They're not only here for the beer

Brewing has become increasingly small beer to Whitbread. Now, as it circles Allied Domecq, it may stop brewing after 250 years.
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The Independent Online
THINK WHITBREAD and you think beer. But not for much longer. Whitbread has already turned itself into a leisure retailer. Now it looks ready to go one step further and detach itself entirely from its brewing roots.

If Whitbread's multi-billion pound bid for Allied Domecq's Firkin-to- Big Steak pub chain comes off - and with other bidders circling, that's a big if - its brewing business will have to be sold, possibly floated off to fend for itself on the stock market or more likely disposed of in a trade sale.

This dual transaction will be one of the most important pieces in a jigsaw that has been assembled carefully over the past few decades and, when finished, promises to reveal a brand new company. Whitbread's chief executive, David Thomas, has followed in the footsteps of his predecessor Peter Jarvis in executing this strategy of transformation. Whitbread now sees itself firmly as a retailer rather than a brewer.

The group's transformation has been remarkable. Few companies have undergone such a dramatic change in such a short time. From a business always synonymous with beer, brewing the stuff for more than 250 years and having its headquarters in a brewery, Whitbread now lays claim to a diverse collection of leisure and retail businesses.

From Cafe Rouge to Pizza Hut restaurants, from Marriott Hotels to Travel Inns, from David Lloyd leisure centres to Costa Coffee bars, Whitbread owns them all. But what tempted Whitbread to take on a new life of leisure and why is the company thinking about calling time on its brewing interests?

The Whitbread of today had its genesis in the early 1980s. "Our pubs were not as big as some of our rivals' boozers so we started to look for other things," says David Richardson, Whitbread's strategic planning director. The solution was obvious. The fast-living and fast-moving lifestyle of the 1980s meant more people were eating out rather than wasting valuable time in the kitchen.

Whitbread already had Beefeater, the chain with the rather dubious honour of stamping the "prawn cocktail, steak and chips and Black Forest gateau" menu firmly across the culinary map of Britain.

But it had bigger ambitions and saw the chance to take a larger slice of the market. First, in 1982, it signed a deal to run Pizza Hut outlets in the UK. Three years later it added TGI Friday's, its brightly dressed bouncy waiting staff and gimmicky menu marking one of the first in a long line of themed restaurants that now appear to adorn every high street.

"It was not some large strategic vision, these things just happened at about the same time," says Mr Richardson. Brewing and pubs still dominated the group, but the status quo had been broken and Whitbread was never going to be the same again.

The group decided to reorganise its business in 1984. "We segmented our business into brewing, branded drinks. tenanted and managed pub estates and retail," says Mr Richardson. "Then retail was just a `sexy fringe' and nobody quite understood it."

It was the infamous "beer orders" of 1989 that kick-started the move into new business areas. After a monopolies investigation, the Government slapped a limit on the number of pubs the big brewers could own in an effort to cut prices. The result: industry turmoil and the beer drinkers still had to pay more.

"The brewers realised there was a lot more profit in retailing," says Mr Richardson. "The idea was to force brewers to sell pubs to reduce the price of beer. In practice they held on to pubs and got rid of brewing. This is what others have done and what we are about to do."

Against a backdrop of falling beer sales and the forced sale of pubs, Whitbread and the rest of the industry started sprucing up the bars it still owned. Better pub grub, with pasta replacing ploughman's, was part of the change. David Thomas came from that side of the business, helping to create food-led chains such as Brewers Fayre.

But probably the most significant break with the past came in 1993 when Whitbread finally unbundled its complex A and B share structure, allowing it to raise money more easily in the City. Soon it had firepower in the war chest and was itching to hit the acquisition trail.

Peter Jarvis, then chief executive and the man credited with masterminding the Whitbread revolution, had a marketing background at Unilever, and knew all about pushing brands. So he hunted businesses to give Whitbread a bigger slice of the leisure pound.

But he was temporarily outgunned. While the company was busy sorting out its share structure, arch-rival Scottish & Newcastle snapped up the Chef & Brewer pub business from under its nose. Stung by the deal, Whitbread came out fighting. First it pumped tens of millions of pounds into its managed pub estate, building nearly 100 new outlets a year. It also invested heavily in its hotel business, which now included its fast-growing Travel Inn budget hotel chain. Then, with the economy on the upturn and the feelgood factor returning, Whitbread swooped.

