Punch's vision of the future

Roger Whiteside was telling a packed audience last week, at the Morning Advertiser's Tenanted Pub Summit, that he's been travelling the country visiting pubs "with protection".

It was a throwaway line, but hints at the feverish debate that's now taking place over how the pubco-tenant relationship will develop to placate critics in quite high places and behind the company's own bars.

Something has fundamentally changed, with pub tenants now feeling that they can and should hold their companies to account. One pubco chief reports that relations with his tenants are becoming positively "wearing" as tenants agitate.

To be fair, Whiteside has been aware that Punch needs to change the way it does business from the day he joined six months ago — his brief was to create a new level of trust and transparency. He's been working pretty hard to get a grip on the key issues, with the Business & Enterprise Committee report turbo-charging the need for urgency.

On Monday, Whiteside was ready to brief the trade press on the key areas of change that Punch sees directly ahead.

First of all is the machine tie. Two committees of MPs have now told the tenanted pub companies that the tie can't be justified. The tenanted pubcos will be loathe to give up the money they earn out of the machine tie — £25m per annum in Punch's case.

But a major concession on income division is the least that will be needed. Punch believes the machine tie is justified because its scale ensures tenants get the best machines, serviced and changed in the most regular fashion. However, Punch will give up two types of income streams it receives from machines at a cost of £2m per annum.

First of all, Punch is promising to stop rentalising machine income. But here comes the first reality check. Punch plans to do this for new agreements, as and when rent reviews take place. All in all then, it will take the best part of five years before it applies to the entire estate. Part of the problem is that adjusting rents downwards by removing the machine takings rentalisation element would take a team of bean-counters months to do in one fell swoop.

The second income source that Punch will give up is what can only be called machine rent profiteering. Put simply, Punch, like Enterprise, has been charging machine suppliers a royalty per machine per week to gain access to the estate.

This royalty appears within the rent that licensees pay for their machines, an over-large chunk of which is actually slipping into the back pocket of the pubco. What will go is the gap between what tenants pay now in rent and the proper free-market rate for the same machines.

Whiteside stresses that Punch feels it should be able to earn income that accrues from its scale in being a customer for large numbers of AWP machines — not unlike the discounts it earns from being a large customer for beer suppliers. This area is likely to be fraught, with tenants, anti-pubco pressure groups and others pressing for more and sooner.

One major difficulty is that Punch and other tenanted companies are on the back foot on this one, having been caught bang-to-rights in relation to over-earning out of machines. Punch will be hoping that the new, larger-stake machines may take the edge off its financial pain here, but its figures on the precise cost of this seem little more than an educated guess at the moment.

culture of change​

Elsewhere, Punch has stopped selling pubs with restrictive covenants as of this week. It's backing a low-cost rent review dispute service organised through the auspices of the BII. Whiteside will push for this body to cover other areas of dispute in the longer term.

Tenants will be given the chance to seek cheaper insurance premiums than obtained by Punch, with the difference paid back to them. Whiteside says he's not come across a better rent-setting formula than "fair maintable trade". But he concedes that there's work to do making this "transparent and understood" — he reports that he's not opposed to the setting up of a fully-accessible rent register to allow tenants to understand the rental tone within the trading areas.

He is also keen on setting up official accreditation for the transparency of the process of rent setting. And there's a brand new agreement in the locker that will aim to incentivise growth, although this is unlikely to appear until 2010. A Punch business development manager was in touch this week to tell this magazine about how aggressive the rent-setting targets were at Punch a few years back, and how BDMs were incentivised to churn a set number of pubs each year.

Whiteside assures me that he is determined to engineer a culture change in line with the spirit of Bec throughout the company. There's no doubt this starts at the top, but the way tenants are treated on the ground will be the proof of the pudding.