One of the noticeable features of the pub M&A market during the past 18 months has been the arrival of large American distressed debt and property investment funds. Cerberus Capital Management started the trend with the acquisition of Admiral Taverns in January 2013 and recently acquired, from Prestbury, 134 freehold pubs leased to Spirit Pub Company and Punch Taverns. Apollo Global Management has also been active, acquiring Bramwell in September 2013 by buying the debt held by the banks and, most recently, taking ownership of Tragus from Blackstone, again mopping up the debt to take control. And two weeks ago, Avenue Capital, along with its partner, May Capital, acquired 275 pubs for £75.6m from Greene King to form Hawthorn Leisure.

   

What do American investors see and why are they investing in British assets? The European macroeconomic environment is improving. Greece and Portugal are joining Ireland in issuing new bonds to investors and much of the concern about the euro has subsided for the time being. The EU has shown a renewed commitment to ensuring that the eurozone survives, which is reassuring to US investors. As a result, US investors are raising substantial funds to invest in UK and European real estate.

   

US investors are focusing on unloved parts of the pub sector. Apollo, Cerberus and Avenue are “open” about being value-oriented, contrarian investors. Their interest is in acquiring undervalued, out-of-fashion assets with strong recovery prospects. They also look for fundamentally strong businesses struggling with excessive leverage.

   

Tenanted pubs feature in both the Admiral and the Avenue transaction. The performance of tenanted pubs has been severely challenged since 2007, with the combined effects of the smoking ban and the recession hitting tenanted pubs hard.

   

Several of the transactions that have attracted US investors involve a fair amount of risk and a willingness to step in where other investors fear to tread. In the words of one investor we know, “we aren’t afraid of being in the kitchen when the heat goes up.” They are accustomed to “messy” transactions – such as acquiring the debt to gain control of a business.

   

So for example, Apollo acquired the debt in Bramwell to take control of the business, and later sold the core estate to Stonegate Pub Company at the same time that it put Bramwell into administration. The banks that sold the debt to Apollo (an assortment of UK and foreign clearing banks) could have executed the same strategy as Apollo but they lacked the resolve to do so, partly due to concern over adverse publicity.

   

Apollo, Avenue and Cerberus are all active in the property market, and, with Lone Star (another large American property and private equity investor), have been actively acquiring distressed loan portfolios from UK and Irish banks. The property market is recovering and financing is far more readily available than it was two years ago. Pubs have similar asset-backing and US investors are gambling that UK lending markets will recover over the next two to three years as banks and other lenders develop increasing confidence in the UK economic recovery.

   

We have seen this at first hand, since we acted for Cerberus in acquiring and refinancing both Admiral Taverns and the Prestbury portfolio. The Admiral refinancing was completed on 1 July 2013 and the Prestbury refinancing was completed on 1 April 2014. In that nine-month period, there was a noticeable increase in the number of lenders, the amount of leverage available and the reduced cost of debt.

   

US funds are typically larger than most of their UK counterparts. Apollo has $50bn under management, Cerberus has $25bn and Avenue has $14bn. Relatively few UK firms have similar firepower. All three firms are able to “write the cheque” when they make an acquisition, financing once they have completed. This is a powerful allure for sellers, who don’t want to be hostage to the vagaries of the lending market.

   

Most of the UK PE funds have been chasing the fast-growing restaurant and bar companies, such as Rex, Hawksmoor, Cote, Drake & Morgan and Byron. All of these companies have strong consumer offers with a successful track record in what is becoming a crowded and competitive market.

   

However, there have been two successful UK private equity investors who have invested capital in under-appreciated wet-led pubs during the recession: TDR Capital and LGV. TDR had the vision in 2010 to identify a “roll up” strategy in town centre, wet-led pubs at a time when few others would buy wet-led pubs. Sapient advised Mitchells & Butlers on the sale of 333 pubs to TDR for £373m in November 2010. The new company, Stonegate Pub Company, then merged with Town & City Pub Company in 2011. In November 2013, Sapient advised Stonegate on the acquisition of 78 core assets from Bramwell Pub Company. Stonegate raised £400m of debt in April 2014 and is rumoured to be considering the prospect of a stock market listing, which should be very successful given its three-year track record of successful sales growth and integration of acquisitions.

