St Austell gives small beer to short-term growth
What’s the key to long-term growth? St Austell Brewery might have a few ideas. The brewery has tripled its turnover in the last two decades while weathering the pub-sector-crippling economic crisis.
St Austell brewed 20,000 barrels per year at the turn of the millennium, turning over £50m in 2001. By last year, turnover had growth four-fold to £169m when it brewed 140,000 barrels.
Finance director Colin Stratton puts the company’s long-term success to a balance of short and long-term investment, sustainable debt and a focus on forecasting.
Balancing capital investment risk
St Austell made £15.7m of capital investments last year, including improving the Hare Brewery bottling line. It purchased Bath Ales, which brews Wild Hare, for £16.7m in 2016 alongside £9.2m of other capital investments.
“We might except a lower return for an asset that the grandchildren might look back and say ‘thank god’. We’ve bought pubs in iconic locations off-market. The first three or four years we’re investing to bring them up to standard and therefore accept a low return because it might be in the estate for 50-100 years,” said Stratton, who’s worked for St Austell since 1996.
The investment philosophy is born out of being a 167-year-old business. But Stratton stresses it’s crucial to balance this with short-term investments that have the potential to show an immediate return.
“We try to put smaller investment alongside large ones that have quicker payback. If we only did long term it would be very restrictive and risky. A lower return can become a small return and then no return. We try to spread the investment risk,” he added.
Long-term real growth in EBITDA is the key operational measure - St Austell has a strategic goal of 3% real growth in EBITDA per year. Stratton describes it as a “high hurdle” that drives challenging budget setting.
Today, the brewer has 179 pubs, inns and hotels. It had a turnover of £169.3m last year, growing 10.3% on 2016, and underlying EBITDA grew by 3.9% to £19.7m.
The finance team doesn’t focus on EBITDA conversion because it operates in a number of different sectors. St Austell’s effectively a retailer, wholesaler and pub landlord.
“Each part of the business has different EBITDA and conversion model. If one part of the business does better than the other it will pull on the margin,” said Stratton. “The bottled beer market, which is a low-margin sector, has had a very strong year for example. The key is to drive up the overall growth.”
From a shareholder perspective, the KPI is earnings per share and dividends per share. The company tries to maintain a dividend cover of 3.5-5 times: “This means you can't influence your key drivers by just upping the dividend unless you have the profits to do it,” explains Stratton.
What happens when growth plateaus?
St Austell’s been on a “massive growth trajectory,” said Stratton, but that doesn’t mean it’s been easy. The smoking ban, 2008 downturn and changing consumer habits have forced the business to revise its strategy.
“I distinctly remember those periods when you're in the plateau and thinking about how you get out of it from a strategic point of view. It’s not a magic button. You’re looking at trends and the market,” advised Stratton.
The 2006 smoking ban was a turning point in a gradual move away from traditional pubs. St Austell’s team invested heavily in food in response. It created a new dining experience for the 20% or so locations that didn’t offer more than a pork pie and improved the rest.
“We’re careful not to see things as fads,” said Stratton. “The launch of Korev in 2010 took advantage of the premiumisation of larger and we invested in cider when it started becoming popular.”
Building a finance team around forecasting
Stratton built St Austell’s finance function with a focus on forecasting. It aims to provide as much real-time information as possible and spend equal time looking forward as backward.
Being based in Cornwall means they don’t benefit from the talent pipeline provided by the Big Four. The response has been to train graduates. Stratton said their current credit controller joined on their year in industry and spent 10 years working up the ranks.
“It’s not like London or Bristol where you have lots of graduates. We are fulfilling that function to a certain extent. This year we’ve taken on a number of graduates.
"One of the challenges we’ve had is that we’ve had a reasonably high level of staff turnover in the last four-five years. The low levels of unemployment down here and the demand for well-trained finance people make it difficult. If they have St Austell on the CV they are quite attractive,” Stratton added.
St Austell received a £15m revolving credit facility from HSBC in June. The money will fund pub and hotel acquisitions.
“Having too little debt can restrict growth. You have to manage it appropriately and invest appropriately. We haven’t always got it right.” said Stratton.
The facility came out of a long-term approach to relationship building. Post the 2008 crisis Stratton maintained conversations with banks they weren’t working with, including sharing management information.
Thinking long-term about everything from finance facilities to investments helps build a sustainable business.
“Sustainability has become a very overused phrase,” summarised Stratton. “I think St Austell is what sustainability really means, which is about being a business that's been around for 160 years and we intend to be around for another 160 years. We want to generate growth and employment and profitability for the long term.”