between 800 and 950. The company sees the scope to grow Hungry Horse from 244 to 280-320; Flaming Grill from 142 to 180-220; Farmhouse Inns from 36 to 55-75; Chef & Brewer from 136 to 180-220 and Metropolitan from 66 to more than 100.
The company has started trials within the estate in a bid to identify early learnings for rollout.
Anand said: “We were looking for great potential in terms of sales, profits and returns so that we are investing in brands that can actually deliver a return on that investment and provide future growth for the combined business.
“We have done a lot fieldwork, a lot of diagnostic work. We have looked very closely at what customers think and feel about the brands. We have talked to the frontline staff and management in both, so that we can really understand what it is that makes the brands tick, not only in our eyes but most importantly at the altar of the customer. We need to know what it is that customers love about Hungry Horse, why do they choose Flaming Grill over another neighbourhood pub, why do they think they can get something from Chef & Brewer that they can’t from another branded restaurant. These are the really important nuggets that we have used to describe our growth brands.
“You will notice that two of those brands are Spirit’s and three are Greene King’s so we are certainly not saying ours is the only way. We have been both competitors and admirers of Spirit’s business brands in particular. The chance to put Spirit brands and our brands on Spirit pubs gives us, we think, an opportunity to create the strongest retailing branded company in the sector.”
Pub Partners
The combined tenanted and leased estate currently stands at 1,236 with a plan to reduce that amount by 1,000 over the medium-term.
The division delivered like-for-like net income growth of 2.4% in H1, while in the Spirit Leased estate like-for-like net income was up 1.4%.
Revenue was up 40.8% as a result of the addition of the 416 tenanted and leased pubs from Spirit. Excluding Spirit, revenue declined 3.3% due to disposals. Average revenue per pub grew 5% and the operating margin expanded 1.6%pts.
Anand said: “Before we bought Spirit we gave informal guidance that we would be reducing the Pub Partners down from what was then 840 down to around 750 over a three-year time period. Currently we are at just over 1,200 so over the next three to five years I could see that coming down to around 1,000. But that does not need to be done in a rush because it’s not about generating cash or about trimming a really poor tail. At our peak in 2008 we had 1,700 tenanted units and they generated an aggregate £97m in EBITDA. We now have 1,200 units and they generate together £97m EBITDA.
“EBITDA per pub is up substantially – up from £57k to £81k. The quality of the business has improved dramatically.”
Restructure
This week has seen a further restructuring of the senior management, with John Forrest taking on the role of chief operating officer for the retail business.
Meanwhile, Anand told M&C that Clive Chesser had been made managing director of the Pub Partners division, reporting directly into him. He was previously business unit director.
Anand said: “Clive has done a fantastic job as leader of our tenanted estate and his new role gives Pub Partners the recognition and status it rightly deserves.
“John is a really important hire for the business. He has a lot of experience, not just in leisure retailing at Whitbread but before that top flight retailing at Marks & Spencers and Body Shop. He’s an operator’s operator and is happiest at the front line of the business where staff are engaging with customers and the offer is being brought to life in the field.
“He will be joining a very strong team of executives across Greene King and Spirit and he’ll be charged with building the strongest and most capable operations team in the sector. What we want to build is a team that blends the best of hospitality leadership and management of people with the best of operations with a retail background.”
He said Forrest would also be working closely with the HR team to take learnings from the frontline of the business to feed into the company’s recruitment and retention strategy.
He added: “One of the things we want to keep in Greene King is the sense that we are very agile and fast moving business so the fact we have nearly doubled in size as a retail business should not compromise the speed at which information is fed from the frontline to head office. It is vital that the marketing and trading teams don’t get too far removed from the customer.”
Daytime trading
The company reported a 9.9% increase in sales before 5pm across its Retail estate. Drivers of trade included the relaunch of its value-orientated breakfast offer in Farmhouse Inns, introducing a breakfast offer in Old English Inns and extending breakfast service hours in Hungry Horse. In the Spirit estate a premium sandwich menu was launched and there was a continued evolution of the snack menu in Chef & Brewer.
Anand said: “I wouldn’t say we have been leading the pack in terms of breakfast and daytime sales but we have been a fast follower.
