How to get punters to drink more Maclays

HERE’S a challenge for you ... taking over a pub chain just as people stop drinking your beer.

That in effect was Steve Mallon’s job description when he took over as managing director of Maclays, one of the old guard from the Scottish brewing and pubs tradition.

When the 42-year-old KPMG-trained chartered accountant was appointed in 2001, few were calling for pints of heavy any more. Instead it was lagers with continental labels, wines by the glass and alcopops.

"People stopped drinking dark beer," said Mallon, "which left us with a brewery producing for a market that was shrinking before our eyes."

But dark beer was what Maclay’s 174-year tradition was built on. So if it was going to be saved, cosmetic surgery wasn’t going to be the answer.

"It was clear from the start we were going to have to contract the company if we were to do anything with it," said Mallon. "We had a brewery and, up to the mid-90s, 60-odd pubs. At one time turnover was 20 million a year. It wasn’t that any more. These were tough times, when every pound was a prisoner."

So he outsourced the brewing to Belhaven, sold the distribution arm and continued selling off the smaller pubs - Belhaven paid 4.5m in 2001 to buy 15 in central Scotland.

He then signed a five-year deal under which Belhaven exclusively supplies beers, ciders and soft drinks to the 21 pubs still owned by Maclay’s and agreed a five-year licensing agreement for Maclay’s brands in Scotland. The companies have since launched Maclay’s Signature brewed by Belhaven.

That restructuring has just delivered an almost 6 million pre-tax profit for the latest financial year - up from 4m last year and a major turnaround compared with losses of almost 1m in 2002.

The company that emerged was leaner, fitter, and at last clearly focused on a market that wanted what it had to offer.

"We took a conscious decision to stay away from the high street," said Mallon. "City centre pubs operate in a very tough market. They compete to stay in fashion so their overheads in terms of changing decor and branding are enormous. And they have to compete on price. They have to discount and promote to keep the customers coming through their doors.

"That is an expensive way to do business. The margins are so tight they’d make you weep."

Instead, Mallon opted for the scenario where the Maclay’s pub was the dominant player in a small yard. He built on one of the company’s traditions that was still working, building a presence in towns like Alva, Blairgowrie, Balloch and Oban.

He also turned the group away from the traditional Scottish pub ambience. Out went bars that catered for men in "bunnets" hunched over a "hauf-an’-a-hauf", dimly glimpsed through a roiling fug of tobacco smoke, and in came exposed beams and tartan, and family-friendly eating areas.

"We developed characteristics that would make us unique and broaden our appeal," said Mallon. "They are community-based pubs. The key is to have food and beer gardens."

But challenges, like buses, seldom travel alone.

"The smoking ban," he says portentously. "Just when you’ve completed one renaissance ... It is the most significant challenge we have yet faced. What we have to achieve is finding entirely new ways of getting people out of their homes and into our premises."

Needless to say, Mallon is already on the case. And it is the beer gardens and food he hopes will help them weather the impending storm.

"We have been over-legislated here, but it is going ahead and so it is up to us to look at how best we can deal with it." he says. "We’ve been over to Ireland to get a sense of how they have coped and done a risk assessment if you like.

"Units with outside space offer the best potential. They can be covered over and fitted with spaceheaters. Units without outside space present us with the biggest problems, and we are going to have to be very creative to get round that and do it as quickly as possible. We are racing against time to get it done before the ban comes in.

"Take the Three Judges at Partick Cross in Glasgow. Very limited space - none at the back at all. But the road system outside is being re-designed so there could be opportunities to sit folk outside but it all involves planning permission and lawyers - all unwanted overheads. Otherwise we’ll just have to fall back on the old faithfuls. Drink, cask ales, jazz and chat.

He estimates that, for smaller pubs, the new spend to equip them to meet the ban will be less than 10,000, but for the bigger pubs the costs will be 30-40,000.

"It’s a hefty hit on cashflow," he says, "And that’s not counting the cost of keeping the space heated eight months of the year. We’re looking at supplier sponsorship for that."

This week, the first indication of the full weight of the blow came from detailed analysis of official Irish government statistics. It calculated that over the first seven months of the ban on smoking, Irish pubs, bars and nightclubs lost 7.3 per cent of their turnover - costing the industry €117m (80m).

But yet again, Mallon has a plan.

Using the Enterprise Investment Scheme, he set up the Thistle Pub Company five years ago with six pubs in central Scotland and, dangling the tax breaks under the scheme, he invited investors to buy.

Some 80 investors "bought" the pubs and Maclay’s managed them. Late last year, Maclay’s bought them back for 3m, giving the investors a 15 per cent return on their initial outlay - far more than they would have earned elsewhere.

He’s now launched Thistle Pub Company II, to raise another 6m in two offers for subscription for each of the current and next tax years.

"We raise money from investors who get a pub and its profits in return. Then we bid for them in five years. It’s a great way to raise third-party equity.

"We’re not hell bent on growth for growth’s sake. Or to grow till we go burst. And we don’t have to. That is the advantage of not being a listed company. But grow we must, and this is a painless way to do it."

30-SECOND CV

Where is home? Giffnock.

Significant others? My wife Caroline and two boys and two girls, all of school age.

How much would you spend on a bottle of wine? 6.

What car do you drive? A Mercedes.

Best business decision? To believe in the future of Maclay’s.

Worst business decision? You wouldn’t believe me if I told you.

What are you reading at the moment? McCarthy’s Bar.