No rent reviews, cheaper beer and a bigger chunk of the machine income — Badger Pubs director Matt Kearsey tells Ewan Turney about the new Hall & Woodhouse tenants' deal.
In an innovative move, Dorset brewer Hall & Woodhouse has scrapped all rent reviews across its 180 tenanted pubs, as part of a new agreement it's offering to re-balance its relationship with tenants.
By virtue of the fact that the news only generated two comments on the Morning Advertiser forum — where critics are highly vocal — this appears to be great news and a positive step in the right direction.
Hall & Woodhouse has acted decisively after undertaking a survey of tenants that revealed beer prices were too high, rents were too high and, as a result, tenants were not making enough money.
The answer? Change the agreements. Here's the new deal — rent is RPI linked, but there are no reviews; there's a full supply tie, but beer and other products are cheaper; plus tenants receive 67% of machine income and more support in the first year.
"Prices for utilities and beer have gone up and at the same time we have had the smoking ban and the recession," says Badger Pubs director Matt Kearsey. "The profit left for tenants was getting smaller and smaller, and if you are not careful you are just pushing people out — forcing them out of business and replacing them.
"You can't carry on doing that. The more profitable our tenants are, the more profitable it is for us in the long term — and there are fewer costs from business failures.
"If we want to attract the best people into the industry we have got to have the best profit opportunity for them.
"If that profit opportunity is not there then you are not going to attract the best people."
Rent rebasing
Kearsey hopes all pubs will switch over to the new deal within three years. Rents on new agreements are being rebased. "It is no good saying, well, that was the right rent five years ago, therefore it must be forever and a day, because the game has changed," he says.
"Taking the rent review out will remove a huge source of friction and increase the trust and flow of information," he adds.
Is the rent a 50/50 split of net profit? "Not always. It is on a case-by-case basis. We need to make sure there is enough profit for the tenant."
Critics rightly point out that tenants could still be swallowing a 15% rent increase over three years if RPI continues to rise at current levels. "We are going to have to keep an eye on that, obviously," says Kearsey. "At any time our business partners can challenge the rent under our code of conduct.
"The whole reason we introduced this is to not penalise success. We can't have rents that get ridiculously out of line with the profit opportunity of the pub.
"It's not in our interests to see good operators running the business effectively fail because some part of the deal is wrong. We are now calling tenants 'partners', but we realise you have to earn the right to be a partner and that is what we are aspiring towards.
"There is a lot of talk about partnership, but if this sector of the industry is to work, then we have all got to start behaving as partners.
"We are putting out a statement at the start of the deal saying — we want to build a long-term business partnership with you.
"We want you to be successful, we will be happy if you are successful and we recognise, in the long term, we will be successful, as well. It's not rocket science. It feels like the right thing to do."
The beer tie
Cheaper beer is also a key. Under the new agreement tenants will also be tied on wines, spirits and minerals, but these prices have been dropped too. Kearsey, who has had spells working within the Scottish & Newcastle and Greene King tenanted estates, believes the differential between the tied price of beer and the freetrade price has got out of hand.
"A lot of the heat about the tie over past few years, for me, has been less about the tie and more about the price. When I started 15 years ago, the price differential for buying beer from the freetrade and what you paid as a tied tenant was nowhere near as great as it is now.
"That's caused a lot of the emotion and heat in the argument. I always say it's not about the tie, it's about the share of the pie."
The machine tie has been a source of anger for tied tenants and lessees since the 2004 Trade & Industry Select Committee inquiry suggested it be removed.
Hall & Woodhouse has not gone that far, but has lowered the rents on the machines and increased the tenants take from 50% to 67%. "While we believe there is a benefit to having a machine tie, the benefit probably doesn't equate to 50% of the profits," explains Kearsey. "We were taking too much of the profit — without doubt."
Kearsey said the brewer thought long and hard about scrapping the machine tie, but genuinely believes that the company can provide better support and service of machines on behalf of tenants with a tie in place.
The scheme will ultimately be judged a success on a number of criteria. The aim is to eliminate first-year failures — bar exceptional circumstances — through increased area manager visits, support and open-book accounting.
"Our retention rate in the first year is more than 80%, but you don't rest on your laurels. Actually, the question is: why would two out of 10 fail in the first year?"
He also hopes the average tenure will increase. At the moment, more than a third of tenants have been with Hall & Woodhouse for more than three years, nearly a quarter have been in place for six years. "If someone moves out before the end of a three-year term, then we have to ask if we got the deal wrong."
Time for change
Unlike some who run tenanted pub estates, Kearsey views the recent pubco inquiries as a positive step. "It has been a trigger for change as has the recession — I think we have had five years' worth of change in the last year alone. The inquiry has brought arguments from both sides to the forefront. It's exciting that we are now in an era of change and it will be interesting to follow what others come up with."
As a regional brewer, Hall & Woodhouse is clearly committed to the tie. "We think it adds a point of difference. We only supply our cask ales to our own pubs. You won't get them anywhere else, apart from our managed or tenanted pubs."
And if the tie was to go? "We believe our products are good enough that our pubs would still want them."
Hall & Woodhouse is also drawing upon the experience of its 60-strong managed pub chain and funding a mystery-shopper programme for tenanted pubs.
It will be trialled in its top-end food pubs along with an independent customer satisfaction survey to provide feedback for tenants.
Kearsey sees this as the first stage in a new era for the company, which is also ploughing £5m into a new brewery. "We have to build the foundation first and that is getting the offer — our agreement — right, to attract the best people."
The next stage is to look at group utility deals and to perhaps introduce tailored expert advice and training using its managed house expertise, and exploring the idea of a food franchise agreement for tenants where it is required and wanted.
"The biggest challenge is and always has been finding the right people," says Kearsey. "We think we have an offer that will give us an advantage. We want our business to be the first port of call for everyone who wants to run a pub business in the south of England. I think the franchise people — the Dominoes and Subways — have really stolen a march on us."
Kearsey believes the industry as a whole has been poor in letting pubs to ill-suited candidates in the past for short-term gain.
"We use really prosaic language in our business," he says. "We talk about letting pubs and recruitment, but actually what we are doing when we give someone the keys to a pub is fulfilling their ambition and dreams.
"If you use that type of language, actually it makes you aware that you are guarding their ambitions and their dreams.