“We want to capture the opportunity that is presented by extending hours of trading and attracting people who might typically be evening or weekend customers or maybe wouldn’t usually come to one of our pubs at all.
“But we want to do it in a way that will be sustainable from a profitability standpoint and that’s one of the things that has been pleasing from our performance so far this year. We have seen incremental growth from some of our sales developments – breakfasts in Farmhouse Inns being a very good example, which we’ve been able to achieve in a very modest way without destroying the economics of the intrinsic business.”
Scotland
This week marks the anniversary of the changes to the drink driving laws in Scotland, which were this morning described as having had a catastrophic effect on the country’s licensed trade.
Anand said: “As the date of the anniversary approaches the level of impact is starting to fall off after a real low point last December. While there is still a decline it’s nowhere near as severe as it had been.
“We have done all things you would expect – developing the offer to encourage consumption of soft drinks or lower alcohol beverages, improving the focus and messaging around our food offer.
“This isn’t just about drinking at that point in time it’s really about the impact of what we would call school night drinking – being over the limit the next morning. That impacts on the off-trade as well as the on-trade. This is legislation that was brought about to affect drinking not drink driving.
Disposals and acquisitions
During the six months to 18 October, the company disposed of 12 sites on top of the 16 required by the Competition and Markets Authority. It added 10 new sites to the Retail estate. It said it expected 20 to 30 disposals in H2.
As of 18 October, the combined estate was 3,069-strong, made up of 1,833 pubs in the Retail division and 1,236 in the Pub Partners estate.
Analysts’ reaction
Geof Collyer, of Deutche Bank: “ The market should respond well to what is a very positive statement - in stark contrast to some of the recent comments from the peer group. Upgrading forecasts despite absorbing the National Living Wage (NLW) impact is better than we had expected. Current trading has maintained above average lfls growth (we estimate ~2%-to-3%. CEO headlines: “…seen broadly similar trading patterns across the business and we go into the busy and important Christmas season with deposited bookings up strongly…”
“Almost all lines in the P&L benefitted from the Spirit acquisition. However, GNK’s core businesses all grew profits on an underlying basis. We would single out the following highlights. (i) The Tenanted & Leased business grew EBITA despite -7.9% fewer pubs and -3.3% lower revenues. (ii) Brewing & Brands and Greene King Retail both grew sales and EBITA by +5%.
“The integration is ahead of schedule, with the T&L estate merger already completed. Cost synergies have been increased from £30m to £35m, with upside risk from further revenue synergies in Brewing, as well as investment in the GNK and Spirit retail estates from the new brand repositioning programme. We had the cash flows for this already in our forecasts. The number of retail brand & formats is to be halved to ten, adopting a ‘best of both’ approach, with the Retail head office moving to Burton (Spirit’s HQ). There has been a Fair Value Adjustment (FVA) resulting in £456m of goodwill on acquisition. The main part of this is the recognition of a £305m liability relating to the leases in the Spirit estate. (Spirit’s last reported equivalent provision was £46m as at Mar-15).”
Mark Brumby, Langto Capital: “Greene King’s shares have moved strongly higher on the back of this morning’s H1 numbers such that they have now advanced by around 20% over the last 3wks.
“The group’s shares are now trading on a current year PER of around 14.6x EPS and offer a yield of around 3.6%.
“GNK has been able to reassure that October was very good and that current trading is in line with expectations.
“The integration of Spirit is ahead of plan suggesting that upgrades are more likely than downgrades going forward.
“Whilst we believe that there may be better value elsewhere and see today’s share price move as a little on the strong side, we recognise the appeal that relatively certain (integration-driven) growth offers shareholders.”
Karl Burns, Panmure Gordon: “Today’s update highlighted strong trading from the Greene King managed estate, an improvement in trading from the Spirit managed estate and confirmation the Spirit pub acquisition is ahead of schedule. Cost synergies have been increased by £5m to £35m (with more to come) whilst Greene King plans to invest £40-50m of capex per annum into 300-400 Spirit managed pubs, over a three year period. Assuming an ROI of c.20% (in line with that historically achieved) could provide an additional £30m of EBITDA. Finally, the group expects revenue synergies from selling the Greene King Brewery product into the Spirit managed and tenanted estate.”