   

The other active UK investor in the sector has been LGV Capital, which acquired Liberation Group in 2008 and Amber Taverns in 2009. Both have been very successful for LGV, with strong management teams and a strong track record of growth and cash generation.

   

How and when will US investors exit? Bramwell, Admiral and the Prestbury portfolio are, or were in the case of Bramwell, good businesses labouring under excessive amounts of debt. Freed from their debt burden, these businesses should flourish.

   

With the UK recovery finally taking hold in the next 12 months UK clearing banks should broaden their lending to the pub sector. In the last two years, the clearing banks have been very slow to participate in the recovery of the sector, particularly for pub companies with a troubled past.

   

However, it is Sapient’s view that as the economy improves and the trading recovery continues to deepen, this will attract more traditional investors to the sector. For example, the recent transaction completed by Avenue and May, at 6x outlet ebitda, is at least two “turns” below the long-term average of 8x. As leverage levels increase, this should generate sizeable profits for investors such as Avenue and Cerberus.

   

I’ve been invited on plenty of brewery visits over the years, but never before has the invite come with the request: “Please bring wellies and a spade.” This, however, was a field trip in a considerably more literal sense than normal: to the two and a half-acre field right opposite the Hogs Back brewery, just outside Farnham in Surrey, to witness – and take part in – a historic event: the first planting of the Farnham White Bine hop variety in its native soil since the last bines were grubbed up 85 years ago.

   

This is not just, however, a footnote in Farming Today magazine: this is, according to Hogs Back’s chairman, Rupert Thompson, an important step towards increasing the “localism” aspect of the brewery’s products. Once the new hop ground (the proper Surrey name for what elsewhere are called hop gardens or hop yards) is producing a healthy crop, those hops can then be used to flavour the beer being brewed just yards away: Surrey’s own hop variety, grown in Surrey, to produce Surrey beers.

   

A century and more ago, Surrey was an important hop-growing area, and at one time Farnham White Bines were the most favoured hop variety in the land. Disease – to which hops are particularly prone – and the rise of Kent as brewers’ favourite source for hops hammered the Surrey industry, and the county’s own hop disappeared from its homeland in 1929 as hop grounds after hop grounds closed. The collapse of the industry is encapsulated in one telling statistic: the planting of hop bines at Tongham doubles the number of hop grounds in Surrey.

   

Before the planting earlier this week, Rupert Thompson said: “It will be wonderful to look out from the brewery and see the raw materials we use growing in the next-door field – that’s local! That is part of what makes the craft brewing revival so exciting.” Right now all you can see is a muddy field with, if you look carefully, row after row of angled pieces of metal sticking a few inches out of the ground, all carefully spaced one foot apart. Each marks where a hop plant was planted by a small but enthusiastic squad of helpers, including me. But in a few weeks, once the hops start to grow, the trellising will be going in: and a couple of months after that, the field should be a magnificent sight: two thousand or so hopbines (slightly fewer than half Farnhams, the rest the American variety Cascade), leafy and green, climbing 15 feet or more into the Surrey sky.

   

It will not just be the brewery’s workers who will be able to look and marvel. The Hogs Back brewery is a popular tourist halt with an almost perfect score on TripAdvisor for its brewery tours: 35 “excellents” out of 38 reviews, with the other three being “very good”. Soon visitors will have the hop ground as an additional attraction, and eventually, when they buy beer in the brewery shop, they will be able to feel they are genuinely taking away the taste of Surrey, with beer made from hops grown literally on the brewery doorstep.

   

Localism, in the context of the British pub, currently pretty much only means the Localism Act of 2011 and its introduction of the idea of “assets of community value”, through which campaigners have been trying to preserve pubs under threat of closure. But could “localism” in its rather older, more internationally understood sense, of local purchasing, sourcing what you consume as locally as possible, have any prospect of influencing the pub customer? The idea of the “locavore”, defined as “a person interested in eating food that is locally produced”, was invented in California just under a decade ago: but California is a place that can pretty much produce all the foodstuffs anyone would wish to eat, unlike rainy, frequently cold Britain, and locally sourced food is much more easily found in Los Angeles than London. However, with initiatives like Hogs Back’s, the “locaboire” – a word I just invented, meaning “a person interested in drinking beer that is locally produced” – may suddenly have a much easier time.

