Subjects: Social trends reinvigorating the British pub, diversifying a venue to increase spending per head, and marketing budgets in times of trouble

Pubs undoubtedly had their heyday during the period when much of the population lived in such disagreeable circumstances that the boozer was something of an oasis. They could escape from their cramped uncomfortable home surroundings and spend time in a more pleasing environment – helped by the effects of alcohol of course. We’ve come a long way since those days and thankfully in this modern age most of the population has a sufficiently comfortable home environment that the pub does not provide quite the same social function any more. When you combine this with the reduction in the price of takeaway alcohol then is it any wonder that so many people shun the pub and instead drink at home?

 

But hold on a minute – don’t write the pub off quite so quickly. Did you know the average one-bedroom home in the UK is now four square metres smaller than the recommended minimum (according to a survey by Made.com)? It was recently announced property company Northacre is increasing the number of apartments in its New Scotland Yard development in London from 268 to 295 as it looks to reduce the number of three-bedroom properties and bump up the one and two-bedroom variety.

 

It’s the same story at the monumental Battersea Power Station development where an additional 409 flats have been added to the roster as the developer has sought to downsize the properties it is offering. Yes, this is high-end stuff we are talking about here but this trend will undoubtedly wash through the whole system. The high cost of property is also being seen with the increase in the number of people now forced to share accommodation. Growing numbers are now living in increasingly small and constrained spaces. The Made.com survey also found 34% of people say they are unable to have friends around for dinner while a hefty 48% claim they are so cramped they have insufficient space to entertain visitors at all. And we all know that growing numbers of young people are living back with their parents after university because they are unable to afford the high rentals or are saving for deposits on their own place at some point in the future. 

 

I know one thing for sure – this would be enough to send me down the pub far too frequently than would be healthy. I cannot possibly be alone in this thinking, so could we therefore be on the cusp of a renaissance in the fortunes of the pub? It would unfortunately be driven by the same sorts of social issues that fuelled the pub’s earlier successful period but then beggars can’t be choosers. Another factor playing into the hands of the pub is the changing face of transportation. In the US – especially around California – the use of Uber by drinkers is helping even the most remote brewpubs by making them much more accessible. The ease of ordering and competitive pricing of Uber is making it very attractive to younger drinkers. It’s also beginning to happen in the UK. At the end of each session of the recent Indy Man Beer Con beer festival in Manchester it was noticeable how many people immediately dived on to the Uber app to take them to their next drinking destination in the city.

 

Now, I’m going to consider something that might be a bit of crystal ball-gazing, but please bear with me. What about the impact of autonomous vehicles on the pub trade? One of the aspects that sounded the death knell for many country pubs was the rightful enforcement of the drink-driving laws. Just think of a scenario in the future where you could pop down the pub for a few beers and a bite to eat and your alcohol consumption is not limited by having to drive back home or having to pay a taxi fare or Uber. You can just slip into the seat of your self-driving vehicle and let the Tesla (or whatever brand you have) take the strain.

 

When you throw in the increased car sharing that is forecast to take place over future years then the enhanced mobility – without the requirement to actually drive – looks set to deliver great freedoms to consumers, which might just well benefit the hospitality industry. Such are the seismic changes in how we are living that the millennials of today – who are the bunch that have been shunning the pub – might just be the very grouping that contributes to returning the great British boozer to its glory days.

With the current cost of assets, growing rents, rates bills and other operating costs, maximising value by increasing turnover is now more critical than ever. Various strategies are being employed across the trade although dependent on the unit, size, location and the demographic catered for. One of the largest overheads within a business is the cost of alcohol; what if you could increase profit on alcohol whilst creating a niche product for your unit? It has now become more feasible, with the aid of space-saving automated equipment, to successfully house a micro-brewery on-site. This can raise profit margins as marketing and transportation costs are removed, whilst quality products with unique flavours remain. 

