Can the pub trade be franchised?

As an industry we're stuck. Stuck with nowhere to go - and no-one to pay the bills. The pub trade is the hospitality industry's very own Icarus. Over-excited by the heady days of massive packaged pub deals funded on securitised debt, in its own way it flew too close to the sun and crashed into the sea.

So where do we go from here? Over the next three weeks I will be looking at potential solutions to the pub industry's problems. Ways in which we can inject more cash into the trade, ways we can attract new customers, finally arriving at my view of where this industry needs to head in the coming years from a retail perspective.Can we franchise?

Last week I went to a pub. A lovely pub. In fact, a gorgeous country pub. Positioned in the middle of a village, with great links to surrounding villages and towns, it attracts huge numbers of customers drawn to its fantastic food, great beer garden, excellent cask ale and fabulous wines. Its footfall is high. This pub has everything going for it.

But it barely struggles to break even. Why? Because the rent it is charged by the very well-known super-regional pubco it leases from is punitively high.

This, more than any of the stories about Punch Taverns, Enterprise Inns, plummeting shares and alleged broken covenants, shows how the tenanted/leased model is broken. In theory it's a good model. It allows people who dream of running a great pub but who aren't flush with large amounts of cash to come in and run their own pub.

But the failure of pub companies to heed the warning signs of societal and legislative change, coupled with tumbling lager sales, has ripped the soul from the model - through greed.

And now they need too much money from tenants to make ends meet. All this has created is a band of demotivated tenants. When some pub companies charge rent as high as 30 per cent of turnover, tenants rightly ask "what is the bloody point of busting a gut only to have so much taken away from me"?What's next?

One word that has been bandied about is franchise. Some of the most successful high-street food retailers have based their success on franchises and now pub operators are, certainly behind the scenes, asking if this model could be applied to pubs.

It works because it attracts strong entrepreneurial types into a business and, very importantly, gives franchisees a higher return on their investment.

Subway, Domino's Pizza and even McDonald's have attracted young, ambitious and successful entrepreneurs into their businesses with the lure of franchises. And whereas in the pub industry the pub companies will take home more of the turnover than the tenant, in these franchise agreements the situation is completely reversed.

Before any of the noisy minority who have been demonstrating at pubco headquarters recently gets too excited - there is a price for this: according to Domino's pizza, a franchisee would need £240,000 at least to get their own outlet (and would have to fund about a third of that themselves).

The second issue is that you get any element of product and brand control taken away from you.

You are tied on everything: food, drink, right down to the clothes you wear. It is as tightly controlled - in fact, more so - than any managed pub model.

In many ways franchising goes against everything the British pub stands for: individuality, character and community. The traditional British pub is something that is very hard to brand. Greene King tried it by emphasising 'Greene King' branding on local pub signs. Sadly, it didn't quite hit the mark.

But how about taking the most attractive part of franchising - the high level of return for those running the outlets and make use of that? Perhaps pubcos simply need to change the terms - take less away from the tenant and give them more incentive to make money.

One former senior pub executive put it to me recently that this would be highly desirable, but that the pubcos would have to agree "to take a haircut for a year". In other words, deal with a fall in income but come out the other side with a more stable industry - which is far more attractive to entrepreneurs. We both agreed slightly gloomily that this simply would never happen. Not when you have sold your soul to the City.

Another issue the franchise model would have in the pub trade is scale. As suggested earlier, one of the key drivers of the popularity of franchises is how much franchisees get from the deal. Therefore, the brand owner is going to need a high number of outlets to make any money.

In fact, according to Andy Emmerson, business development director at Domino's Pizza, a company would need 400 to 500 outlets straight away.

So the straight franchise model is probably not going to work.

Inject more cash

What about ways of injecting some cash into the industry by attracting already successful franchise companies? In other words, leasing off part of a pub property for use by one of the big franchise fast-food companies.

It is not an idea dreamt up by yours truly. The Publican has it on very good authority that before the financial crisis blew up Punch Taverns very nearly struck a deal with Subway to lease parts of their pubs to the sandwich chain. And there are pub companies such as Fuller's which lease their kitchens out to specialist food restaurateurs.

Many licensees do not fully utilise all their space in outlets; some don't make full use of their kitchens; others want to be a wet-led pub but could do with food income.

Leasing anything up to a third of the space in your pub to a franchise could work wonders.

Plus, the big companies are interested, not least Domino's Pizza. The chain has recently been in the news after picking up several closed pubs from property developers and turning them into outlets for some of their new franchisees. And Emmerson says there is real potential for these "part-leases". He says: "Would we take on part of a site? If we could find a site that was right for us we would do that in a heartbeat."

It is a strange concept - getting into bed with the enemy. No doubt for some months your BDMs have been telling you that it is not rival pubs but coffee shops and fast-food outlets that are taking your custom. So why on earth would you want to go into business with them?

But perhaps trying to buy into some of that leisure pound is the smart way forward. You are never going to be able to operate like them. They run simple food-led operations. They do not have to be the heart of a community, knowledgeable on drinks categories and brands from across the world. So why not try and make some of their success your success too? n