   

According to Datamonitor earlier this year (talking, admittedly, about the United States), “knowing where a product is from instills a sense of comfort and security for consumers. Origin and localism are strong consumer pulls in craft beer, which comes through in ingredient selection and product marketing, with origin and provenance featuring heavily in the sub-sector’s imagery.” I’m not sure that’s so true in the UK, but initiatives like Hogs Back’s, if taken up more widely, could help make local provenance much more important if been fans start to feel that drinking local offers a genuinely different taste experience, rather than just the warm glow that comes from pushing one’s money at neighbours, not international conglomerates.

   

Right now, however, Hogs Back is one of, as far as anyone seems aware, just three of Britain’s 1,100-plus breweries growing its own hops, the other’s being Iceni in Norfolk and, unsurprisingly, Shepherd Neame in Kent. Growing your own hops won’t be for every brewer, and it may be that in terms of added value for the consumer, it will turn out to be meaningless – the looked-for “locaboire” market could likely be a figment of wishful thinking. But I’d love it, personally, if the British locaboire really turned out to be a thing. And if any brewer reading this is interested, in the 1870s hops were grown in 40 English counties, five counties in Scotland, and Wales as well.

    

I was recently asked my opinion on how long an eating-out brand can last in the market. With so much continual focus and publicity attracted to the new and emerging brands, it is too easy to assume that older brands will lose their appeal and have a finite lifespan.

   

There is a lot of evidence to support this theory. Reading the trade news from the United States, it is clear that many well-known casual dining brands over there are experiencing tough trading. Brands such as Olive Garden and Red Lobster from the Darden stable are going through challenging times, whilst other brands that I am sure many of you visited in your past are mere shadows of their former glory (brands like Bennigans, Tony Romas, and Ponderosa). Part of this demise can be attributed to a structural change in the market (migrating from the middle ground of casual dining and polarising towards either fast casual or more polished dining), but a lot of the responsibility must sit with the historical management of these brands, and their reaction to changing times.

   

Last year I was working on an assignment in Moscow with the task to revitalise two established brands that were similarly diminished. Whilst both brands retained high awareness and goodwill, the parent companies focus had been on rapid roll-out , which, in reality, had resulted in some inferior site selections and a compromise on build quality and ambience. So we were competing in a very strong eating-out market but with aged brands, whilst our customers had an abundant choice of new and updated competitors to compare us against. Creating a new look for the brands was the easy job, the challenge now is how to replicate this cost effectively across the national estate. And then ensure the brands do not become outdated again in the future.

   

All is not lost. Whilst we still remember the ones that got away (think Pizzaland, Berni, Tom Cobleigh, Ha Ha), age and seniority remain kind to many seasoned brands. Indeed a random selection of ten established brands I considered now enjoy an average age of over 40 years and still remain relative category leaders in their sector. My chosen ten in order of age seniority: are McDonald’s, Domino’s, PizzaExpress, TGI Friday’s, Brown’s, JD Wetherspoon, Harvester, Pret A Manger, Nando’s and Carluccio’s. While many of these brands have experienced highs and lows in their life cycles, today they all retain strong brand credentials and consumer preference that remain an aspiration to others.

   

So why do some brands manage to grow mature gracefully while others struggle to survive? Operationally all the brands will face the same day-to-day operating challenges – how to manage scale roll-out, building a support team infrastructure, creating cost-efficient supply chains to maximise scale economies, keeping a tight control of costs and, most importantly, focusing on good operating standards and guest satisfaction.

   

But it is the concepts that have a strong brand position at their core, that understand the values that make them differentiated and preferred by their guests, and who constantly focus on evolving and developing the core offer in addition to brand expansion, which are the brands that win in the long term.

