Punch steps away from the cake

One persistent and justifiable complaint you hear from tenants of the pub companies is that success is rentalised over time.

Former Greene King Pub Partners boss David Elliott argued in the Morning Advertiser recently that there was an urgent need to ensure this does not happen.

The danger here is that good licensees and multiple operators become disillusioned because they don't get to keep the rewards of their out-performance — they get grabbed by the pubco over time at rent review. Then they leave the tenanted trade never to return — and warn others against joining it.

I can think of many examples of this. Just last week a multiple tenant — a top operator with a well-known pub company — was telling me his total earnings are around £8,000 a year, while the pub company earns £750,000 in rent and beer discounts across his sites.

It's obviously out of kilter. It's an example of what JD Wetherspoon founder Tim Martin calls the "superior forces" of the landlord tending to overwhelm the tenant over time.

The challenge for a pub company is one of self-restraint, to create a framework that provides tenants with the reassurance that the pubco landlord will not seek to rent success and the clear incentives that mean an above-average licensee sees the financial rewards that should flow from above-average performance.

Punch Taverns has this week unveiled its plan to ensure that it attracts and keeps the best quality licensees by creating a mechanism by which great performance produces great profit — for licensees. Put simply, those signing longer leases will pocket between £160 and £180 a barrel in discount for every barrel over and above fair maintainable trade (FMT).

So if a licensee takes on a pub with a FMT of 200 barrels, at the higher discount and rent level, but manages to sell 300 barrels, he earns £11,500 extra profit over and above what's currently on offer (£180 a barrel x 100 barrels minus £65 a barrel x 100 barrels currently available).

On the new 10-year lease, rent reviews are scrapped at the five-year mark to reassure licensees that the landlord won't seize your cake half-way through a 10-year term.

And there's an added bonus, an extra free cookie for licensees. The details are far from ironed out yet, but Punch wants to turn licensees free-of-tie on at least one microbrewed cask-ale product. Punch is also using its central purchasing power to offer licenses access to a buying club (some hosts may need to buy a computer because it's only accessible online).

All in all, it's sensible stuff based on the over-riding principles of helping licensees create sustainable businesses — and letting them keep a fair chunk of the extra business they create.