INTERVIEW: Steve Goodyear, CEO, Young’s

YOUNG’S AT HEART – Following four years of massive restructuring at the brewing giant, Young’s CEO Steve Goodyear tells Ron Emler how he implemented improvements in the business and his current plans for further expansion

“It has been a very hectic, tough four years,” says Steve Goodyear, the chief executive of Young & Co, the Wandsworth-based company whose fortunes have been transformed. He is talking about the momentous decision to restructure the brewer, a process that has generated a 40% rise in profits before tax over the past five years and a staggering 600% increase in the share price to give the company a market value of about £400 million. It is also, he says, a process of improvement that is ongoing.

For several years Young’s share price was under pressure but the brewer and the controlling Young family had resisted demands to realise the value in its property assets (its brewery and its pubs in the southern Home Counties with a heartland in south west London), and the shares bumped along at between £6 and £8. Then in 2003 Young’s announced a wholesale review of operations.

The outcome was radical. In early 2006 it announced that it was selling its five-acre site in the centre of Wandsworth to property group Minerva for £69m. In addition, Young’s formed a separate brewing joint venture with Charles Wells of Bedford to produce all its beers. The brewing company, Wells and Young’s, now has a rolling three-year contract for Young’s beers, while Young’s itself has a 40% stake in the brewing company.

Young’s share price moved rapidly northwards from 2003 to peak at more than £36 earlier this year. The recent stock market turmoil means they now trade at about £30, which is still a handsome improvement for the many loyal shareholders who have followed the company.

Goodyear stresses that it was not just the sale of the brewery that sent the share price up so spectacularly. “Our actual pubs estate has performed very well, as indeed did the free trade business before it was transferred to Wells and Young’s,” he says. “Young’s Bitter had become the fastest-growing standard ale in the country and the whole business was beginning to take off”.

Joining forces
“But we had to know the value of the brewery site to be true to our shareholders and true to ourselves. There were health and safety problems; it was a five-acre site in the middle of the Wandsworth one-way system, a lot of traffic. There were English Heritage problems on the site, so we couldn’t redevelop. For instance, we wanted to knock down a big Victorian canteen block for health and safety reasons but we weren’t allowed to. We had taken on more brewing contracts, such as Courage Bitter, and we were  becoming congested. Being a very old site and a split site meant it was people intensive and the efficiencies of brewing were not available.

“We had to decide what our future would be, so we looked at every scenario open to us. There were about six, including whether we should brew at all. We wanted to stay in brewing but we wanted to show shareholders and ourselves as a board that mathematically we had come to the best solution. We looked at building another brewery; we looked at joint venture; we looked at contracting out brewing our beers and, indeed, at not brewing at all.

“They were all quite complicated until we started to talk with Charles Wells at Bedford. The attraction of that was another family company on the same wavelength as us and that they had a very good modern brewery in Bedford, which was under capacity. So we formed a JV, Wells and Young’s. They’ve got 60%, which is fair enough because it was their brewery.” Goodyear is delighted that nobody has commented negatively about the quality of the Young’s beers now brewed in Bedford.

“The property sale completed in January. Ending brewing in Wandsworth was very sad but it had to happen,” he says.

It is also symbolic of the change brought about since John Young, the flamboyant 84-year-old chairman, who had led the company for more than 40 years, died this spring, just hours after the final production run at the Ram Brewery in Wandsworth.

John Young was regarded as an arch conservative by many, but he set in train the events that have transformed the company his family had controlled for 175 years. “John was an amazing bloke,” says Goodyear. “I was lucky to have 11 years with him. He was a far thinker. He famously said about the site evaluation, ‘I have to rule with my head, not with my heart’. I’m certain he would have approved of what we are achieving. John knew we had to move ahead.”

And that is Goodyear’s goal. “We have a very robust business plan and we are going to make it work,” he says. “We are a focused, high-quality pubs business with a strong link to our beers and our heritage, continuing our unique offering of Young’s beers in Young’s pubs.”

Goodyear insists that Young’s remains a vertically integrated brewer through its stake in Wells and Young’s. “I’m very pleased with that,” he says. “It’s working well and we are brewing pretty much to capacity. We could expand, it’s a big site. We bought the Courage brands, which was exciting, and now we’re one of the biggest cask ale brewers in the country.

