M&B returns to like-for-like growth, accelerates estate investment: Mitchells & Butlers has reported like-for-like sales down 0.8% in the year to 24 September but with improving trends – the first eight weeks of the current financial year have seen like-for-likes up by 0.5%. The company reported total sales of £2,086m (FY2015: £2,101m) and profit before tax of £94m (205: FY: 2015: £126m). A total of £167m (FY 2015: £162m) was spent on capital investment, including eight new openings and 252 conversions and remodels. Chief executive Phil Urban said: “During the year we have made good progress in our three priority areas: building a more balanced business; instilling a more commercial culture; and driving an innovation agenda. This focus is starting to have a positive effect on our sales, with improved performance against a subdued market in recent months through continuation of the momentum we saw start in the second half of last year. Sales growth in the first eight weeks was impacted by the Rugby World Cup in the prior year, but I’m encouraged by the underlying momentum which has seen recent weeks return to the levels seen in the summer. In the next year, as previously announced, we face external cost headwinds, notably from further wage inflation, the recent business rates review and exchange rate movements. We are working hard to mitigate these headwinds wherever possible, both through building on our sales momentum and active management of our cost base.”

Building a more balanced business: The company stated: “Our estate comprises more than 1,800 sites, of which more than 80% are freehold or long-leasehold. This provides the opportunity for long-term value generation; our priority is therefore to ensure the estate is set up to extract this value. Over the coming years, we are committed to improving the quality of the estate: by exposing it to more premium market spaces and by improving the overall level of amenity. The premium market is where we would expect to see the strongest growth, and these spaces offer a form of long-term mitigation towards cost inflation. We are therefore converting several of our businesses towards more premium concepts (both existing and new) as well as making selective site acquisitions and disposals where appropriate. To this end, within the year we have carried out a full estate review, which gives us a plan for each of our sites. We have recently identified around 75 sites for sale in order to generate greater value for shareholders than if retained as managed businesses. Going forward, we will continue to look at acquisitions and disposals as part of our normal course of business. It remains our intention to grow Miller & Carter to 100 sites by 2018 and we are well on track to achieve this. This is a proven and successful steakhouse format that generates strong like-for-like sales, and also delivers good returns when we open in new locations. We have grown the brand in the last year from 36 to 52 sites. A small number of these have been acquisitions, with the majority being existing site conversions delivering Ebitda returns of more than 40%. Our portfolio gives us a strong pipeline of future conversion opportunities to continue successfully growing the brand. We have also evolved our Pizza & Carvery businesses and established the new Stonehouse brand in summer 2016. This is a reinvention of our Crown Carveries brand, involving modernisation of the amenity whilst enhancing the menu to broaden its appeal. At the end of FY 2016 we had 36 sites under the new brand. This remains a strong value format, but with a more premium offer than prior to conversion. As with Miller & Carter, these are largely existing site conversions, and are generating returns of around 25%. We will aim to grow Stonehouse to around 80 sites by 2018. Our estate’s amenity level has improved through our remodel programme, which encompasses all our brands and allows us to develop the guest proposition whilst maintaining and enhancing the estate through capital investment. An example of this is Harvester, which has faced increased competition in recent years. We have evolved our ‘Feel Good Dining’ remodel solution, which sees us spend around £400,000 of capex per site, and is delivering a return of around 25% in the 32 sites in which it has so far been implemented. We have a pipeline of Harvester sites to continue the rollout of this format. In total, we completed 252 remodels and conversions in FY 2016 (FY 2015: 167), moving us towards a six-year investment cycle for all our sites. We will continue to increase this to around 300 remodels and conversions in FY 2017, which we expect to be broadly the rate in future years.”

Instilling a more commercial culture: The company stated: “Across our retail teams and our support centre we employ more than 43,000 people. Engagement of this team is critical to achieving growth in profitable sales. Given the challenges we face as a business and an industry, it is critical we execute well and at pace. To facilitate this, we underwent an organisational restructure this year, creating four operating divisions, each containing similar brands and customer types. The four Divisional Directors leading these each now sit on the Executive Committee. Organisationally, we have also identified a number of clear workstreams aligned to our three priorities. These changes enable us to make much quicker decisions, with our workstream teams empowered to be decisive, work their way through barriers, and deliver effectively. We have focused our work in this area across a wide range of activities. There has been a significant drive towards resolving our guests’ complaints more quickly. A year ago it was taking an unacceptable average of 11 days to resolve a guest complaint. We quickly reduced this to our target of just over two days, and successfully maintained this level. This will continue to be an important area for our teams. Much of our work in this area has been around creating a more sales-focused culture, and we will continue to have an ongoing number of initiatives to achieve this. Examples from the last year include dedicated sales training provided to all the operational teams, an incentive scheme in the second half of the year which awarded cash bonuses for improving sales trends, and the establishment of a London-based sales team to fill secondary space and increase levels of corporate bookings.”

