Following this morning full year results, recently appointed Mitchells & Butlers chief executive Phil Urban spoke to M&C about his priorities for turning the business around. These include growing the Miller & Carter brand by 20 sites a year, tackling the “loss of a commercial edge” within the company’s culture and selling the revitalised M&B through digital media. He also talked about the need for more brand extensions within the Heartland business, his approach to tackling the threat of casual dining and the cost of implementing the National Living Wage.
Recent trading
The first eight weeks of this financial year saw total like-for-like sales fall 1.6% with food down 2.1% and drink dropping 1.2%.
Urban told M&C: “There are two drivers for the drop in food sales. One is the Rugby World Cup, which drove a lot of wet-led trade, particularly those Saturday night games, but inevitably had an impact on food sales. The second is that we overlapped the launch of breakfast last year. We were doing a lot of work this time last year in launching that so it’s not surprising that we are suffering in comparison.
“The start of the year has been disappointing but it’s mainly November not October. Looking at the industry statistics it seems that everyone has found the past few weeks difficult. I’m not sure if that’s consumers saving up for Black Friday or for Christmas.
“We’re now fully focussed on Christmas – our bookings look encouraging and we are cautiously optimistic about that.”
Drinks
While like-for-like food sales were in growth throughout the financial year, drink lfls recorded a 0.3% rise in the first 32 weeks then fell 1.4% between weeks 33 and 52, leading to a 0.4% drop overall.
Urban said: “Innovation in the drinks space is as important as anywhere else and consumers do respond to that so we need to make sure we’re on top of that.
“There’s not a brand by brand solution but we need to make sure we’re on trend.
“It often gets forgotten that a lot of drink sales are now tied in with food sales so if you are losing core number of meals sold you’re also going to see a dip in drinks sales.
“We are working with suppliers to share innovation in this space, where I think it’s long overdue.”
Priorities
In his statement on the annual results, Urban said he had identified three key priorities: to build a more balanced business; instil a more commercial culture; and increase the pace of execution and innovation.
He explained his philosophy to M&C: “The company has lots of strengths but sometimes those same strengths can act as inhibitors. There’s no doubt we have some great real estate and some fantastic brands but we are over-represented in some segments and under-represented in some others so we need to get a greater balance to the portfolio.
“In the short term, that means accelerating the growth of some of our smaller, more premium and successful brands, such as Miller & Carter, where we only have 36 sites at the moment. It also means reinvigorating and upgrading our cashcow mature businesses, such as Toby Carvery and Harvester.
“Another area that needs work is the culture of M&B. We have some great people in the business but over time the culture has changed from being quite command and control to being more open and participative. We have lost a bit of the commercial edge through that. We are doing a lot of work now on redialling up the focus on the bottom line and converting sales to profit and how we create value over the long run.
“At the heart of this is a philosophy that says the GM is the most important role in the company. They are the ones driving performance and are responsible for recruiting, motivating and training the people who are ultimately the face of the company for the consumer. They are closest to the market place so we have to empower them and the area managers who work with them. We will be doing a lot of work in removing bureaucracy and focussing on supporting those key roles.
“Another key area of focus is innovation. While we have done a lot of work over the last year on some of the basics like new tills and back of office systems, we perhaps haven’t focussed as much on some of the forward looking stuff and I would say we’re still behind the curve in terms of digital innovation and how technology can play an important role in the customer journey. But also, more immediately, in terms of our digital marketing – things like CRM, social media, loyalty. We need to invest more heavily there and in new products around them. That’s something has been on the backburner for M&B.
“We already have the basics – great people, brands and real estate. If we fight on the three fronts I’ve mentioned, if we balance the portfolio and start selling it through digital media then I think we’ll be well placed.”
Structure
Urban said he had yet to make a decision on whether the chief operating officer role he vacated to replace Alistair Darby as chief executive would be replaced.
He said: “I’ve only been in the role seven weeks so I’m still thinking about what is the right structure for the business.
“It’s fair to say that in removing bureaucracy we have to look at what the optimum structures are and how we can empower the brand teams to be far more fleet of foot. A lot of that is in our processes and governance – having that right balance between governance and being able to move quickly.”
Miller & Carter
Asked what he saw as the potential for Miller & Carter, Urban said: “It’s a hugely successful brand. But one of the things we have to conscious of is not breaking the DNA of the brand. We will probably look to do another 20 this year and continue that into the following year. Once we get to 100 then we will start to get a material brand. But the most important thing is to do it in a controlled way so we continue to generate the returns we are seeing.”
Sizzling Pubs
Over the past year M&B has invested in two new concepts within its Heartland estate - Sizzling Pizza & Carvery was designed as “an innovative solution to move our Crown Carveries business forward”, while Sizzling Pub & Grill was seen as an extension of the existing Sizzling Pubs offer.