This also capitalises on the craft ale movement and a feeling of uniqueness that is the zeitgeist of a growing customer base. Many people today when entering a public house like to feel they are party to an individual offering, preferably coupled with a “localism” product. Gresham Collective, of The Pride of Paddington and Cork & Bottle in Leicester Square, has created a micro-brewery in its new unit at the Load of Hay in Haverstock Hill, London. Customers can venture into the basement to look through a window at the micro-brewery, witnessing their pint of The Load of Hay beer being made. Will Clayton of Gresham Inns states: “With margin squeezes hitting all areas of the business, financially it is vital to counter balance this wherever you can to help maintain and protect your bottom line profit. Brewing your own beer is just one way of doing this. Moreover, it is a real talking point for the business. Customers and staff alike love having ownership and input into the product they are drinking, especially when it comes to naming the latest brew!”

 

For many years units have tried to optimise the use of space to allow for additional private rooms – these can then be reserved for dining or drinks parties, and governed by a minimum spend or set fee when booking. This provides forward income of cash flows and delivers a captive, long-stay audience, appealing to customers in need for a special service set apart from a standard booking, whilst also encouraging increased spend per head.

 

Lovely Pubs created a private room at first-floor level in Baraset Barn, Stratford-upon-Avon. Located in the eaves of the renovated barn, the area overlooks the restaurant through a large glass window. With more employees working remotely, thus without need for an office, there is an opportunity for some units to provide an offering to meet this social trend. Meeting spaces will still be needed, hence there is an opportunity for private dining rooms to also be utilised during the day as serviced meeting rooms. Again, operators benefit from a booking fee and also a retained audience with the possibility of a further spend per head on drinks and food after vacating the room. 

A successful example of this is The Somers Town Coffee House, London, operated by Yummy Pubs. The four themed rooms are used by day for meetings, providing a welcome alternative to oppressive corporate spaces, but still have all the amenities that are required, such as internet, presentation screens as well as tea and coffee making facilities. The unit benefits from its close proximity to Euston and King’s Cross, making it logistically a viable option for national companies. It has also maximised its space by converting the substantial cellar into a bar area to allow for not only an overflow area but also a cocktail bar.

 

Products that are produced on-site, but sold as takeaway goods, are on the increase. The supplementary revenue is generated without having to seat customers or provide table service. It could also be considered an “impulse buy” if found serendipitously; if you are walking past you may pick up a sandwich for lunch or your morning coffee. A good example of this is Camden’s Daughter in Kentish Town owned by Jasper Cuppaidge, of Camden Town Brewery, which opened in November 2015. This property has a hatch by the bar servery referring to itself as a “snack bar” where a selection from the changing menu is offered on a takeaway basis, with a 10% reduction in price.

 

When there is no space within a building to allow for expansion of trade areas, can the rooftops become usable space? This allows an added attraction to be created, especially if there is no beer garden available in the warmer months. This is what The Culpeper in Commercial Street in London has developed, and it has become very popular; on a first come, first served basis customers flock to drink here as they take in the vista overlooking the City. The enclosed greenhouse (that has the added functionality of growing the herbs and vegetables used in the restaurant) is now also available in the winter for private functions. This feature again capitalises on the localism and sustainability trend that is a visible marketing tool and encourages drinking customers to book the restaurant on the first floor, increasing spend per head. Due to the size of the four-storey building at The Culpeper, letting bedrooms have been added to create a revenue stream that was not present when “Mad in London” took up occupation.

 

Nico Treguer, managing director of the company, commented: “The vision for our pubs always starts with a complete use of an iconic, but somewhat forgotten, building. We refurbished the entire Princess Alice from top to bottom to give birth to The Culpeper in 2014, which has now four floors open to the public: a ground floor pub, a first floor restaurant, a second floor hotel and the rooftop kitchen garden where we grow all our salads and herbs in addition to it being a rooftop bar and grill. We are keen to show our customers that they are welcome to explore the upper floors and the creation of a lightwell at the core of the building, connecting all the floors together. Most customers now use more than one floor when they visit us, either having a drink downstairs in the pub or on the roof before having dinner on the first floor or simply spending a whole evening on the rooftop before going down one flight of stairs for a great night’s sleep.” This captures increased spend per head through diversity and capitalises on the knowledge that customers from the rooms will be likely to eat and drink on location as well.

