Pubco power in the balance

There's no doubt that a profound shock is reverberating around the tenanted sector. Michael Turner, the urbane chairman of Fuller's and boss of the British Beer & Pub Association, provided real insight last week on just how much is at stake now for all those who operate tenanted pubs.

The Fuller's boss was, as always, a study in carefully chosen words and diplomacy. But there was no missing the message. MPs began with a limited look at whether recommendations of 2004's Trade & Industry Select Committee had been implemented. The final report turned out to be a devastating attack on the two major pubcos, in particular, that also holds the prospect of a fundamental weakening of the tie, the time-honoured relationship that is the cornerstone of family brewers' business model.

Turner's words need to be seen in the context of the very early reactions of the big pubcos, which, in some cases, were intemperate. Turner said "everybody" within the tenanted sector had to come on board as the formal response to the "very widespread criticism" of the Bec report is framed. He went further in reproaching anyone who thinks that the criticisms can simply be faced down. "Public rhetoric is not going to do it," he said.

Turner also reflected on how the intervention of Government in the form of the Beer Orders destroyed the British brewing industry at the time. Beer Orders had also allowed the "creation of some of the landlords people are now complaining about".

It's important to remember historical context before anyone criticises Punch and Enterprise: the smoking ban, the increasing regulatory burden, off-trade pricing have all played their part in undermining pubs in the tenanted sector. And where bottom-line pressure is being felt by pubs within Punch and Enterprise, the two operators are stumping up a lot of financial support (the alternative, of course, is hundreds and hundreds more closed pubs).

Flexible mechanism​

Turner pointed out that the tie is a very flexible mechanism and ultimately those who do not operate it sympathetically enough will find themselves "gradually losing their tenants".

There is in fact a surprising amount of consensus out there on what has gone wrong. When you talk to other tenanted bosses off the record they are critical about the degree to which Punch and Enterprise have been hitting a number of earnings levers too hard. (One multiple operator I spoke to last week was remarkably philosophical about this: "Let's face it, if you had this kind of power, you'd use it.")

With estates' trading profiles predominantly based on beer income and volumes in decline, an earnings crunch for large numbers of tenants was inevitable. Let's not forget that JD Wetherspoon, a first-class retailer growing sales year after year, has done well to defend earnings per pub over the last eight years as fresh rounds of costs have swept in.

The average pub tenant will, similarly, have done well to defend profits yet the pubcos have been in growth — it's very hard to square this circle even taking into account churn and, in Punch's case, the migration of managed pubs to its tenanted division.

A consensus has arisen now around machine earnings in particular. The two tenanted pubcos have been taking more than their fair share, earning out of machine royalties and rentalising tenants' earnings as well. It seems a more equitable share of machine income is the very least that will need to be offered up to stave off a formal inquiry that could take up to two years.

How, or indeed whether, this is applied to the pubco battalions is likely to be a sizeable sticking point.

Elsewhere, many of the recommendations of the Bec report are quite helpful if pubco/tenant fractiousness is to be finally put to an end — a low-cost rent dispute resolution service overseen by the BII, for example.

Punch's new tenanted division boss Roger Whiteside has a brief to change the relationship with tenants fundamentally. There are few details yet but I would expect Whiteside, in the near future, to come up with some pretty radical stuff on insurance, transparency in agreements and discounts for out-performers.

At Punch, there seems to be a growing recognition that better terms and more transparency can become an actual point of difference. Mood music at Enterprise, a less-than-willing confessor to faults in the past, is softening already. Tuppen went as far as suggesting last week that it would be willing to stump up a pot of cash to fund a tenants' trade body. It's a stark contrast to Enterprise's decision to quit the Association of Licensed Multiple Retailers in high dudgeon last December when the trade body had the temerity to criticise its business model.

Potential new beginnings in pubco/tenant relationships engendered by the Bec report hold the promise of tremendous wins for Punch, Enterprise and others in the sector.