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Fri 9th May 2014 - Friday Opinion |
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Friday Opinion:
Subjects: tenanted pub sector cigar butts, the 2015 election, US fast casual developments, good and bad news on alcohol policy
Authors: Paul Charity, Martyn Cornell, Darren Tristano and Paul Chase
Tenanted pubs: cigar butts or not by Paul CharityThe legendary investor Warren Buffett is often misquoted on the subject of "cigar butt" investments. The term refers to finding value in otherwise discarded assets, an approach that actually served him pretty well in the early years of his investment career. In a famous letter to shareholders in 1989, he described the cigar butt approach thus: "If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the 'cigar butt' approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the 'bargain purchase' will make that puff all profit.” Invariably, commentators leave it there, overlooking the next part of Buffet’s comments where he described the cigar butt approach as foolish unless “you are a liquidator”. He added: “First, the original 'bargain' price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8m that can be sold or liquidated for $10m and promptly take either course, you can realise a high return. But the investment will disappoint if the business is sold for $10m in ten years and, in the interim, has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre.” More generally, Buffet argues: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Using the Buffet worldview, the question arises: are the tranches of tenanted pubs currently changing hands or on the market currently little more than the discarded cigar butts of the large operators? I believe it has got to the stage where this is not necessarily the case. The 275 pubs sold by Greene King last week to May Capital is a case in point. For Greene King, tenanted pubs are now simply run for cashflow (and barrelage volume) while it eyes the bigger prize of growth in its managed division. In Hungry Horse, it has a category killer in the value-food market that is probably a sizeable factor, alongside Spirit and Marston’s expansion in this area, as to why M&B has struggled to maintain its own value-food volumes. The Hungry Horse brand has every chance of growing to the 400-unit plus size that Toby Carvery and Harvester should now have attained. Anyone who read last week’s Greene King presentation to analysts, where it set out ambitious plan to develop or buy trading formats with all-day potential AND expand its blockbuster brands, can see why low-growth tenanted pubs are a long way down the company’s list of priorities.
Yet, for May Capital and partner Avenue Capital, Greene King’s 285 discarded tenanted pubs offer more than mere cigar butt value. For a start, these pubs produce £44,000 per annum ebitda each for their owner, the sort of ebitda levels that are 50 to 60% higher than the truly cigar butt pubs that were changing hands in very large number half a decade ago. The average sale price of the Greene King stock works out at £275,000, with a strong South East bias in the portfolio. It has got to the stage in the property cycle where we are back to the hybrid scenario that served Admiral Taverns pretty well until the crash of 2007. These pubs have a safety net – in many cases the bricks and mortar value is higher than £275,000. But that is not the plan. In many cases, these pubs are the survivor in their village or are located in small towns. May Capital is promising focus, investment, innovation and flexibility – and that approach stands every chance of carving out a strong future for them. It is also worth mentioning that Greene King eschewed the hot-wired, long-leasehold business model that meant large swathes of the tenanted universe needed, in Luke Johnson’s words, “hundreds of millions of catch-up capital investment”. Greene King took the longer-term view, deciding that the three-year non-full-repairing tenancy was a better way to ensure the long-term quality of its assets – having your badge over the door means you cannot afford to let physical assets deteriorate.
So for May Capital and its licensees there is good potential for an harmonious and mutually profitable future from the crucially important starting point that a very fair price has been paid for pretty high-quality assets. That might be somewhere mid-way between Buffet’s two alternatives, but that is normally the way it is in the real world. And, as I say, back in early days of Hathaway, Buffett happily seized upon less promising stogies.
Paul Charity is managing director of Propel Info
What to do between now and the general election by Martyn CornellExactly a year from today we will be waking bleary-eyed into a new political era – or maybe not. On the second Friday in May next year, after a night of watching pundits pontificate and politicians prattle while the scorecard records gains and losses for the reds, blues, yellows, greens, purples and others along the political spectrum, we will know – or, just as likely, not know – the flavour of government expected to take us through to 2020.
The Fixed Terms Parliaments Act of 2011 says that the next general election has to be on Thursday 7 May 2015, unless (as seems unlikely right now) Parliament orders an earlier date. Personally, this will be my 12th general election since I became old enough to cast a vote – I just squeezed in to my first one, being exactly 18 years and two days old on polling day, and I deliberately went to the polling station in my school uniform.