 

Letting rooms above pubs have become more prolific in the past 15 years, with more operators choosing sites that benefit from having space for rooms. Pub companies such as Young’s have created rooms in existing units such as the Rose and Crown in Wimbledon Village in 2003, as well as the Dog and Fox, also in Wimbledon Village in 2014; due to the success and high occupancy rates. Its newest site, the recently acquired Bell in the Cotswolds, has five letting rooms. The average revenue per available bedroom is up more than 4% on last year with 56.82% in 2015 compared with 52.02% in 2014. It has added an extra 76 bedrooms to the estate between 2014 and 2015 from investing in existing sites, creating more rooms and the addition of the two newly acquired sites.

 

Whether an occupier is fully utilising space, making the most of the location, keeping up with social trends or creating/growing produce on-site, many operations are choosing to add value by identifying with the customer and giving them a feeling of ownership and something exclusive that can’t be had at every public house. Any sensible operator will make sure this increases turnover and in turn profit, keeping the leisure trade thriving.

One of the headlines in the Times this week was “Premier Foods feels heat as it warns on profit” followed by “Premier Foods said its profit expectations for the full year ‘remain unchanged’ due to careful management of costs”. By this Premier meant it had taken an axe to its marketing budget, which was estimated to be between £42m and £44m this year but will now be “broadly” in line with last year’s £36m. Clive Black, an analyst at Shore Capital, said cutting marketing costs to maintain profitability was “absolutely the wrong strategic decision”. What makes this story even more alarming is this impact on profit was due to sales shortfall, not due to rising input costs. The latter will surely make the rest of the year even more difficult for Premier Foods.

 

So, the other major story of relevance this week, of course, was #marmitegate between Tesco and Unilever. The Telegraph reported Unilever had increased its prices to Tesco by 10% across its full portfolio of 40 brands, ostensibly because the pound had dropped to its lowest level for 31 years. The Telegraph wrote: “Unilever hasn’t even felt the pinch yet when it comes to increased costs: the multinational’s foreign exchange hedging means that it is covered against currency swings well into next year. But here’s the rub. Unilever’s profit margin last year was about 15% whereas Tesco’s profit margin was 1.8%. If the cost rises aren’t going to be passed on to consumers, it is clear which company is best equipped to absorb them.”

 

Topline sales in our sector (bar some sterling performances on some brands) have been, like those of Premier Foods, somewhat fragile of late. A number of chief executives I have spoken to recently have been delighted at performances of anything more than 1% in like-for-like sales. This level of growth though just does not provide any refuge against the impact of rising input prices from suppliers (due to the impact of the pound’s performance or not) on net profit. The looming effect of both wage and rates increases on top of this is causing serious alarm amongst operators I know.

 

In contrast to Premier Foods, most hospitality brands do not have the luxury of large marketing budgets to pillage to prop up their PNL. Marketing budgets in our sector are nowhere near as high (in either absolute or percentage terms) as they are in the fast moving consumer goods or retail sectors, which has always been an intense source of irritation to many marketers I know (especially if they have come from fast moving consumer goods brands).

 

I have often been asked by marketing directors in our sector if I have any information on the size of marketing budgets or teams in other brands – they want to use that evidence to convince their own boards to increase their marketing budgets or the size of their marketing teams. I only ever have what’s publicly available so most of the time, they fail to secure the budgets or support they want or need. I think it’s going to get very sticky over the next 12 to 24 months. A few brave chief executives will resist the temptation to pillage their marketing or training budgets, in the face of rising costs and flat sales, to ensure delivery of their profit projections but many will not. Many will also be unable to resist calls to take costs out of their product (food, drink and labour). There will then follow that all too familiar spiral of deteriorating value for money, poorer customer experience, falling awareness and consideration, and brand decline.

 

Marketing budgets do not need to be culled at the first sign of profit risk but they do need to be analysed and understood to make sure they are truly delivering topline sales. Not all marketing works – the trick is to find the bits that do, and do more of those. Creating demand for your brand in these difficult times is going to be more important than it has ever been. That’s absolutely the right strategic decision to avoid headlines in the business section of The Times.