The Leeds Livery

The Leeds Livery^[1]

Hugh Tudor had retired early from his position as office manager in a large company. At age 55; he had a reasonable pension and some capital that he had saved. Hugh had lived in Milville for 30 years and was reasonably well known in the community. He was active in a service club, on the executive of a soccer league and a hockey league, and worked with some local charities and fund-raising activities. He was a physically fit and active man who enjoyed challenges and was growing restless in his retirement.

Hugh wanted to invest in a small business, not only to add to his income, but also as an entrepreneurial venture that would be challenging and interesting for him. He was considering buying The Leeds Livery, a British pub located in Milville. The pub was located on the edge of town, on the main road running through Milville. It was a five-minute walk from the GO train station.

Milville is an Ontario town of 21,000 people. In recent years, its population has grown quite rapidly as people have moved from the Greater Toronto Area (GTA) into less crowded communities with lower real estate prices and a community lifestyle that suits them. Most of these recent arrivals are reasonably prosperous family people who commute daily to professional jobs in the GTA.

The Leeds Livery is presently owned by Barry Bilkmore, who lives in Georgeburgh, which is 30 km from Milville. Bilkmore, who practices corporation law in Toronto, bought the pub as an investment 5 years ago, in 2004. After the performance of his high tech mutual funds had been disappointing, he cashed them in and bought The Leeds Livery.

The previous owner had been Henry Montagu, who had managed it himself and had actually lived on the premises, in a modest apartment over the pub. Henry sold The Leeds Livery to Bilkmore before retiring and moving back to Manchester, England. In the five years before the sale, the pub’s sales had been rising and profits had been good. In fact, as a percentage of sales, profits had been better than the industry average over the last two years that Montagu owned it.

Bilkmore’s impression was that while the business was profitable, profits could be increased, mainly through better control of expenses. Montagu had spent a considerable amount on things that Bilkmore found questionable. In particular, labour costs seemed high. Wage expenses (mostly for the servers) were 25% of sales, as compared to only 20% for a roadhouse tavern of which Bilkmore had been part owner in the 1990s; the difference in 2003 being $25,000 per year. Also, sponsorship of local sports teams alone cost $20,000 per year, and the pub’s participation in a wide variety of community events such as baseball and golf tournaments was costing another $5,000 to $8,000 per year. Bilkmore was not interested in running the pub himself, so he hired a manager from out of town for $35,000 per year plus one percent of the gross sales. Bilkmore regarded Montagu as an old, out-of-date amateur who had been careless with expenses and fortunate to be as successful as he was with The Leeds Livery. He believed that with modern, professional management, the pub might even become profitable enough to allow him to buy a 32-foot cabin cruiser like the one a lawyer friend of his owned.

To help pay for the manager’s salary, Bilkmore rented out the apartment over the pub for $1,000 per month and reduced spending on “incidentals” such as team sponsorships, community events and so on. In addition, he directed the manager to reduce wage expenses from 25 % of sales to 20%, and reduced expenditures on entertainment by 15%.

However, Bilkmore found himself disappointed with his investment. In 2008, sales were actually slightly lower than in 2003, and profits had decreased. When profits started to fall, Bilkmore decided to reduce expenses. He reduced staffing in order to cut labour costs, and postponed planned renovations involving replacement of worn upholstery on furniture and new paint and wallpaper. He directed the manager to concentrate more on providing high-volume, lower-cost beer and reduced offerings of more expensive imported brews. However, both sales and profits continued on their gradual downward trend, and Bilkmore eventually concluded that, like the roadhouse he had once partly owned, this business was at the end of its “product life cycle”. Bilkmore decided to put The Leeds Livery up for sale and invest the proceeds in mutual funds that stressed high-flying computer stocks of companies whose names ended in “.com”.

Hugh Tudor read up on the market for pubs, and learned that this is a market that has been changing considerably in recent years. In the 1980s and 1990s, the market was dominated by “roadhouse” bars and restaurants such as Kelsey’s or Boston Pizza. These were big bars, 500 square meters (5,000 square feet) or larger) with no intimacy, high noise levels and food menus that offered standard items with no product differentiation – a sort of “mass-production” approach to the business.

During the late 1990s and early 2000s, the market changed significantly. The trend was away from hard liquor and big, noisy bars and toward smaller, more intimate neighbourhood pubs and premium and imported beers. As the baby boomers aged, the phenomenon known as “coccooning” developed – more people were spending more time at home, and near home, in their neighbourhood. The over-40 age group spends considerable time with its elaborate home entertainment systems, and does almost all of its basic shopping within a 10 km radius of home. On the other hand, these people had grown prosperous, and wanted to socialize close to home in a comfortable, cozy and friendly atmosphere. To these people, service, quality and a welcoming atmosphere were more important than price. A neighbourhood pub, close to home, and with the “flavour of England” -- a place “where everybody knows your name”—could provide just this, according to the literature Hugh had read.

The price of the pub would be about $150,000^[2]. Since Hugh Tudor had about $60,000 of his own money, he would have to borrow about $90,000, which would add interest expenses of about $6,000 per year.

Hugh discussed the matter with a friend, who told Hugh that he wished that he had seen The Leeds Livery first. He thought that the pub had real potential, especially if it were managed by its owner and managed well. He noted that this would involve a lot of work, but could be quite rewarding financially.