OPINION: Is the franchise pub model the new route to expansion?

The franchised or managed operator model was hardly ever mentioned and only operated by a handful of specialist operators such as Amber Taverns, Bravo Inns and Nectar Taverns.

Now we have something like 4,000 pubs operated on this model, which has been embraced by all the major pub companies.

So, what is the attraction? Why have we seen this seismic shift and what does it tell us about the current state of the pub property market?

The managed operator model in essence follows a similar format from company to company. The owner retains the income from the operation and covers the majority of the overheads and the operator pays all staff costs in return for a fixed percentage of turnover and the balance representing their profit or renumeration.

Economies of scale

The franchise model has the advantage of benefiting from the economies of scale and buying power of a managed house and cost control of a tenanted pub. This model was first rolled out in wet-led operations where pricing had to be competitive in the local market but has now extended far beyond this.

The rise of this model has been fuelled from either single new-site acquisition or from the bigger pubcos converting pubs from their tenanted estate or the bottom end of their managed estates as and when the opportunity arose. 

To date, there has been limited M&A activity within the pub sector quite simply because there hasn’t been any need for operators to go down this route to continue on the expansion trail. The only notable exception being the acquisition of Bravo Inns by Hawthorn Leisure back in 2019, which it used as a springboard for expansion. This, in turn, has been continued by Admiral Taverns following its acquisition of Hawthorn back in 2021.

As the bigger pubcos work through their estates, it will be interesting to see whether they eye the wider M&A market for opportunities.

Activity begins to gain some pace

Amber Taverns is currently rumoured to be doing the rounds and hitherto this kind of opportunity would have almost exclusively been of interest to private equity looking to continue the model of expansion through single-site acquisition. Whether trade buyers are ready for this type of route to expansion remains to be seen.

Activity across the property sector is beginning to gain some pace albeit of soft comparatives from last year. Year to date, our own statistics are showing inspections up 16%, viewings up 12%, offers up 12% and exchanges up 18%.  

We are also seeing increased activity in the M&A market helped by the expectation of decreasing interest rates, inflation falling and consumer confidence picking up.

Pricing remains key and there is still a gap between buyers and sellers expectations, however, with more buyers back in the market and the fundamentals showing signs of moving in the right direction, there are signs the market is begging to move again.