COURT ADMINISTRATION orders reveal countless cautionary tales of businesses that have tried to expand too far, too fast, with often fatal consequences. So it is perhaps remarkable that the Orchid Group, which became the fifth-largest pub/restaurant group in the UK seemingly overnight, is here at all, let alone planning to add a further 100 sites to its stable during the course of this year.
In 2006, Orchid, the private equity-backed business created from the remnants of Noble House Leisure, ran 12 restaurants. Charles Freeman, FD of Orchid, who joined the company at its formation “to ostensibly help it grow”, says the plan was to add about 10 to 15 pubs each year to its portfolio.
No one could have expected quite how explosive that growth would be. Within two months of joining, Freeman, along with chief executive Rufus Hall, had acquired 290 former Spirit Group pubs from Punch Taverns for £571m, earning the company the moniker “the billion-dollar start-up”.
With financing provided by US private equity group GI Partners, the acquisition made Orchid the largest start-up the pub sector had ever seen. The old business plan had to be ripped up and a new one written overnight. “I joined a company to acquire 20 pubs a year, not 300 in one go,” Freeman tells Financial Director.
Freeman joined the company from Bank Machine, where he was FD from 2003. He previously served as the finance director of various leisure retail businesses within the Rank Group, including Mecca Bingo and pub chain Tom Cobleigh, where his initial partnership with Rufus Hall was formed.
From the ground up
The experience of working as the FD of “multi-site, high-volume cash transaction businesses” put Freeman in good stead for the mammoth task that lay ahead. But nothing can really prepare an FD for the work involved in building a company from scratch in mere months.
“All of a sudden, Rufus and I found ourselves in Slough, with 290 pubs to look after. I suddenly had to choose which accounting, payroll, banking, reporting and capital expenditure systems to put in place. We just didn’t have any of those systems,” says Freeman.
“We had no bank account, no paying-in books, no people. We had to recruit everything – pensions, life insurance and a finance team.”
And if the creation of all reporting processes, procedures, management accounts and board reports was not enough, Freeman also oversaw an aggressive £50m capital expenditure programme to reposition the Punch Taverns sites. “We knew the pubs we bought were under-invested in, so we had a £50m cap-ex fund to invest across the estate and some were major repositionings,” he says. “We changed menus and interiors, transforming pubs from snooker halls to family carveries. That meant a tremendous transformation in the customer base.”
According to Freeman, being prepared to aim at an entirely new set of punters – a daring move for any business – and tap into changing market trends has been key to the group’s success. Freeman says the changes reflect the way in which the industry is evolving, placing a heavier emphasis on female clientele and food-led revenue, offering coffee and wine lists, and creating a welcoming and soft ambience.
As Freeman points out, the success of the business is not just about money but about the success of the company as a people business. This year, based on feedback from its own staff, the company was placed among The Sunday Times top 25 companies to work for, for the second year running. The fact that this is important to Freeman shows the finance role is as much about people as it is about numbers.
“Managers like to meet the senior people in the business,” he says. “I’d like to think that if I go into a pub for a visit, the managers are pleased to see me. We have a chat about the issues and challenges they have, and if I can take something back to the office to help them sort that out, then it is a service well provided.”
This approach to people management is in evidence on the day Financial Director met Freeman in one of the group’s chain of Living Room bars in London’s West End. The night before, during the London riots, two pubs were broken into. Freeman says he is off to “say hello to staff and make sure they feel looked after”.
“It’s important for senior people to make sure our staff feel valued for the work they do. At one of the pubs I am visiting after this [our interview], staff and customers were attacked at knife point and the manager had his phone stolen. I have a replacement phone for him. That might seem like quite a soft issue, but it is not about being touchy-feely. There is a direct benefit in this approach for finance.
“We encourage all our finance team to get out and talk to the managers. We have 300 pubs/restaurants across the UK and there is a manager in each one. It is important for the finance team to understand the challenges the manager has in running that business,” says Freeman.
It has not all been plain sailing for Orchid, though. In 2008, the company entered into a pre-pack administration, whereby the group was placed into administration and immediately bought back by the original owners. The financial overhaul, which included the disposal of 48 sites that did not fit the group’s strategy, helped Orchid through the difficult trading environment.
Orchid’s bankers – HBOS and Deutsche Bank – took a minority stake in the business in return for relaxing covenants, providing Orchid with the firepower to pursue distressed opportunities in the sector. Given how important that was to the growth that followed, it is unsurprising how Freeman talks about managing bank relationships: “We are open and honest – the numbers I produce are correct, on time and clearly presented. There is mutual trust. If trust doesn’t exist, the relationship will flounder,” he says.
With financing secure following the pre-pack, Orchid was able to push in the past 18 months with 10 bars and pubs from Black Pubs and a further 43 businesses, including the Living Room and Prohibition brands from Premium Bars & Restaurants, which was in administration.
The recession is causing pubs to close down in record numbers and Freeman sees this as a golden opportunity for a business that is built on turning around failing pubs. With a further 100 pubs to be added in 2011, Freeman says small groups, as well as individual pubs, are on his shopping list.
“The profiles of the pubs that have been closing down have been smaller village-type pubs. Within that there is opportunity for Orchid,” he says. “Every retailer on the high street is fighting for sales – that is part of the economic climate we are in. But the closure of pubs is more of an opportunity for us to maximise our position in that community. We have the solution and we can put our people in, introduce our menus, and reposition it.”