That particular election, in 1970, resulted in a surprise victory for the Conservative Party under Edward Heath. Since then, most general elections in the UK have gone pretty much the way most disinterested observers expected them to: perhaps the only exception was 1992, when Neil Kinnock somehow snatched defeat from the dripping jaws of victory, losing to John Major. (Since Major's era, incidentally, the name "John" has plunged in popularity for new-born babies, from being one of the country's favourites to falling out of the top 100. Make of that whatever you like.) Even the result of the 2010 election, a hung parliament, was in line with predictions that were being made months before.
But what of 2015? As Patrick Wintour, political editor of the Guardian, said earlier this week, we may have a fixed date for the next general election, for the first time in our history, but this is the least predictable contest since the end of the Second World War. Nobody has a clue which way the British public will jump in the polling booth, or even if enough of them will jump in the same direction on the day to give any clear outcome.
So where does this leave the hospitality trade as it contemplates the political scene? Fortunately we are long past the situation of a hundred years ago, where the Liberal Party, then in government, was pretty much the parliamentary wing of the then extremely powerful temperance movement, and the Tory party, then in opposition, was the only home for the brewer and the pub owner. Nick Clegg may not go down in history as quite the equivalent of his great Liberal Party predecessor Lloyd George, but at least Clegg would never say, as Lloyd George did in 1915, that drink was the deadliest threat Britain was facing.
Certainly the trade can be expected to be treated with greater fairness from all the main political parties than it would have received in the past. But one can wonder whether it will be treated with much greater understanding. In his youth Lloyd George had called for a complete ban on the sale of alcohol, and during the First World War he persuaded the King, George V, to give up all alcoholic liquor himself and issue an order against its consumption in the royal household, in an attempt to set an example to the nation. "Treating" – buying rounds – was banned, opening hours were drastically cut back, and taxes on beer massively increased, while the strength of the drink plummeted. Rather than – as happened in the Second World War under Winston Churchill, the man for whom Carlsberg first produced its Special Brew – recognising the important role that the pub played in the life and morale of the nation, Lloyd George and his government treated the pub and brewing industry as one of its enemies.
It took almost a century – until 2005 –to remove the last of the restrictions on the hospitality industry brought in by the First World War. Meanwhile, until the not too distant past, the legacy of the Lloyd George era, and the fact that the Labour Party contained men like Herbert Morrison who had also contemplated nationalising Britain's pubs, meant the hospitality industry, via the big brewers, was a regular financial contributor to the Conservative Party. In the 1980s Allied Lyons, Whitbread, Scottish & Newcastle and the Brewers' Society itself were still making out substantial cheques to the Tory treasurer. That may have helped when, for example, Lord Young came to look at the MMC's recommendations for the brewing industry in 1989, and watered them down so drastically, though if it did, then Young's subsequent botching of the Beer Orders, which effectively saw the vast majority of the British brewing industry fall into overseas ownership, might be regarded as a particularly bad bargain.
Today the attempts to influence the government and MPs by bodies such as the Brewers Society's successor, the BBPA, and the ALMR, and companies in the industry, is generally limited to lobbying and informed discourse rather than cheque-writing. The All-Parliamentary Beer Group provides a route to dialogue, and brewers and pub companies hand over around £50,000 a year to keep the APBG going. But while the APBG is the largest industry group at Westminster, it still represents only a minority of MPs. Do the rest of the hundreds of legislators, and the thousands of would-be legislators, who will each be hoping to have smiling faces a year from today have Lloyd George's attitude to the hospitality industry, or Winston Churchill's?
While lobbying of the government, and the opposition, and of bodies such as the Business, Innovation and Skills Select Committee remains vital in order that they continue to understand just how important the hospitality industry is not just to the economy of the country, in providing employment and tax income, but to the national happiness, in giving us all places to relax and enjoy ourselves, it should also be important in the coming year for the industry, individually and through its corporate organisations, to try to reach out to every likely candidate and would-be candidate in the 2015 general election. Get them to come along to restaurants and coffee bars, pubs and nightclubs in the constituencies they hope to represent, or continue to represent, and meet their potential constituents: the workers front-of-house and back-of-house, and the customers, the people who can tell them what is wrong about how the industry is treated in terms of tax, red tape, legislation and political interference, and what needs to be done to help it prosper and grow. That way the parliament of 2015 can have a proper, and properly grounded understanding of the issues this industry faces.
