What the multiples think

One key relationship in the pub sector is the one between pubcos and their multiple tenants. The PMA Team looks at the results of a Morning Advertiser survey of 24 multiple companies

To recast an unusable phrase: opinions are a bit like bellybuttons — everyone's got one. No surprise, then, that our survey of multiple tenants found views on the relationship between multiple tenants and their landlords ranged quite widely (see pages 39 to 45).

For my money, though, the multiple managed companies are a very useful barometer in a number of ways. They often tenant across a number of companies so can compare and contrast them. They are top-end decile tenants by dint of having expanded organically and based on trading success.

So, their trading problems can't ordinarily be blamed on a lack of professionalism. They also tend to be fairly stable — our MA150 club of multiple operators show much more durability than the more general pubco tenant population. Their existence proves one much-vaunted strength of the tied model: it's a cheap point of entry. And their expansion to multiple pubco sites reinforces the point.

There are numerous current examples I know of managed multiples earning spectacular returns on their pub company sites, even in the current recessionary times. Nevertheless, they undergo a perilous journey where they need to make multiple internal adaptations to navigate the stormy seas of growth. Their strength lies in the application of superior retailing skills, which means, if all goes well, they create the out-performance required to produce the profit needed to service their bigger cost bases. And here's the rub.

The tied model doesn't allow them any economies of scale so the costs of running larger estates have to be met from whatever fat they produce on a site-by-site basis.

One bad opening can threaten company extinction, especially in the early days.

This means that for most companies expansion beyond a certain point tends to move away from the pub property held within the leased and tenanted battalions, using the cash flow from their early tenanted pubco sites to expand into free-of-tie venues and, where possible, the

odd freehold.

The relationship between the pubcos and their multiple tenants has been under particular stress in the past 18 months for all the obvious reasons. Multiples of all sizes have found wave after wave of additional costs undermining the bottom end of their tied estates, threatening the viability of the entire company in a number

of cases.

Some of these have had to explain to their pubco landlord that they need help to evolve through the current market challenges. Our survey shows that the pub companies have indeed responded in very many cases. That's not to say there aren't many other frustrations and four companies of the 24 we spoke to were so disaffected that they felt they could only comment behind the veil of anonymity.

Others felt that the pub companies still needed to respond in a more timely, less bureaucratic fashion to the issues they raise. There seems to be particular recognition for the speed and flexibility of Punch's response to market conditions.

Not surprisingly, the bugbear of excessive dilapidations bills on exit from sites was mentioned — a phenomenon that might be called "cheap entry, expensive exit". Some respondents also reported that they occupied sites where there was clear over-renting and there was an unfair division of the spoils. Others have found that tenanted pub companies have moved to rebalance the equation.

The Morning Advertiser has been making efforts to chart the universe of multiple lessees — a club we set up two years ago for them moves to 200 members next year. One notable feature is the tremendous loyalty that companies feel towards a particular landlord in the early years; their early sites tend to cluster within a particular pubco estate. But there is also a real danger of the relationship souring in later years.

Multiples start to resent their inability to get a better deal across a number of sites. They also run the risk of having their ambitions get the better of them by signing up to run additional pubco sites that just aren't suitable for them, often egged on by an over-eager business development manager. The more mature multiples have quite a bit in common with their pubco landlords in that they have had to accept that a swathe of their sites no longer fit the model. It's worth also reflecting on the underlying strength of this group.

The note-worthy administrations that have occurred from within the Morning Advertiser membership — Regent Inns and Suburban Style Bar — can't be pinned on the door of the tenanted model. (Regent has too many onerous leases from gung-ho expansion days and Suburban was entirely freehold.)

One of the big stories in this sub-sector this year is that a large number of multiple tenants have been able to show the operational strength to persuade their banks to finance the purchase of freeholds from their pubco landlords. They share this underlying strength with certain regional brewers, which have had a bit longer to perfect their business model.