Grow through innovation and technology: The company stated: “Innovation and technology are critical areas for us as a business, in terms of efficiency, attracting and interacting with guests and remaining competitive in our markets. A key area of focus is to build on our existing technology, given the systems investment we have made in recent years. We have developed our online bookings system to increase the availability of short-term bookings and to integrate with third party booking providers to extend our reach. Our bookings have grown, such that more than half our restaurant bookings are now made online. We are looking at various other ways to improve efficiency and the guest experience, including enhanced Wi-Fi provision in our sites and the trialling of alternative payment technology. We have also developed our digital strategy across key guest interaction areas: acquisition, experience, customer relationship management, loyalty, and social media. The relentless nature of digital development is such that we must continually enhance our skills in this area. In the last year we developed five new brand apps, which have collectively had more than 400,000 downloads, and achieve a significantly higher booking conversion rate than through traditional email communication. We are looking to build on this through the addition of loyalty incentives into forthcoming apps for Browns and Miller & Carter. We have increased our social media presence, consolidated 10m guests’ details on our central database, our gift card sales have increased by more than 40% and we have carried out several successful campaigns with affiliates. Food delivery is becoming increasingly important to the industry, and we have carried out an initial successful trial with Deliveroo across 25 All Bar One and Browns sites. Given the early success, we are working to roll this out further across our brands, in different locations and with different third party providers. We believe that this model can apply to around a quarter of the estate, and that it provides a good opportunity to generate incremental sales. We have increased our use of TripAdvisor as a guest interaction tool by providing all our house managers with accounts and encouraging its usage. We will look to develop this further in the year ahead, but have already seen the number of reviews significantly increase, as well as our average rating rise by more than 8%. Early results from our increased usage of TripAdvisor suggest that better scores correlate with higher like-for-like sales, increased bookings and a reduction in the average number of complaints. Finally, we have stated that we will look to carry out new concept and product development, to maintain the appeal of our existing brands and innovate in new markets. As noted previously, we have launched the new Stonehouse brand, a successful innovation to evolve and transform the Crown Carveries brand. We are also on the point of launching a casual dining rotisserie-style concept aimed at the millennials market under the brand of ‘Chicken Society’. This provides us with an opportunity to test a new concept which may be later rolled out to further sites. We expect to take the learnings from this and to develop a pipeline of further new concepts this financial year.”

Market supply: The company stated: “In recent years the eating-out market has seen a significant increase in the supply of restaurants. In the year to June 2015 there were over 1,700 net restaurant openings - broadly the equivalent of our own business in terms of outlet numbers. This provided us with many new local competitors and impacted our mid-market brands in particular, as a number of these openings were close to our own high-quality trading locations. However, since the summer of 2015 the rate of openings has slowed considerably, most likely as a result of the cost headwinds the sector faces, notably the announcement of the introduction of the National Living Wage in July 2015. Net restaurant openings are now broadly flat year-on-year, which gives us an opportunity to win back market share. It therefore remains imperative that we focus on our priorities to maintain our competitive position through our range of brands and formats, our high quality locations, and the delivery of our offers to guests.”

EU referendum: The company stated: “We believe it is too early to predict with any certainty what the impact of Brexit on the economy might be, particularly without clarity on exit terms. However there are broadly three areas in which Brexit may affect us in the medium to long term: changes in consumer confidence and behaviour; changes to employment and immigration laws; and changes to input costs. The first two of the three are largely unknown at present, and therefore our approach is to stay close to developments whilst continuing to support all our 43,000 employees. Input costs will be impacted by the value of sterling, which has fallen significantly since the EU referendum. We have a small number of sites trading in Germany, but otherwise our international trade is defined by our supply chain. The net effect of a weaker sterling is therefore profit dilutive due to the food and drink which is purchased in foreign currency, although this is partially mitigated in the next financial year by existing contracts.”

Current trading and outlook: The company stated: “In the first eight weeks of the current year like-for-like sales have increased by 0.5%, continuing the momentum that we started to build in the second half of last year. Although we are working hard to take mitigating action where possible, we expect to see downward pressure on margins in this financial year, as our sector incurs the additional cost headwinds including the first full year of the National Living Wage, indications of two potential increases in the National Minimum Wage, the impact of exchange rate movements on foreign currency denominated purchases, and the recent business rates review. Despite these challenges, we remain encouraged by the progress we have seen so far, in particular the strengthening of our performance against the market. We will continue focusing on our three priorities, and believe that by doing so we can continue to generate long-term shareholder value.”