Martyn Cornell is managing editor of Propel Info
Progress in the American fast casual segment by Darren TristanoIn a press release yesterday, my company, Technomic, reported that the fast-casual segment continues to be a growth leader within the restaurant industry in the United States. Fast-casual restaurants that made Technomic’s 2014 list of the Top 500 Chain Restaurants, based on 2013 US system-wide sales, saw sales growth of 11% last year. That growth reflects strong performances both from rising regional chains and from top national fast-casual players. Panera Bread and Chipotle Mexican Grill, the No 1 and No 2 fast-casual chains by sales, saw impressive sales growth of 12% and 17%, respectively, in 2013. Meanwhile, the five fastest-growing fast-casual concepts on the Top 500 list – BurgerFi, Hot Head Burritos, Lime Fresh Mexican Grill, Mooyah and Shake Shack – all posted sales growth of at least 40%.
Still, it is not all sunshine and roses for fast casual. Sales growth last year was not quite as strong as in 2012, when fast-casual chains on the Top 500 list saw sales climb more than 13%. The fast-casual segment is maturing, and chains are finding increased competition from their fast-casual brethren for real estate and share of stomach in many urban and suburban markets. This makes it more challenging for individual chains to maintain the remarkable sales growth that the segment has enjoyed in recent years.
Furthermore, the need to offer differentiated menus, a strong value proposition and distinctive branding – the last of these encompassing all of those crucial elements from restaurant design and ambience to the chain’s “voice” in advertisements and social media – is acute. As I discussed earlier this spring, brands that do not nail these down risk fading into the background once the novelty of a fast-casual version of whatever menu item they specialise in, be it pizza or salads, wears off in a given market.
In this competitive landscape, how do the fastest-growing fast-casual chains stand out, and what can we glean from their success about the status and outlook for the fast-casual segment?
Among the leading fast-casual growth chains, better burgers are still going strong, as BurgerFi, Mooyah, Shake Shack and The Habit Burger Grill would illustrate. Differentiation will remain an imperative for all players in the better-burger sub-segment, and it is worth noting that these fast-growing burger slingers do not share the same menu formula. Mooyah, for example, has a to-the-point menu of build-your-own burgers plus fries and shakes. The Habit focuses on a limited menu of signature burgers as well as sandwiches (chicken, steak and tuna) and salads. BurgerFi and Shake Shack take the middle ground, serving both build-your-own burgers and original creations. One thing they all offer? Vegetarian burger patties.
Some are owned by companies that made their mark in casual dining. Lime Fresh Mexican Grill was bought by Ruby Tuesday in 2012, and Shake Shack was launched by the New York restaurateur Danny Meyer’s Union Square Hospitality Group in 2004. Lime Fresh and Shake Shack are interesting in particular because they are so distinct from their parent companies’ legacy concepts –this points to the growth opportunities that restaurant operators can realise by branching out into different service and menu segments. Looking ahead, we can anticipate more operators from both the full-service and quick-service segments making plays in the popular fast-casual arena. (After all, higher-quality, built-to-be-customised fare served in a convenience-oriented setting at a sub-$10 price point has proved to hold pretty strong consumer appeal.) Just in the past year, we’ve seen Yum! Brands’ KFC and Taco Bell trying their hand at the fast-casual formula, and Buffalo Wild Wings has made a significant investment in the fast-casual pizza brand PizzaRev.
Many have outpaced their 2012 growth. Zoës Kitchen, Shake Shack and Chop’t Creative Salad Company all saw higher sales growth in 2013 than they did in 2012. Zoës (sales up 37% in 2013, against 33% in 2012), which specialises in Mediterranean-inspired cuisine, and Chop’t (sales up 33% in 2013 against 20% in 2012) share a fresh-and-healthy focus. Their menus are markedly different, but the chains demonstrate the resonance of concepts that play up the idea of “food you can feel good about”. Today’s consumers are increasingly attuned to ingredient quality and foods’ effects on their energy levels and sense of well-being, making restaurant operators’ sensitivity to health concerns especially important. And even for chains not specifically catering to health-seekers, the quality of the menu’s “raw materials” can be a valuable concept differentiator. Shake Shack (sales up 40% in 2013 against 33% in 2012), though it is hardly health-oriented, also places a premium on ingredient integrity. The chain, whose higher-end pedigree has made it an eagerly anticipated arrival in its expansion markets, touts its use of only 100% all-natural beef patties and hot dogs, both made with hormone-free and antibiotic-free meat, and made-fresh-daily frozen custard that contains only cane sugar rather than corn syrup.
