Ivell the engine

These are not good days to be an underperforming pub company. Big companies are snapping up little companies, big companies are snapping up other big companies, and, since Mr Punch whacked Whitbread in the eye to win the battle for Allied Domecq's tied pub estate, it seems that even the little companies are snapping up the big companies.

Nor are there any signs of this Wild West show calming, when there are whispered rumours that Whitbread might be the next surprise takeover target in the pub business.

Scottish & Newcastle (S&N) is one of the predators intent on growth in this corporate scuffling after its £1.14b purchase of the pubs, restaurants and lodging business of troubled Greenalls in December. The difficulty Greenalls had got into is reflected in the sharp fall of its share value, which from 500p in midsummer 1998 had slumped to 274p by the turn of 1999.

The buy gave S&N Retail - the division into which pubs, bedrooms and restaurants fit - too many units for it to stay below the Monopolies and Mergers Commission's (MMC) cap of 2,764 pubs for S&N. It was also too many concept brands for S&N Retail managing director Bob Ivell, the man responsible for the development of more than 2,000 pubs, restaurants and lodges, and the man with the job of rationalising the joint brand portfolio that includes both the existing S&N concepts and the acquired Greenalls collection.

Merging of brands

Ivell, who developed Whitbread's Beefeater chain in the 1980s before joining S&N in 1992 to run its food operation, says that there has to be a merging of brands between existing S&N concept brands and Greenalls, but it may not all be one-way traffic. It is too soon, however, for him to say exactly what will stay and what will go. "We said when we took control of the Greenalls business that we would need a few months on the inside to decide what we needed to do," he says. "But clearly, there are business synergies between the two companies and consolidation is needed."

Ivell first began looking seriously at Greenalls 18 months ago, when it became obvious from the flagging share price that Greenalls was in trouble. "There had been significant management changes," he says. "They created a new team, but kept changing the structures. That says they were not getting it right. There was a lack of focus on the brands. But they had some good people and good sites."

However, it isn't difficult to guess how S&N will be thinking. Most vulnerable are the low-barrelage, wet-led boozers, either managed or tenanted, which came with the Greenalls buy. These hold an attraction for some of the newer pub companies but not for S&N, which would prefer to go down the route of high-turnover managed units.

The first logical result of the buy should be the combining of suitable Greenalls' Miller's Kitchen sites with S&N's Chef & Brewer brand. The other merging which could happen is the food-led pubs from both S&N and Greenalls with a simpler concept than Chef & Brewer and a lower food spend. This is likely to be streamlining between Greenalls' Henry's Table pubs and Miller's Kitchen sites unsuitable for conversion. These logically fit alongside the 32-strong S&N Homespread brand of easy-eat pubs. Henry looks certain for the axe, but it's a close call between Homespread and Miller's Kitchen as the new umbrella brand.

Another probably doomed Greenalls brand is Quincey's, the 17 US-style diners which Ivell admits are a poor imitation of TGI Friday's. The most obvious destiny for Quincey's sites is to convert to the far-better-performing Old Orleans concept of S&N, which has a similar £12-a-head average food spend but is better at packing in customers.

One of the gems in the Greenalls acquisition is the 68-strong Premier Lodge chain, most of them integral to a pub rather than located at the back of the car park. Premier Lodge was, admits Ivell, one of the really good concepts that Greenalls had. Aware of the need for mid-priced accommodation, Greenalls believed that the nomadic business traveller and leisure guest would pay a £10 premium over normal lodge prices for a room in the pub.

Two problems for Ivell in this merging of lodges are, first, Premier's more costly room decoration and furnishings than are offered by other brands, and, second, the higher current room rate of Premier Lodge, up to £55. The answer will be to tweak up furnishing and decor in S&N's Lodge Inns and tweak down the price of Premier Lodge. A probable room rate for the merged chains will be between £45 and £49, depending on site. The name is still undecided, says Ivell, but he is likely to opt for the cachet of Premier Lodge.

