A franchise affair

A significant development of the past few years that has perhaps not received the attention it deserves is the rise of franchise models for operating pubs owned by the major pub companies. These are a kind of halfway house between a managed pub and a traditional tenancy, under which the publican remains self-employed, but the pubco pays all the bills and takes all the sales revenue, leaving a cut of typically between 18% and 22% to pay themselves and employ staff.

All of the major pubcos now offer deals of this kind, as explained in this article in the Morning Advertiser, with Marston’s being the leaders in the field with 637 sites currently operational. Probably the most visible is Stonegate’s Craft Union, which has been positioned as a standalone brand, with the pubs painted in a distinctive livery. Most of them tend to be wet-led pubs, but some of the deals allow the licensees to run their own food operation.

From the point of view of the pubco, they avoid the commitment and administrative burden of a fully managed operation while still retaining a high degree of control over how the business is run. Most significantly, all the sales are put through their own books.

The prospective publican may find this kind of arrangement an easier introduction to the pub trade than a traditional tenancy, and it requires much less of an initial financial ingoing. It provides a much more structured operating environment, which may suit many people, although others will find the lack of opportunity to use their initiative to develop the business limiting. Running a tenancy is much more complex now than it was fifty years ago. There’s a direct relationship between the success of the business and your own remuneration, although of course that is a double-edged sword.

An important aspect is that all the bills are paid by the pubco, including the energy costs, which is a massive attraction in the current climate. However, concerns have been expressed that these deals may in practice leave people working for a pittance and can be regarded as exploitative. People are effectively entering into unsatisfactory contracts just to get a roof over their heads and their bills paid. On the other hand, several people interviewed in the Morning Advertiser article seemed happy enough with the situation. No doubt the shrill anti-pubco lobbyists will find much to criticise, but they never seem able to come up with any constructive suggestions about how pub operating companies should actually function.

When I first heard about this kind of arrangement, my initial thought was that they were a way of pubcos avoiding the possibilities of seeing their pubs lost to tenants claiming a Market Rent Option and going free-of-tie. However, that hasn’t in practice proved to be a major problem for pubcos, and in reality franchising is more a way of finding a system that works for smaller, lower-end pubs that have proved difficult to let on a traditional tenancy basis. But, whatever its pros and cons, franchising certainly seems to be here to stay as a significant part of the pub landscape, and is only likely to expand its share at the expense of tenancies. Marston’s certainly see it as a key driver of future growth.