MA Feature - Challenges for pubs in 2007
At a recent BII-sponsored Tied Trade Forum I was asked to present my thoughts on how the relationship between tenant and pubco could be improved.
This seems to have coincided with much conversation on the matter within the industry.
The BII is examining the Codes of Practice of the major and not-so-major pubcos - and no meeting at the ALMR is complete without the topic being well and truly aired.
The title of my talk was Tenants are from Mars; Pubcos are from Venus - as it really does seem that we inhabit different planets at times.
From the tenant's point of view, it is certainly the case that it is better to know the truth as early in the relationship with the pubco as possible.
But even then, the reality is often somewhat different to the words in the Codes of Practice.
The general view of operators is that the public words of the chief executives do not translate entirely into action at pub level.
The table below gives examples of the two worlds colliding.
No-one on either side of the divide would deny that all leases/tenancies work overwhelmingly in favour of the pubco.
Why shouldn't we have transparency? Rather than feeling defensive, the pubcos should feel proud to be open and honest about the sources of their income
The the rights of the pubco are enshrined in a legal document and enforceable in law, so many protections exist to protect the pubco.
Why then, given this position of strength, do they engage in various techniques, which suggest that they need to add even more to this tilted playing field?
A non-exhaustive list of factors which don't exactly add to harmony of the relationship include the following:1) Why is there such mystery surrounding the workings of rent reviews?2) Why do some pubcos pretend that AWP income is shared 50:50 when it is obvious the tenant only gets about 22% of the income, if AWP income is taken in at the revenue line?3) Why are some allowable expenses, such as tenants' capital, "forgotten" by some pubcos in the rent review process?4) Why do tenants never receive a straight answer on whether the pubco insures/self insures and is/is not willing to accept a competing lower-premium offer?5) Why is it so difficult to have sight of pubcos' insurance details when most pubcos demand to see tenants insurance cover?6) Why do pubcos guard so secretly the beer discounts they receive?7) Why do BDMs behave so differently on the street from the "reasonable" and "fair" proclamations of many of the pubco CEOs?8) Why do some pubcos abhor the concept of a tenant selling his/her business for a good premium?9) Why is there such obfuscation by pubcos on the subject of dilapidations and the concept of "put and keep" in a lease?
Some of the pubcos are now major companies - some are now amongst the largest companies in this country. Many now boast annual cash-flows running into hundreds of millions of pounds.
Perhaps we could now expect better industry leadership to be shown by them. Perhaps the time has come for them to begin to feel less threatened and defensive with their customers.
Perhaps now they could lift their aspirations to become true business partners and business-builders, rather than just policemen?
WHAT THE PUBCOS SAY - AND WHAT THEY MEAN
What they say publicly
What they mean (actual quotes)
We want our tenants to pay fair rents
"My target for this year is to increase my rent income by 8%; I have to do it or I won't get my bonus" - BDM of a pubco
We want our tenants to be successful
"If they have a good living we are not getting enough out of them. Tenants are not supposed to make money" - tenanted pubco managing director
We want our tenants to enjoy a good standard of living
"We will rentalise success, because we can" - pubco BDM
We want there to be a good market in our leases
"The only grief we have is from assignments. It would be much better if they were at nil premium. If a new tenant pays a premium, he or she has less to build the business" - two pubcos' managing directors
We have a code of practice for our rent reviews so that they are fair
"The more "mug" punters, the more we get. If they can't analyse our rent model, it isn't for us to do it for them" - pubco BDD
The role of the BDM is clearly crucial. As the daily ambassador of the pubcos, it is remarkable how poorly-prepared and trained many BDMs appear to be.
Perhaps the confusion at pub level is caused by the fact that tenants read the latest corporate initiatives and "good news" of the pubcos in the trade press, usually quoting CEOs or corporate affairs departments, but are faced with a wholly different experience at pub level from their BDMs - if they see them at all.
Some firms only use their BDMs as cash collection officers. It is amazing how many BDMs have no knowledge of how their own rent model works.
The quality, experience and training of BDMs needs to improve dramatically.
It is, therefore, an enormous pity that one of the largest pubcos is not putting a single candidate forward for the ALMR BDM of the Year Award this year.
Now that shows real commitment to the pubco model.
On the other side of the equation, tenants' foibles can probably be summarised in two ways - some are not good enough and some buy out of the tie.
Both can be rectified by the pubco.
Genuinely working with tenants and lessees should lead to stronger businesses all round. A tenant's business will be stronger if a full understanding of the pubco model is made available publicly.
Take the example of the life-insurance industry (one with a very smelly reputation 10 years ago) - whenever a salesman sells a product, there is a legal requirement for a full breakdown of the benefits the salesman and his company derives from the product.
Why should we not have a similar level of transparency in the pub industry? Rather than feeling defensive (and I do believe that some of the behaviour of the pubcos and their BDMs is born out of defensive concerns) the pubcos should feel proud to be open and honest about the sources of their income.
If they get £200 per barrel discount from the brewer and pass on £50, why not say so? If they receive retrospective income on their insurance policies, why not say so?
If they get a big kick-back on AWP income, why not say so? Such visibility, including the cost of capital and its benefits to tenants, need not be hidden.
My hunch is that within five years, much of this will have become commonplace. The more we talk about it now, the sooner it will arrive and the more the pubco model will produce benefits for tenants, lessees and pubcos.
All the pubcos I meet tell me how difficult it is for them to find good new tenants.
Perhaps if they embrace transparency with genuine commitment, they will attract a new generation to the sector, while improving relations with existing tenants and lessees, thereby improving the business for everyone.
Peter Linacre is managing director of Massive, the London-based pub group.