Upcoming investment in the lodge chain will see 148 sites operational by the end of this year, which will put it in a significant third place in the lodge market behind Whitbread and Granada. Ivell believes that there is still more growth to come in lodge business, and believes that this growth will be at the expense of the three-star hotel market. "The market is polarising into budget and four-star," he says. "Three-star hotels are expensive to run, and are in older buildings. Lodges are cheap to build and cheap to run."

Intent on developing

Sorting out the food operation is a key task for Ivell, but it is not the sole focus. He is intent on developing S&N into a restaurant chain as well as a pub chain. There are good commercial reasons for this strategy given that MMC cap of 2,764 pubs, which has already been exceeded. The trick to this is a blurred answer to the question: "What is a pub?" Chef & Brewer definitely is a pub, but if S&N opens a unit that looks and operates like a restaurant rather than a pub, it escapes the cap.

That is why Ivell is confident about Italian restaurant concept De:alto. This is a modern, minimalist design, mid-spend restaurant chain targeting customers who want to spend between £8 and £15 a head in an easy-eat environment where they feel happy to make frequent visits - a similar market to those targeted by City Centre Restaurants' Est! Est! Est! and Pizza Express.

There are currently six De:alto restaurants, in the Bluewater shopping complex in Kent, Stratford-upon-Avon, Milton Keynes, Liverpool, Cardiff and Edinburgh. All feature open-plan kitchens with a wood-burning oven. The menu is extensive, with an even mix of pizza, pasta, meats and fish. Typical of the business the De:alto restaurants are doing is the 1,600 customers a week with food-only spend per head of about £14 that the Milton Keynes outlet is enjoying.

Yet while buzzy restaurants make the headlines in S&N's development plans, Ivell is a staunch defender of its bargain-priced pub concepts such as T&J Bernard and John Barras & Co. Menu prices in these two community pub brands hover around £3 for a main course. What makes this concept busy and profitable is that customers think that it is not worth cooking a meal at home with food prices being so cheap. There is also a high table-turn when customers think of it as a fuel stop rather than a table for the night. The trick to making money from a low-priced menu, says Ivell, is smart purchasing, smart menus, smart pricing and a suspicion of the percentage profit mentality. "You can get a good profit on sausage and mash at £1.99 if you control things and look at the till and not the percentages," he says. "You can bank cash, but you can't bank percentages."

Yet, among all the concepts in which S&N is investing, there is one that Ivell believes will be the S&N cash cow: it is Chef & Brewer. "Chef & Brewer was a great concept and a great name when we got it from Grand Met in 1993," he says, "but it was a muddled business. The public were confused on what the name meant. We put it on the shelf until we sorted out what the concept meant."

Chef & Brewer went live again in 1996 with a sharp focus on being a local pub which local people would recognise as offering fresh food at reasonable prices. Use of frozen food is at an absolute minimum, kitchens become reskilled, chefs are allowed to develop local specialities if they sell well, and celebrity chef Tony Tobin is a training and development consultant working with S&N chefs.

The S&N name is almost non-existent in external and internal branding. It is more important to S&N that customers recognise the pub as the "Wheatsheaf down the road" rather than as an S&N pub. Even the name of Chef & Brewer is discreet branding. Ivell justifies this approach, saying: "In this industry, we get seduced by our own brands. Ninety per cent of customers who go into a Chef & Brewer are locals. They know the pub by its name, not its brand. The important thing is that Chef & Brewer is a standard we maintain, not a brand we advertise."

Mindful of the cut-throat nature of the pub-restaurant business, Ivell is reluctant to reveal specific revenues, though he gives a clue to how Chef & Brewer is performing by revealing that the flagship Greyhound pub in Northampton, which had a £500,000 refurbishment to make it a Chef & Brewer, has moved from a tickover wet and food weekly turnover of £1,500 to a current peak of £40,000. The redevelopment cost has been repaid in two years. Financial performance such as this, Ivell says, will become S&N's benchmark for Chef & Brewer units.