   

Consider as examples two from my list of ten successful “longevity brands” to understand the constant evolution that successful brands achieve. Both remain true to the original core offer idea and values, but both continue to fanatically reinvent themselves to remain relevant and market leading. Twenty years ago, who would have predicted that McDonald’s (now 40 years old in the UK and more than 70 years old in the US) would have such a strong and contemporary design, offer the McCafe, be famous for its responsible sourcing and be a massive coffee retailer. Consider also Wetherspoon, now 35 years old – still with great accessibility and value, now famous for breakfast and its food offer generally, and even credible in a motorway service area.

   

The pressures for rapid growth in our business will not diminish, especially for those governed by the needs to satisfy the needs of city shareholders or venture capital funds. It is how brands respond to the evolution challenge as well as satisfying these inevitable and important growth challenges that is the key to successful brand longevity.

   

There are some fantastic brands emerging from infancy in the UK market at the moment. And some of these are now being tasked with rapid scale roll-out of 25 to 30 new sites per year. Let us hope that these brands have learnt the lessons of the past and are able to preserve the core values of their customer promise over time and expansion to govern their successful evolution – with the hope that in 40 years’ time, when another contributor reflects back on brand history they are on the “established hero” list and not in the “remember them?” pile.

   

It all started with an email “What? No porridge at Somerstown!” sent by me last week to Anthony Pender at Yummy Pub Company. Some places do great porridge (JD Wetherspoon serves Momo for instance ,which is brilliant) but not Yummy’s Somerstown (albeit its cooked breakfasts are wonderful).

   

Anthony passed this on to Tim Foster, his business partner, who responded: “Anthony mentioned the lack of porridge option at Somerstown and has blamed me as I’m looking after the SKUs. It’s true – it is my fault. We delisted it because we had only sold seven portions in 12 weeks – three to staff and, I’m pretty sure, four to you. However, there is always a bright side in Yummy. Our temporary stock-holding of my very own “on-the-move” breakfast Quaker Oaks has been left on site for you, in your own special jar in the kitchen room. It’s a good start to the day, with a slice or two of banana if I can steal it from under the chef’s noses, but this is only a temporary solution for you. I have ordered in some finer porridge (not in packet) for your jar, it should be in for Tuesday of next week. So, whenever you visit, simply ask any of the team for ‘Elliott’s Oats’ and they shall oblige. I’ve attached a picture so you can indeed prove you are the owner of said oats. Have a great weekend, Tim Foster.”

   

As you can imagine I feel brilliant, treasured and needed as a customer – I am looking for excuses to go back there. Isn’t that just brilliant?

   

This email made me feel just as good. It came from one of Becky Salisbury’s pubs. I had tried to book a table online at The Alford Arms in Frithsden, Hertfordshire for last Saturday but without success. They rang me twice and emailed me too, saying: “Hi there, Thank you for your reservation request from our website. Unfortunately our dining room is already fully booked on the date you have requested. You are more than welcome to come along and join us anyway. You can add your name to the waiting list in the bar on arrival and our lovely staff will keep you watered whilst you are waiting! For more information please give us a call here at the Alford Arms on 01442 864480. We hope to see you soon, The Team at The Alford Arms.”

   

When I emailed back to say thanks, I received this response: “Hi Ann, I hope you have a lovely evening, do let us know if there are any other dates we can look at for you. Hope to see you in the future, Regards, Andy Bosher, Deputy Manager.”

   

What more can you want in terms of customer service? Both of these examples contrast with the response I received from Europcar this weekend. I had emailed them to say my dad and brother were stuck in Innsbruck when their hire car broke down. They waited from 10.30am to 7.15pm for a replacement car and were frequently lied to when asked for a delivery time. In a desperate and futile attempt to see if I could help, I emailed their “help desk” and received this reply: “Dear Ann, Thank you for your email. First of all, sorry for the inconvenience caused to your father and brother. I’m afraid from central reservations I’m unable to advise how long the breakdown services will be to pick up your family and help them on their way. They will need to contact the breakdown services number on the rental agreement to get some further confirmation. Sorry for the inconvenience.”

   

Europcar’s mission? “To be perceived as the most innovative, friendly and customer-oriented car rental company.” If that’s the case give me action, a “my customer, my responsibility” feeling in the team and personal contact versus meaningless words every time. No wonder we are called the “hospitality” sector.