Urban said: “There’s no great secret to a successful pub - it’s about giving your customer a nice environment and a quality food and drink offer. That might be a bit of a simplification but sometimes I think it’s good to crystallise exactly what it you’re trying to achieve.
“Under the Sizzling brand that’s what we have effectively done. In Crown Carvery we did two Sizzling Pizza & Carvery. The results from that so far have been absolutely fantastic so we are going to extend that. Are we going to do more of those sorts of things? Absolutely. The work on the Sizzling Pizza and Bar & Grill happened within the core business and I see that continuing because in that Heartland business we have got high street sites and old legacy brands we need to find a similar solution for.”
Casual dining
In analysing the wider market, M&B highlighted the challenge of the fast-casual sector, saying more than half of its Harvester and Toby Carvery sites had been impacted by direct competitors opening in their immediate catchment, with several of those seeing multiple new openings nearby.
Urban said: “Casual dining brands create new markets and new interest, which is great, but I would be confident to put a number of our brands up against them. Once we have restored our amenity, I’d be confident that our market brands can compete against those newer entrants to the market.
“If you have any new entrant on your doorstep you will inevitably lose a bit of top line until you then respond by upgrading your own amenity. “
On the ways in which pubs can compete with casual dining, he said: “Pubs have the benefit of having a core wet-led side of the business and they can grow food sales alongside that. I think it’s much tougher for casual dining to do it from the other direction.
“I’d also say that pubs serve a broader range of occasions – we can be truly all-day venues.”
National Living Wage
On the cost of implementing the National Living Wage, Urban said: “Before NLW we would have typically expected a 3% increase in the national minimum wage. NLW is a 6% rise, so that’s £30m extra when we would have expected £15m. About half of that will hit this year.”
However, he said he expected to see an uplift from consumer with more disposable income. Adding: “I would expect for the people who have suddenly got disposal income they will probably start spending it quickly. That’s why we are fighting on a number of fronts. You have to be prepared to move quickly when the market dictates. We will be looking where we can pass on price or take our customers on a journey and premiumise our offers. We will be looking at how we can target people with more money in their pockets.”
Analysts’ reaction
Mark Brumby, of Langton Capital: “There’s some good stuff and some bad stuff.
“Trading is weak, new entrants are an issue, the group historically has been a bit sluggish in its reactions and the share register remains skewed.
“On the positive side, the dividend is back, the group’s new CEO outlined the options available to the group, MAB has sites to die for and its shares are chronically under-held by fund managers given the stakes owned by Joe Lewis and ELPIDA.
“And the group has bought itself some time. Changes will be made but it will be a little while before their impact can be ascertained.
“In the meantime, investors have at least a dividend to hang on to and the warm feeling that a 30% uplift in AWT at refurbished Orchid pubs brings with it.
“There is clearly work to do. MAB is there to be shot at. New entrants are a constant irritant. Some are extremely good and others are not. The latter may still be funded by crowd-funding and PE houses keen to get involved and there may be some lack of discrimination but each new pub, pub restaurant or restaurant thins the cake.
“Overall, we recognise M&B’s strengths but remain somewhat put off by its share structure. If would-be holders want to participate in companies controlled by a handful of individuals then they could do a lot worse than invest in M&B. however, for others amongst us, there remains a lot of choice elsewhere.”
Nick Batram, Peel Hunt: “FY15 results were broadly in line but the return to the dividend list was a pleasant surprise. Unfortunately, that’s where the good news started and finished.
Current trading is weak and this together with the living wage means 2016 will be even more challenging. Phil Urban is the latest in a long line of CEOs to outline how he will get the top line moving.
He has a tough job on his hands and MAB still looks more like a value trap than a compelling recovery story.”
Simon French, Cenkos: “There is a positive surprise in the earlier than anticipated resumption of the dividend with a 5p final (assume 7.5p annualised). This is a very encouraging step which will go some way to negating the disappointing trading at the start of FY 2016E with LFL sales -1.6% as the group continues to find the market challenging and laps tougher comparatives (incl breakfast).
“Nevertheless we don’t expect material changes to forecasts at this early stage of the year given Christmas is just around the corner and we expect that the identified key priorities from new CEO Phil Urban will start to take hold during the back half of the year. These priorities include building a more balanced business, instilling a more commercial culture, and increasing the pace of execution/innovation.
“In practice we believe in the short-term this includes the upweighting of capex on amenity levels - something that should be applauded.
“Overall our positive stance is unchanged with the divi resumption offsetting a slightly tougher trading task for Phil Urban than even we had anticipated but the stock is inexpensive on a CY 2016E adj EV/EBITDAR of 7.1x and now yielding 2.3%, BUY.”
