Tuesday, 2 July 2013

Be careful what you wish for

There has been a great deal of discussion in the media recently about the government’s plans for tighter regulation of pub companies. Now let me make it quite clear that I hold no brief for the likes of Punch and Enterprise – they are an essentially flawed and unsustainable business concept, driven by financial engineering rather than retailing in an attempt to keep alive the tied estates of the former Big Six breweries. They have geared themselves up to the hilt and found themselves in dire straits when it turned out they had taken a hopelessly over-optimistic view of the prospects of the pub trade. And it’s impossible not to feel a touch of Schadenfreude at the way they called the impact of the smoking ban completely wrong.

Punch Taverns remains confident over UK smoking ban

Punch Taverns writes off 491 value-less pubs hit by the smoking ban

However, this saga of corporate disaster has produced a great deal of pain and misery at the level of the individual licensee, and there are plenty of stories of pub companies treating their tenants in a high-handed and bullying manner. So the calls for tighter regulation and a statutory code of conduct are entirely understandable. But it’s important to sound a note of caution.

Firstly, many of the complaints that licensees can buy beer cheaper on the open market than from the pubco come across as distinctly naive. That, quite simply, is how the pubco business model works, as does the business model of the traditional pub-owning brewery. They charge tenants a higher price for their beer in return for a lower rent – what used to be referred to as “wet rent”. Thus the pubco has a stake in the profitability of the pub, and the tenant is to some extent insulated against market fluctuations. If you convert all tenancies to free-of-tie, then the pubco becomes a pure property operation and no longer has any interest in maintaining the premises as a pub.

It’s also the case that, if you impose additional cost and regulation on any business sector, you inevitably tend to get less of it, as it becomes less financially attractive. Thriving sectors can often take it in their stride, but the pub trade isn’t exactly thriving, and, however well-intentioned, any new controls have the potential to backfire. There must be a danger that new regulations could lead to a further damaging shake-out, with large tranches of bottom-end pubs simply sold off, often for alternative use, and more successful ones converted to management. I’m not saying nothing should be done, but the government needs to tread very carefully if it doesn’t want to end up with another Beer Orders disaster on its hands.

8 comments:

  1. Wet rent makes sense for a brewery, as it is basically a risk sharing agreement between tenant and brewery. They have beer they want to sell, and by offering reduced rent they are effectively "buying" the exclusive rights to supply a particular pub.

    But does it really make sense as a business model for a company that has to buy in the beer it then sells via the tie? What value does a pub co actually add to the process in order to earn its slice of the pie? What is their core competency? Its really no wonder its turned out to be a failure as a business model.

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  2. Tenancies (whether brewery or pubco) offer an entry into the trade for people without the capital and/or business skills to be independent free traders, and you do get a certain amount of guidance on how to run your pub.

    On the other hand, the mere fact that a pub belongs to Punch adds nothing to its appeal, and the pubcos wouldn't exist in the first place if there hadn't been brewery tied estates.

    I've often wondered why pub-owners haven't developed the kind of franchise model that is popular in the fast food industry - that would provide brand identity while still transferring some of the business risk to third parties.

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  3. I think the reasons people go to franchises - largely that you know exactly what you are going to get, and an absolute minimum of social interaction is required - are generally incompatible with the reason people go to pubs - as an adventure, to engage with the local society and culture, to see what interesting and unusual food, drink, entertainment are on offer.

    Of course, there are pub chains that cater for people who want a recognisable chain and are not really interested in the nuances of local culture: wetherspoons, all bar one, walkabout etc.

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  4. "Tenancies (whether brewery or pubco) offer an entry into the trade for people without the capital and/or business skills to be independent free traders, and you do get a certain amount of guidance on how to run your pub."

    That's precisely what the pubcos say - I've read that almost word for word on one of their websites - and it would get a hollow laugh from some of the licensees I've spoken to. I've been told quite a few times that the pubco was helpful and willing, with nothing too much trouble, right up to the moment the potential licensee signed on the dotted line. Then it all went quiet.

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  5. I did think about qualifying that with an "in theory". But I would say, despite the horror stories, it does generally happen to some extent. It certainly does with Robinson's tenants which is probably the operation I am most familiar with.

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  6. Mudge I have to take issue with: "They charge tenants a higher price for their beer in return for a lower rent"... whilst this may have been true in the past, it certainly isn't now.

    The BBPA in its own evidence to parliament admits tied rents now outstrip free of tie rents... by 1.6% according to the last RICS rent benchmarking survey.

    Whilst I agree, to some extent, government intervention in business is unwelcome, there is analogy here to the Landlord & Tenant Act, which, was a response to the activities of the likes of Peter Rackman in the 1960s.

    If any proposed regulation results in a "shake out" at the bottom end, then so be it. I, amongst many others, believe many pubs currently unviable under the pubco business model have, and would, thrive once these particularly greedy snouts are out of the trough.

    Just a thought...

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  7. "The BBPA in its own evidence to parliament admits tied rents now outstrip free of tie rents... by 1.6% according to the last RICS rent benchmarking survey."

    Is that comparing like-with-like, though, or an average across the board? It may simply reflect the fact that free-of-tie leases are more readily granted on bottom-end pubs.

    I'd be amazed if an FoT lease was on offer cheaper than a tied one on the same pub.

    It's also generally recognised that rent controls, however well-intentioned, tend to have the effect of reducing the supply of rented property.

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