Near where I live, in south-west London, there is a building, which over the years has seen restaurants come and go. For months now, it’s lain empty.
When I mention it to the pubs and restaurants entrepreneur Mark Derry as a suitable location for him, he nods. He knows the place. But then he quickly shakes his head. It’s no good, it’s a bad site. Parking isn’t easy, it’s tucked away, there’s no lunchtime trade, there’s not enough outside space, it can feel a bit abandoned in the evenings.
I find myself nodding as well. He’s so right, which is why others have tried their luck and failed and why it’s not been snapped up.
He mentions a nearby pub. There, on the other hand, he could do something with that. He’s made offers to the landlords, a mega-group, to no avail. It’s big, central, a local landmark, with different drinking and dining areas and plenty of external tables.
Listening to him, you wish they would take him up. It’s much loved but as an institution. Derry, you just know, could make it better still.
A hospitality veteran
Derry, 66, is a hospitality veteran, one who has created not one but four large-scale successes to his name. He was part of the original team that launched TGI Fridays which was all the rage for many years. By the time it failed, he had long moved on, to co-found Loch Fyne. He built the fish restaurants into a national, highly regarded brand, before selling out. Then, came Brasserie Blanc, where he joined forces with chef Raymond Blanc, opening branches nationwide. Today, they have 13, including three in central London. They’ve been folded into another Derry venture, of what used to be called gastro pubs, before the term became so overblown, but these days are pubs with upmarket food. The company he chairs, London-based Heartwood Collection, has 38 pubs, along with the Brasserie Blancs. Raymond keeps a beady eye on their menus as well and the sourcing of the ingredients and training of the chefs.
The portfolio will soon be joined by three new pub locations, where the builders are in, while a further three “are with the lawyers”. More are planned. Eight of them have bedrooms. Currently, Heartwood has a total of 250 bedrooms. Again, that number is due to grow.
He knows his stuff does Derry. A Mancunian by birth, he’s schooled in plain speaking, working on oil rigs before managing an off licence in Glasgow and heading south. He’s got a firm idea of what works and what doesn’t. With good reason, as Heartwood has one of the highest, if not the highest turnover and profitability per pub in the sector.
Derry is able to cast his vastly experienced eye over a sector that sees pubs and restaurants closing daily but is never short of those determined to have a go themselves, believing they can crack it.
”Some of our business rates have quadrupled in the last three or four years, so it’s kind of mad really.”
We’re meeting shortly after Andy Burnham has announced a cut in business rates for pubs, but not restaurants, which should represent a typical saving of £1,000 a year. Will it make a difference? He laughs. “No pub shut for the sake of £1,000.” Perhaps if they owe £10,000 but not £1,000. He doesn’t wish to be negative, though. “I don’t want to discourage the Government from giving anything, it’s a step in the right direction.” Then, he adds, “but they should remember that some of our business rates have quadrupled in the last three or four years, so it’s kind of mad really.”
The £1,000, he says, “shows that the tax system does not work for labour-intensive businesses such as ours”.
It’s a drop in the ocean, for pubs that are facing higher employment costs, which in turn hit their profits. “They put up the national living wage and employers’ national insurance, which means we have to put our prices up, which forces inflation up and with that, the cost-of-living. It’s a never-ending spiral.”
What is forgotten is that someone on the living wage in hospitality in London may be earning an extra £20,000 a year in tips. That income is not counted towards the living wage calculation, even though it attracts tax. “Someone can be on £30,000 a year in London but be receiving £50,000 when tips are included. But their employers are having to pay them more, despite this.”
Heartwood’s proven formula
Heartwood has a proven formula. They target freeholds. Why? “Because the leaseholds markets is depressed and, in this trade, freeholds offer certainty.” So little of the industry’s future is predictable, he says. Governments are forever targeting pubs and the sale of alcohol for revenue. “Duty goes up pretty much every year. We have the highest VAT in Europe on food and drink. To that is added duty on alcohol.” Then there are energy costs, which are also driven in part by tax. “The energy itself is expensive, among the highest there is. You have to light and heat the room and chill the product. Then people have to cook and serve. Their wages, driven by the living wage, keep on going up, then there are employers’ NI and business rates. All this, before we have sold a pint or a meal.”
Like others, Heartwood has been trying to find a solution to ever-rising charges and taxes. “We started only with restaurants, then we bought pubs, because they have lower labour costs. With food, you need chefs and waiters. With pubs it’s a bar tender. So, we took the Brasserie Blanc menu into pubs so we could benefit from the additional income from the sale of drinks through the bar.”
More recently, he went a stage further and added bedrooms, which need even fewer people to service than a bar. “As a business we are motivated by trying to sustain a level of profitability which pays for the maintenance of our business.” Some in the industry adopt different strategies, such as doing away with waiters and requiring customers to order and collect their food at the bar. “It works for them, it’s not what we do.”
Refurbishing a pub usually costs £1 million. If they’re buying somewhere with bedrooms, the outlay before it has opened can be as much as £9 million. That’s for starters. “The biggest cause of failure of any pub is continued under-investment. It’s essential to keep maintaining the property to a top standard. Who wants to go to a pub when the spend per head — even on the cheapest pint or house bottle of wine — is so high?” Any pub operator, he says, “must keep reinvesting. If you’re squeezed, to the point where money is not available, then you’re on a downward spiral. The look suffers, people stop going, you have less to invest and down it goes”.
“Revenue is king. You’ve got to get the revenue up, to drive the profits.”
What is key, says Derry, “is revenue. It’s everything. You must focus relentlessly on getting it up. The costs of operating a pub with one customer are the same as if it has 100. Revenue is king. You’ve got to get the revenue up, to drive the profits.”
Hospitality businesses, he says, “never stand still. Because costs are going up all the time, there is no such thing as standing still — do that and you are moving backwards. You have to keep moving forwards, to keep growing at a manageable pace. It’s tempting to stop, but if you do you will soon slip backwards.”
As well as the building, they invest heavily in the staff, in training and ensuring they stay. Heartwood claims to have one of the lowest staff turnovers in the industry.
They pay close attention, too, to customer feedback. “We receive about 70,000 online responses a month from customers as to how they found the experience. We interrogate everything they say, so if, for instance, one dish comes up repeatedly as below expectations we fix it. You must remain on top of the operation.”
If he was Burnham, the £1,000 would be the start. “If he reduced VAT on food and drink to 15 per cent, at a stroke he will have solved the energy issue and the business rates issue. It would allow everyone to breathe. There’s little or no growth in the sector because people are not making enough money to fund growth. This would change that immediately.” He pauses, then adds: “They have to understand, they can’t tax their way to prosperity. You have to grow to make money and that in turn earns more revenue for the government.”
He smiles. Forget the theories, the realist is that simple. He’s got to go.
As for that site where restaurants open, only to close, it’s to become a nursery.