“I think there is a lot of room for cask ale to make a comeback. We see ourselves becoming the number-one cask ale producer because we’ve got a fantastic range of beers – Young’s, Courage and the Wells brands, especially Bombardier. It’s a hell of a cask ale range and we are doing very well in the free trade.

“Young’s beers are now in many of the Wells pubs, which means also that we have extended our coverage. That gives us scale. That was the key to the whole transformation. It’s very difficult from a small base as a small regional brewer to persuade people to do deals with you for your beers. Effectively we are now pretty much in national distribution.”

Note that Goodyear uses “we”, not deliberately, but naturally, when talking about either Young & Co, which he heads, or Wells and Young’s, the brewing JV, in which he holds 40%. True he sits on the latter’s board, but it also shows the affinity between the two companies.

Where does Young’s go from here? For years it has been the subject of takeover speculation, despite the Young family and their trusts holding a controlling stake. “We would be extremely difficult to takeover,” says Goodyear, “but we recognise that we have to perform and we are in a good position really.

“There’s lots of work to be done on developing Wells and Young’s and we [Young’s] would like to buy more pubs; there is also still plenty to do on our current estate  [roughly 50% managed and 50% tenanted].

“About 80% of the managed houses have been refurbished in the past couple of years. We’ve worked hard at getting those up to snuff.” Indeed, according to the annual report, in the first full year post refurbishment, the upgraded pubs are generating sales growth of almost 80% and a return on invested capital of about 25%.

He intends to give good tenants long leases to encourage them to develop their businesses and he is keen to improve customer service and boost the role of food throughout the Young’s estate. “We’ve still got plenty of room to grow in food. Our food mix is about 22% and our spiritual number is about 30% because if you cross that great divide you lose the rich mix of the great British pub. Although some pubs have a much bigger food turnover, the vast majority of our houses remain ‘wet’ led.

“Food is important because of the smoking ban but it is impossible to say what has happened because there are no comparable like-for-like figures. Last year June and July were hot and this year it poured with rain.” There are, however, only a handful of Young’s pubs where a “smoking solution”, such as a covered patio, has not been found.

Future growth
Meanwhile, the City and other brewers are waiting to see what Goodyear does with the proceeds of the brewery sale. He makes no bones about wanting to buy more pubs, notably in London and the Home Counties, but he is determined not to overpay. “I don’t think that accusation can be levelled at us over the pubs we have bought in the past few years,” he says. “Any purchase has got to be opportunity driven. We have very strict financial criteria and the return from any deal would have to exceed our cost of capital invested.”

He is now the hunter rather than the hunted. “We would have no problem is raising £100m quickly and I am sure we could go quite a long way above that should there be the opportunity. But in reality it is likely to be a handful of pubs here and there.”

How many? “You can’t put a number on an ideal size for our estate. If it rose to 250 or higher [from the present 216], it wouldn’t be a problem. We’ve got the infrastructure in place, so it wouldn’t be a question of taking on loads more people. I would be very unwise to put a figure on it because these things sometimes happen and sometimes don’t. But it would be nice to have another few, another 100 or so, but they have got to be the right pubs. We won’t dilute what we have got, which is a great estate. But I don’t want to get into a numbers game.

Young’s pubs are the envy of its rivals. It has 13 prime Thames-side pubs, more than anyone else, and recently its houses were valued, in brick and mortar terms, at £399m. “That underpins our value,” Goodyear says. “We’ve done a lot of work on refurbishment, which has paid dividends… but not to the detriment of the ‘Young’s’ pub. We enhance our pubs, not ruin them.” 

So while there remains a “family feel” to Young’s despite all the changes, there is an underlying hard edge to the business. “We are very conscious of our frailties,” says Goodyear, “the main one being that our profits have not been as good as they should have been for all sorts of reasons. But we’ve fixed a lot of the problems.”

Young & Co made adjusted pre-tax profits of £12m last year “and the scribblers have got us down for £17m this year. After that…”  he muses with the smile of someone who knows where he is going.

© db November 2007