Why you can never ignore M&B

Peter Martin suggests Mitchells & Butlers should look at a casual dining acquisition. It has the firepower to go after a company even as big as The Restaurant Group.

It is not that long ago that any warning of an economic downturn would have been accompanied by fears over falling beer sales in the pub. Now the concern is about whether the public will ease up on eating-out. How times have changed.

That's no better illustrated than at Mitchells & Butlers, now the country's leading managed pub and restaurant operator, and its recently expressed concern about pressure on the mid-market.

The increasing squeeze on middle class spending over this past year or so has been well documented, not least in this column. It was also a central theme of M&B's analyst presentation as it announced its interim results last month.

Thorough as ever in its market analysis, it picked up on Government figures that showed that while both blue-collar skilled workers and the professional and managerial classes were just about keeping up with inflation, the mainstream semi-detached suburban market was being pinched.

Thanks to interest and mortgage rate rises and an increasing tax burden, that group had experienced a real inflation rate of 6.2%, while earnings growth at only 2.7% had not kept up.

For blue-collar workers wage increases had also been modest, but the effect of inflation had been less severe. For the better-off strong salary growth of over 6% had offset higher inflationary pressures.

That, said M&B, was one of the factors, along with greater competition in the pub food market in the run-up to the smoking ban, putting pressure on its mid-market businesses. Chief executive Tim Clarke was nonetheless upbeat maintaining that M&B was well placed to withstand inflationary and interest rate pressures.

Strength in its blue-collar focussed concepts, such as Toby, and a buoyant top-end London market, where its 'metro-professional' unbranded concepts had done particularly well, had spread the risk.

Food is the future for M&B and the market it needs to defend. Its strategy concentrates on further leveraging food potential. The fact that M&B's one major investment has been the acquisition of 239 pub restaurants from Whitbread should say enough.

The group now sees itself as the leader in casual dining, and Tim Clarke made the point that as it completes the Whitbread conversions, food will account for 40% of M&B's sales mix, with around 60% of total sales coming from 'an eating-out occasion'.

Food is already almost 60% of sales in the restaurant division, and as a result of the new Whitbread additions that part of the business is now approaching parity in overall sales with the pub division.

These days eating-out may be an everyday part of British life, but that doesn't make it immune from economic shifts. In fact, as the market continues to grow and mature the impact of wider consumer spending trends will only become greater and more significant. Understanding, predicting and planning for them will become more vital, as M&B already recognises.

So what of the future for M&B and what clues does it give to the rest of the market?

The big news, of course, is the potential property deal with Robert Tchenguiz's R20 group that would see M&B's real estate assets put into a 50:50 owned joint-venture company. If nothing else that should make M&B even more operationally focussed.

It might also mean that instead of fitting brands and concepts into property sites, the emphasis of the group might begin to switch more to finding sites to fit its brands and concepts. The property deal would also free up an estimated £4bn in cash. After returning some to shareholders, observers believe that anything from £1bn to £2bn could be used to expand the business.

M&B has already converted, or started work, on well over half the sites bought from Whitbread, with only 90 out of 239 awaiting attention. Is another acquisition being teed up? If so, where?

M&B has done more than most to bring casual dining culture to the British pub, but it is still largely rooted on the pub side of the divide. It sees plenty of upside in further developing food in its local pub estate, through concepts such as Ember and Sizzling, where food is still only around 22% of sales. Like Wetherspoon's, it is investing heavily in improving efficiency through a systemised approach ' a vital ingredient when delivering a value product.

It is also developing more upmarket pub restaurant concepts in the restaurant portfolio ' segmenting its Vintage Inn estate and trialling a new bistro model, Miller & Carter.

Buying more pubs is always an option, if it can find them. Whitbread's remaining Beefeater and Brewers Fayre estate remains the best quality portfolio not already in M&B hands, unless it could prise Chef & Brewer from Punch.

A more radical move would be to move into the pure casual dining restaurant market. It could make sense too. Much may depend on whether M&B sees the weakness of the mid-market as a short or long-term problem?

There is enough evidence to suggest that pub restaurants, including M&B's brands, are losing out in the consumer popularity stakes to casual full service restaurant chains, such as Frankie & Benny's and Pizza Express, especially among women and younger diners. They seem to prefer the restaurant experience to the pub experience. This is another factor that may be adding to M&B's mid-market pressure? The success and popularity of the likes of Frankie & Benny's and Pizza Express is also not just a London or South East phenomenon.

This might change post smoking ban, but why not make a move into that market? M&B would have the firepower to go after a company like The Restaurant Group, Frankie & Benny's parent company, for example, or a still emerging chain like a Strada.

If M&B wants to spread the risk of pressure on any one sector of the market, it might want to strengthen its position on the high street. Its wet-led business has performed well by its own admission, but in the food-led high street arena it only has 39 All Bar Ones and 14 Browns restaurants, accounting for 3% of its sites and 4% of its sales.

Not so long ago the hot rumour was that M&B would be prepared to sell All Bar One. Sentiment seems to have changed in the business, and a new property approach might mean leaseholds are no longer the anathema they once seemed to be for M&B?

M&B's results announcement coincided with that of Marks & Spencer, the high street retail's new turnaround hero. M&S reported a boost in food sales fuelled in no small part by the opening of 100 new Simply Food stores. It is also assessing an assault on the wider eating out market, with the opening of a new restaurant concept in Newcastle and an M&S Kitchen in Canterbury.

M&B has been as progressive as any in adopting the best of food retail's practices ' in wielding supply chain strength, understanding on-site capacity management and in delivering 'everyday value'. But it still seems to lack the ruthless ambition of the food retailers to dominate their markets.

Being the leader in casual dining across all segments, as a Tesco would do, is perhaps the best defence against competition and economic uncertainty.

We may learn more about its future vision if and when the Tchenguiz property deal is done. But as that early-rising analyst mark Brumby of Blue Oar commented: 'It's always worth listening carefully to what M&B says.'

first published in M&C Report, June, 2007