M&B to focus on food brands

THE MANAGEMENT team that took control of Mitchells & Butlers in January has signalled a major reshaping of the business that will see the Birmingham-based plc drop some of its drinks-led brands in a drive to create more of its Harvester and Toby Carvery restaurants.

John Lovering, who was installed as chairman following an acrimonious battle for control that saw his predecessor Simon Laffin ousted in a shareholder rebellion, said: “The strategy of reducing our exposure to drinks-led pubs has been sound but we believe that it could be progressed faster subject to increasing shareholder value.”

Other measures include reducing the business’s focus on property and an overhaul of senior management incentives to support a more aggressive drive to reduce costs and drive profit.

Mr Lovering said: “We will grow our food-led mid-market brands.  We want to develop smaller footprint high street variants of Harvester and Toby Carvery.  We want to open new outlets in leisure parks and other high traffic locations such as retail parks with good car parking.  We will seek through conversion, acquisition and new site development to build scale in other core brands.”

The number of Harvester outlets could rise from 171 to 400, he said, with as many as 1,000 more outlets across all food brands.

Operating margins in existing pubs and outlets would be increased by as much as 3% over the next three years, he said, signalling a harder approach to pricing and suppliers: “Reversing the gross margin erosion that has occurred over the last three years (will) contribute c.£30m by 2014.  We will seek to recover this from suppliers, pricing and menu engineering over the next three years.”

There would also be a major change in M&B’s approach to the management of its property portfolio, he said.

“The ownership of property should not be a matter of dogma but economics.  Many retailers of goods, services and food and drink are very successful in a totally leasehold portfolio.  Sometimes owning the freehold can distort management’s understanding of a unit’s performance and make retention of disadvantaged sites seem necessary to defend property values.
 
“Our view is pragmatic.  If freehold property is likely to achieve return on investment of 11%, we retain it.  If not, we sell it.  In the short term it makes no sense to jeopardise our securitisation and its low interest costs by a sale of property which is core to our trading.  We have the flexibility within the securitisation to extract non core property intensive assets we wish to sell while injecting a certain amount of operating leasehold income.”

Another major cultural shift would come in management incentives, he said: “Our reward system has favoured continuity and security, not profit maximisation.  This is not a criticism merely an observation, but we have made our senior managers value their pensions more highly than their share options – a rational response to plc life with a big generous defined benefits pension fund.
 
“The remuneration committee is developing an incentive programme for our senior management which pays out if shareholder value is created above the cost of capital, thus aligning management with shareholders.”

Mr Lovering said the strategy review was already being rolled out across the business.