Greene King expects to halve the number of brands and formats t operates across it estate through the integration of the Spirit Pub Company portfolio.

Chief executive Rooney Anand said he would examine the consumer relevance of each brand as well as the long-term opportunities to expand, financial performance and proximity to other sites in the combined group.

He made the comments as Greene King reported like-for-like sales in its Retail division up 2% for the 24 weeks to 18 October, with Spirit’s manged estate up 1.2% and Pub Partners growing like-for-like net income by 2.4%.  Spirit Leased’s like-for-like net income grew 1.4%.  In Brewing & Brands own-brewed volumes were up 3.6%.

In the final six weeks of the period, like-for-like sales growth in the Retail division was 4.3%, including 12.9% in Metropolitan, aided by the Rugby World Cup and warmer, drier weather.

Revenue from the existing Greene King business was existing Greene King business was up 5.4% to £648.4m for the half year and the total increased by 49.2% to £917.7m, including a 17 week contribution from Spirit. Operating profit before exceptional items grew 4.1% in the existing Greene King estate and 46.1% to £180.2m when including Spirit and synergies realised to date. Overall, profit before tax and exceptional items grew 46.9% to £121.3m.

On the integration of Spirit, the company said it had conducted a thorough review of the business and that the “exciting task of combining these two leading pub businesses” is well under way using a “best of both” companies approach.

At the end of the half, and ahead of schedule, it said that the two tenanted and leased businesses were successfully integrated and, following “strong customer and frontline team acceptance”, over 90% of Spirit managed pubs are now selling Greene King IPA.

In line with its ‘best of both’ approach to the integration, the company, as previously flagged up, has opted to retain both the Spirit and Greene King offices.

It said: “We will base our combined Retail division at the Spirit office in Burton-upon-Trent, while continuing to locate the combined Pub Partners division, Brewing & Brands and the company headquarters in Bury St Edmunds. This arrangement will ensure that Retail is more centrally located, reflecting our national scale and reach in this division, while protecting the heritage and legacy of Greene King by retaining a significant presence in Suffolk. We anticipate that the people transition will complete towards the end of the financial year.”

The company said it had made “significant inroads” into the realisation of purchasing synergies and reducing duplicated central costs, while it has identified the future Retail systems suite, which will be rolled out from March.

The annualised run-rate of synergies achieved to date is £6.5m and it now expects annual cost synergies to be in the region of £35m by the end of 2017/2018, including around £12m in the current financial year.

The company said: “Our intention remains to invest a portion of cost synergies in excess of our stated target to strengthen important areas of our retail business such as our people, our brands and our systems.”

In addition, it anticipates there will be material benefits from the optimisation of the combined brand portfolio.

Anand said: “Our vision is to operate a smaller number of brands and formats across the enlarged estate, creating a platform for long-term growth and value creation. We acquired a strong portfolio of brands and formats with Spirit - one that would have been very difficult to replicate organically - and optimising the brands from both businesses will provide an exciting growth opportunity over the next few years.

“In order to select the growth brands and formats to invest in, we looked at the consumer relevance of each brand, the long-term opportunities to grow and expand, the financial performance and the proximity to other sites within the combined group.”

Currently, the combined business has around 20 brands and formats and the company anticipates halving this number in the future.

Anand said: “There is significant potential profit upside from investment in between 300 and 400 sites to reposition them into the growth brands over the next three years. These growth brands are: Hungry Horse, Flaming Grill, Farmhouse Inns, Chef & Brewer and Metropolitan, our premium London estate. We will also continue to develop a strong Local Pubs estate, our hotels and Loch Fyne Seafood & Grill.”

Anand said that this portfolio of growth brands and formats will cover a wide range of consumer occasions.

He said: “Hungry Horse and Flaming Grill will cater for different customer occasions within the value segment, Farmhouse Inns is our carvery offer spanning both value and mainstream occasions, Chef & Brewer will be our drive mainstream brand, while we will use Metropolitan to grow our presence in the premium end of the sector. We estimate that these growth brands will account for up to around 950 sites from the current estate, while the Local Pubs estate will be around 800 sites.”

The company recently opened the 50th site under its Local Hero franchise agreement and has also reached its 50th leased turnover agreement in the the Spirit portfolio.

Anand said that this brand and format optimisation programme will be funded from a combination of internally generated cash and, where appropriate, disposals. He said that initial estimates suggest incremental capital investment in the region of £40-50m per annum over a three year period, commencing in 2016/2017.

The operating margin was 19.6% - 0.5%pts lower than last year. The company said this reflected a higher contribution from managed pubs and a 0.3%pt moderation in the existing Greene King business led by Retail, where the margin declined by 0.2%pts due to investment in our people and in customer service.

The company said it estimated the incremental impact of the National Living Wage, over and above general wage inflation, will be £2m in 2016/2017 and will reach an annualised run-rate of £6m per annum in 2018/2019.

Anand said: “It has been a strong first half, with the Greene King business strengthening and significant progress made in the Spirit integration. Like-for-like sales growth in Greene King Retail improved during the half and both Pub Partners and Brewing & Brands delivered profit growth and margin expansion.

“We completed the acquisition of Spirit Pub Company and, by combining the best of both companies, made good progress in capturing value from the acquisition and creating the UK’s leading pub hospitality company.

“We believe we have the best portfolio of retail pub brands, the best pub assets and the most talented team which, when combined with the strong contribution from synergies and the benefits of our enlarged scale, will ensure we continue delivering value to our customers and our shareholders.”

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