In a few days in 1995, the group splashed out pounds 380m for the UK arm of the Marriott hotel business, then the David Lloyd leisure chain, a thriving fitness chain set up by the former tennis star. After that came Pelican, Costa Coffee and Bright Reasons, which brought the Cafe Rouge, the Dome and Bella Pasta chains to the group.

To begin with, there were doubts about the strategy. Whitbread seemed to be expanding too quickly too soon. The early performance of the chains proved disappointing and Whitbread has only recently started to get the sort of returns it expected. Perhaps conscious of City criticism, Whitbread stopped buying businesses for a few years. Its rapid expansion plan, which didn't come cheap, also pushed up the price of other potential targets. With a predator as big as Whitbread on the prowl, share prices of likely victims soared.

Now Whitbread is back on the attack again. Allied Domecq's pub business could be the beginning of another spending bonanza. With a strong balance sheet and cashflow, Whitbread wants to expand its hotel business. It is also looking at new parts of the leisure market.

Mr Richardson says: "I am not saying we will look at bingo halls, but we could look at the things that replace the bingo halls. The leisure market is massive, worth around pounds 130bn. If we could have 10 per cent of that we'd be doing all right."

That is an ambitious target for a group with annual revenues of a quarter of his pounds 13bn dream. But Whitbread has proved willing to put its money where its mouth is. Yet the deal with Allied Domecq is no foregone conclusion. Whitbread is facing stiff competition in its race to buy pubs from Punch Taverns, the independent pub group run by the former Pizza Express tycoon Hugh Osmond. He is courting powerful financial backers from both sides of the Atlantic in an attempt to top Whitbread's offer. City watchers are divided on whether Punch can provide a knock-out blow to Whitbread's ambitions. The hotels and brewing giant Bass may also enter the fray, although it shows more interest in growing its hotels business rather than pubs.

If Whitbread does win it will be a coup for David Thomas, the first big deal for a man who has dodged the limelight since his arrival as chief executive two years ago. Whatever the outcome of the Punch bout, this is still an important moment in the history of Whitbread.

The intentions are clear, the brewing business will go sooner or later. David Richardson says: "The resources for manufacturing and retailing have diverged and it puts the whole group under a strain to hold them together." He means the brewing business is not making as much as the retailing arm and there are few advantages in keeping them together.

Whitbread's brewing arm may have some of the best brands. But in a beer market that will at best remain flat for the foreseeable future, the group clearly feels it makes more sense to put its cash elsewhere. It is pumping hundreds of millions of pounds into aggressive expansion plans for Travel Inn, David Lloyd leisure clubs and the rest.

In truth, the writing has been on the wall for the brewing business for some time. In 1990 beer accounted for a third of Whitbread's profits; by 2000 it is predicted to account for just a tenth. Some brewing enthusiasts will be crying into their pints at the thought of Whitbread ending its brewing heritage. But David Thomas is determined to call time on the old business. For a man of leisure, he has a busy few months ahead.

The rebirth of an old pub regular

Year Event

1742 Samuel Whitbread starts brewing

1948 Whitbread becomes a public company

1982 Joins Pepsi to run Pizza Huts

1985 Sets up TGI Friday's franchises

1987 First Travel Inn

1995 Runs UK Marriott Hotels. Buys David Lloyd Leisure and Costa Coffee

1996 Buys Pelican and Bright Reasons

1999 Buys Allied Domecq own brewing arm?

Chairman: Sir Michael Angus

Chief executive: David Thomas

Employees: 85,000

Turnover: (year to February 1999): pounds 3.4bn (pounds 3.3bn)

Underlying pre-tax profit: pounds 365m (pounds 355m)

Net assets: pounds 2.5bn

Main brands:

Pubs: Brewers Fayre, Hogshead

Restaurants: Cafe Rouge, Pizza Hut, TGI Friday's, Beefeater, Bella Pasta, Dome, Mamma Amalfi

Hotels: Marriott, Travel Inn

Leisure clubs: David Lloyd Leisure

Coffee bars: Costa Coffee

Beer turnover: pounds 1bn (29% of group total)

Beer profits: pounds 51.6m (14% of group total)

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