Mitchells & Butlers has converted the first of dozens of Orchid pub restaurants into its own format after its acquisition of the managed pub group last summer. As FEJ finds out, the move marks the start of a two-year transformation programme worth some £35m.
It took Mitchells & Butlers six months from the date it announced the acquisition of the Orchid Pub Group last June to carry out its first site conversion — and with that landmark reached in relatively swift time it is poised to ramp things up further over the coming 24 months.
M&B stumped up £266m in cash to acquire 173 pubs from Orchid and it is committed to converting more than half of those into its own brands and formats during the next two years.
The Sawyer’s Arms in Manchester holds the distinction of being the first venue from the Orchid portfolio to receive a makeover, re-opening recently as a Nicholson’s pub after what M&B terms a “significant investment”. Chief executive, Alistair Darby, confirms the Deansgate property is the first of 96 Orchid pubs that will be transformed between now and 2017. “This is a significant milestone in our investment plan for the Orchid pub estate,” he says.
“The Sawyer’s Arms is a great addition to the Nicholson’s collection of classic pubs and is the first of around 90 exciting conversions to our leading brands which we will be undertaking over the next two years.”
M&B has set aside £35m for the transformation programme and while it has not detailed how that investment will be spent, it is inevitable that a significant chunk of the budget will be reserved for the kitchen and back-of-house facilities.
M&B wouldn’t elaborate when contacted by FEJ, but previous announcements reveal that the 96 Orchid pubs in line for conversion were selected off the back of stringent site appraisals and due diligence. The sites M&B acquired are spread across the UK with a bias towards the South East and North West. All will take on the moniker of key M&B brands such as Harvester, Toby Carvery, Ember, Miller & Carter, Castle and Vintage Inns when the work is complete.
Latest trading results reveal that the two-year programme is on schedule even though it is still early days as far as the integration programme is concerned. At the time of writing, six Orchid conversions have been completed although the more notable statistic is that these six sites represent more than a third of the 15 conversions that M&B has completed in the financial year to date. Given that there are 90 more to come, it is clear just how much of its overall transformation programme is focused around Orchid.
In the same trading statement, Darby suggested the firm remains satisfied with its efforts so far, saying: “The Orchid integration plan is on track and we are encouraged by the early trading performance of the converted sites.”
Naturally, though, the financial benefits of its strategy won’t be felt until much further down the line, although M&B makes no secret of its expectations. The company believes there is an “opportunity for substantial sales and profit uplifts” from the Orchid conversions and anticipates the exercise will extend its share of the UK branded pubs and restaurants market in the process.
The potential cost savings and synergies are also highly attractive to the company. It expects to trouser at least £6m per annum just from the rationalisation of support functions and combined purchasing activities. Given M&B’s stated strategy to focus on long-term growth in the eating-out market, the significance of the kitchen operation to its sites and the ongoing development of its menus cannot be understated.
If it gets the formula right then the revenue potential for the Orchid sites could increase by as much as 50% — with the foodservice operation intrinsic to that. M&B claims the strength of its brands and formats, together with operational expertise in brand development and evolution, has driven average weekly sales at M&B pub restaurants to £22,700 compared to £15,300 per week generated by the acquired assets.
For the time being, though, the effects of the programme threaten to leave a small blemish on the firm’s books. In its trading statement for the 17 weeks to January 24, M&B admitted the planned integration was one of several factors that led to weaker margins, even though the growth in food volumes and output of its kitchens have driven higher sales.
But the impending conversion of more than 90 Orchid pubs should mean it is only a matter of time before the negative margin impact is reversed.
Amount that M&B paid for the acquisition
Number of Orchid pubs now owned by M&B
Number of Orchid pubs being converted
Capital investment in conversion programme Average weekly sales (2014)
Average weekly sales
Orchid pubs: £15,300
M&B pub restaurants: £22,700