Pubs turns focus from property to staff; For a long time in the pub industry, the property market came before pubs. Whoever was running the pub – and how well they were doing it – did not matter

November 21, 2013 7:05 pm

Pubs turns focus from property to staff

By Duncan Robinson

For a long time in the pub industry, the property market came before pubs. Whoever was running the pub – and how well they were doing it – did not matter. “In the past, you used to churn the tenants,” says Stephen Billingham, executive chairman of Punch Taverns, which has 4,000 pubs across the UK. “If they failed, you brought in somebody new.”But Punch has changed, says Mr Billingham. “Now we want to cut down the churn. We want to train and support them in the early days. We don’t want good pubs failing, then having to let them again. We’re dependent on these guys and girls running pubs well.”

Punch is not alone. Across the industry, companies ranging from Enterprise Inns to Marston’s to Spirit Pub Co are taking a much more hands-on approach to dealing with leased pubs.

The sales growth of managed pubs is outstripping that of tenanted pubs. While managed pubs grew by an average 4.2 per cent on a like-for-like basis in the year to date, pubs in the tenanted sector endured flat or sluggish growth, according to Numis.

Managed pubs have grown, focusing on offering better food and benefiting from centralised costs. Meanwhile, tenanted pubs, which tend to be “wet-led” boozers, have struggled to cope with rising costs and changing drinking habits.

The decision to become more involved in the day-to-day running of pubs is a volte face for some in the industry. Critics say that the larger companies in the sector, such as Enterprise and Punch, did not pay enough attention to the operations of their pubs in the 1990s and 2000s.

“They were effectively property companies, finding the pubs that had the best return,” explains one analyst.

There is still scepticism across the industry over whether the larger performers have truly changed their ways.

Offering benefits such as reduced satellite television and extra training is all well and good, but unless the price of tied products and rent are set at a fair rate then a pub business has little chance of making a fair profit in an ever more competitive market

– Mike Benner, Camra chief executive

The industry still has some convincing to do, admits the head of one large pubco. “A handful of campaigners [for publicans] wouldn’t dream of taking the devil’s shilling,” he says.

Pubcos have come bearing gifts, ranging from discount Sky Sports subscriptions to cut-price WiFi. They have also introduced suggested menus and pricing, along with recommended suppliers. On top of this, some are providing tenants with more training.

While cheap sport and savvier menus help, pubcos should go further than dishing out trinkets to ease the pressure on individual landlords and reduce rents as well as the cost of beer, says Greg Johnson, an analyst at Shore Capital.

“The mark-up that the [pubcos] make overall shows that [their] total income is still too high for the long-term viability of the industry,” he says. Some 7,000 pubs have gone out of business since 2007.

Mike Benner, chief executive of Camra, the drinkers’ rights group, broadly agrees. “Offering benefits such as reduced satellite television and extra training is all well and good, but unless the price of tied products and rent are set at a fair rate then a pub business has little chance of making a fair profit in an ever more competitive market.”

 

The relationship between tenants and pubcos has come under scrutiny again, after the Department for Business, Innovation and Skills launched a consultation into whether to introduce a statutory code of conduct covering the relationship between pubcos and tenants.

It touched a nerve. The consultation’s publication was due in autumn, but has been delayed as civil servants hack through the 8,000 responses they received.

The industry says that legislation is not needed.

Young’s toasts 10% leap in earnings

Pub company Young & Co’s benefited from London’s booming pub market, posting a 10 per cent jump in pre-tax profits as drinkers flocked to its beer gardens during the warm summer, writes Duncan Robinson.

Drinking in the capital has been relatively resilient throughout the downturn. While punters are drinking less, they are opting for stronger, premium beers when they do.

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“There is a huge amount of help available to those who want to take advantage,” says Ted Tuppen, the outgoing chief executive of Enterprise Inns. Enterprise, which has 5,500 pubs across the UK, has taken a direct role in the running of 185 of its pubs.

Other pubcos such as Marston’s have opted for a franchise model. Under this deal, licensees earn about 20 per cent of the pub’s turnover. There is no rent to be paid and Marston’s supplies food and drink directly, allowing the pubco to buy in bulk to keep costs low.

It also keeps the cost of entry low. Marston’s licensees have to pay a deposit of about £5,000 to take on a pub.

Converting pubs to franchises has resulted in a sales fillip for Marston’s. Profits in its franchised pub division have risen 10 per cent from 2009, despite the downturn.

Ralph Findlay, chief executive of Marston’s, says: “Licensees find it difficult to compete with managed operators. Consumer expectations are being raised, but most of that is from the managed sector. Too many tenanted pubs lack appeal to consumers.”

Spirit, which has 1,200 managed and tenanted pubs across the UK, has dabbled with a similar model. “What we’re describing is on the way to franchising: ‘Here is a menu, here are the ingredients, here are the sources and here is the [recommended retail price]’,” Mike Tye, Spirit’s chief executive, recently told the Financial Times. “We are taking a greater influence, but the final decision is the licensee’s.”