Most of the leading fast-casual growth chains saw their sales growth beat their unit growth in 2013. For operators, especially in maturing fast-casual sub-segments such as burgers and bakery cafes, it will be important to ensure that the chain’s appetite for expansion does not exceed its ability to grow sales at existing units.
Darren Tristano is executive vice-president of the research and insights firm Technomic
Good news and bad news by Paul ChaseOn 30 April, the Scottish Inner Court of Session, consisting of three judges, overturned the earlier decision of the Outer Court of Session (one judge) that minimum unit pricing for alcohol was lawful under European Union law. Crucially, the Inner Court of Session, Scotland’s highest civil court, did not substitute its own judgment, but referred the case to the European Court of Justice (ECJ). The case was brought by the Scotch Whisky Association, which argued that the Scottish government’s minimum pricing law breached European legislation.
But before the case can be heard in Luxembourg, the questions it will be asked must be decided. This will involve another hearing in Edinburgh at which the parties to the case will give their views. There are likely to be up to nine EU countries, nearly a third of the current EU membership, objecting to this proposal, as will the European Commission, which has already expressed its opinion that this measure is unlawful. The whole process could take between 15 months and two years before a definitive judgment will be handed down. In between now and then we have the Scottish independence referendum in September this year and the general election in May next year – and who knows what the political landscape in either Scotland or the UK generally will look like?
Does this mean that the issue of minimum pricing is all over bar the shouting? To take that view would be to under-estimate the zealotry of Scotland’s anti-alcohol campaigners, and the fact that the SNP government has been thoroughly intellectually colonised by the neo-prohibitionist health lobby north of the border. There is talk of a further appeal to the Supreme Court in London if the ECJ rejects minimum pricing, but I can’t see how the Scottish or UK governments could safely proceed with minimum pricing if the ECJ rejects it.
Minimum unit pricing is predicted to reduce alcohol consumption by some 1.3% a year: but the fact is that since 2004 alcohol consumption has fallen by 18.9% to its lowest level this century, and indeed its lowest level since 1980. This is an annual fall of 1.9% without minimum pricing. The health benefits touted for minimum pricing that will flow from this reduction in consumption have not been realised as a result of the higher fall we have already seen. This casts further doubt on the public health lobby’s central proposition, that it is the population level of alcohol consumption that is the main driver of alcohol-related harms.
Now, however, to the bad news. Meanwhile, the government’s abolition of the alcohol duty escalator and the cuts in beer duty two years’ running leaves the health lobby in some disarray so far as population level measures to reduce consumption are concerned. But the other prong to their fork is "availability". The health lobby believes that it is the availability of alcohol that causes people to drink it. They want to see availability reduced. This means either a reduction in opening hours, or fewer premises, or both.
At a recent Westminster Policy Exchange seminar that I attended there was a revealing presentation from the Safe Sociable London Partnership about what health lobbyists have in store for us. It is about translating national frameworks into local actions. Dr Matthew Andrews, who heads the partnership, and who is very much a hard-line neo-prohibitionist, has created a resource that will enable health authorities to comment on licensing applications from a health perspective, even though "promotion of public health" is not a licensing objective in England and Wales.
Basically, he has created a traffic light system that can be used to classify new licence applications into "red" or "green". The "green" applications would not be objected to, for example an application for a food-led pub that closes at 11pm. But "red" applications would attract comment and possibly representations (objections). Such applications might include late-night premises or premises making 24-hour applications. Dr Andrews has created a "dashboard" that would enable health authorities to access local data on crime and disorder, and A&E admissions in the area surrounding an applicant’s premises, that can be used to inform their responses. This is a way of smuggling in "public health" by the back door and softening up local councils, which are now responsible for promoting public health locally.
I suspect that this system will be exported to other licensing authority areas and a further bout of trench warfare will ensue. This kind of initiative is much more difficult for our sector to contest, unlike EMROs and the late night levy which are top-down initiatives from government.
We need to watch this one carefully.
Paul Chase is a director of CPL Training and a leading commentator on on-trade alcohol and health policy
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