Just how bad is it out there?

A leading City analyst emailed me this week to claim that analysis of the pub sector has become far too black and white, with managed companies business models equated with "good" while tenanted and leased is blithely dismissed as "bad".

He comments: "Everyone knows times are tough and tenants' profits are falling, but standards of analysis being applied to different parts of the industry are entirely selective."

Life in the managed sector is far from being a bed of roses. JD Wetherspoon has a fairly urgent debt-refinancing to negotiate while needing to boost sales by 3% to generate £17m of additional gross profit to avoid a 30% drop in profits before tax. Likewise at Mitchells & Butlers, the company needs to boost sales by 3% to stand still in profit terms.

The unnamed analyst notes that several other analysts have revised their price target upwards on Enterprise Inns. "All it proves is that their interpretations of the impact of the slowdown were far too aggressive," he argues.

Yet I'm hearing concern about the tenanted sector's business model from fresh quarters. A pub company boss told me at our awards last Thursday that he could not see how a tenanted major pub company could "square the circle".

A leading sector service provider, privy to a good deal of financial information on tenant profitability, has some very worrying statistics.

The boss of a well-known tenanted operator admits the industry is facing fundamental structural problems. A second boss of a well-known pubco admits tenant income is down by around 5% this year. And a blogger, somebody who can be regarded as pretty fair, has some depressing information about the level of churn at a well-known tenanted pubco.

A major property agent reports queues of would-be tenants dwindling — his firm has been enlisted to recruit good tenants. He claims the split on machine income between tenant and pubco is just not fair, with pubcos earning around 75% of total income — an obvious Achilles heel in the context of the current Business & Enterprise Committee review.

Analyst Jamie Rollo, of Morgan Stanley, reports that a privately-owned pubco has had to re-base rents of a number of pubs bought from a larger pubco — an indication of a degree of over-renting. "Through the next 12 to 18 months, it will become clear whether the downturn is due to the ban and the weaker economy, or the beginning of an unravelling of the business model itself," says Rollo.

Toxic leases​

Earlier this year, the phrase "toxic lease" entered the sector's lexicon when a series of high-street managed companies went into administration. The problem stemmed from situations where operators found themselves suffering reduced sales, increasing costs and rental obligations that climbed steadily, often on an annually indexed basis.

The net result over time had been an inexorable profit squeeze. For some tenants, the current climate will be having exactly the same outcome.

But there is one major difference: in the case of the tenanted sector, the interests of pubco and tenant are aligned. If tenants suffer declining beer income, tenanted pubcos suffer reduced income as well. Although tenanted pubcos are compared pejoratively to out-and-out commercial property owners, they're not. That's why Admiral Taverns has moved this week to absorb the latest round of price increases and why Punch Taverns has launched Bar Top.

There's a raft of things tenanted pubcos can do to help struggling tenants trade through current difficulties, although many of them involve ceding a bit more of the profit pie.

The $64,000 question is: how much of the profit pie they will refuse to cede and for how long. Industry gossip suggests that at least one major quoted tenanted pub company is preparing one other obvious solution to its problems — a purging of its bottom-end boozers.

Good news from Greene King tenant​

Greene King's tenanted division has been having more than its fair share of bad luck with fire. First, its busiest pub, Camden's Hawley Arms went up in smoke, then another corker, D'arry's in Cambridge, was closed for months by a bad fire. News reaches us that D'arry's will re-open on 4 November with tenant Chris Gerard, the former Mitchells & Butlers executive who oversaw Vintage Inns, planning to truly rise from the ashes with as many as 10 boutique hotel rooms developed for opening in late spring 2009.

Manchester Oceana planned for 2009​

Looks as if Manchester has joined the hit-list for an opening of Luminar's Oceana mega-club. The company owns the lease on 35,000sq ft site on Peter Street, and will open an Oceana nightclub there in 2009. Luminar currently operates 13 Oceana-branded nightclubs in the UK, offering five bars and two nightclubs at each venue.

Themed bars at other Oceana clubs include First Port, Villa Tahiti, Aspen Ski Lodge, New York Disco and Parisian Boudoir.

Jokers are suggesting the Leeds venue, offering drinks for less than £1 one night a week, should have an area called "Supermarket Sweep".