Thursday, 22 October 2009

The tie

The OFT has ruled that the pubco tie system does not harm competition in the sector. The ruling comes in response to an official complaint by CAMRA. The BBC has the story. You'll note that shares in Punch and Enterprise have rallied.

You'd be forgiven for assuming I of all people would be preoccupied with this issue - but to be honest I take a pretty robust view on the subject. Independent pub operators who are subject to a tie (like myself) can quantify the effect the arrangement has on their business by considering (a) the difference between free trade and tied product prices and how that effects their bottom line, (b) whether they think their rent would be higher or lower if they had a another commercial landlord that wasn't a pubco and (c) whether they'd have secured as promising a site if they'd excluded tied pubs from consideration.

Whether the tie actually distorts competition is questionable. I'm not sure it does, and suspect the OFT are right. Pubs leased from Punch and Enterprise are still independently operated small businesses - they aren't part of a chain or subject to any central direction. Any suggestion that an industry of free houses only would scupper the big brewers and allow access to market for smaller producers is utterly naive. The likes of ABInBev and SABMiller (and, for that matter, Fullers and Greene King) would still have access to huge marketing advantages and would use their clout to sign up all the newly freed publicans to tempting barrelage contracts.

13 comments:

  1. As you've remarked yourself, the PubCos are wakening up on choice, so to some extent at least, that fox has been shot. As for rents, that's a clear problem for some, but it is a complex issue.

    Can't disagree with a word of your conclusion about "an industry of free house" either. It's my view exactly.

    Overall though, some good has come out of it. PubCos are treading more carefully and thoughtfully and there will be more to come from the BEC that will force their hand further.

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  2. I agree with you and Tandleman on the freehouse dream...take a look at the Irish pub scene to see how uniformity thrives where most pubs are independently owned.

    Thought I'd get that in before Beer Nut does.

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  3. As an aside, I do think a serious issue with the tie is misselling. I suspect a lot of people signing up to take on a tied pub have no clue what they are doing.

    People fall into two camps, as they did with the endowment mortgage scandal. Either you think 'you knew the risks, or should've done if you'd read the small print' or 'the big players use marketing savvy to part some naive and gullible people from £15k'.

    I suspect a mixture of the two.

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  4. PubCos are treading more carefully and thoughtfully

    Indeed - and it's not just because of the focus on their activities by competition authorities and the media. You've also got to factor in the effect on their business model caused by falling property values. As the balance sheet looks less attractive, it's more important to focus on the income streams and make sure you're helping - not hindering - lessees in selling beer.

    Also, it's been said that pubcos were never too bothered about lessees going bust, as someone else would be sure to take the lease very quickly. That's far less likely, now that the difficulties publicans face have been so widely exposed - there are simply fewer mugs in the market.

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  5. “take a look at the Irish pub scene to see how uniformity thrives where most pubs are independently”

    Sadly also there is very little interest from publicans to serving anything other than Guinness/Bud/ Carlsberg

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  6. Jesusjohn, where have you come up with the figure of £15, out of interest? Pubcos don't charge premiums to new lessees - they just ask for a rent deposit (which might be more of less than that amount).

    If you take an existing lease on assignment from a previous owner, you'll almost certainly pay a premium to them for the fixtures and fittings and the goodwill in the business - and that could be hundreds of thousands, or a very small amount if the business was on its knees. That's got nothing to do with the pubco - they won't even necessarily know how much money changes hands when they consent to the assignment as superior landlord.

    The situation with tied pubs isn't in any way comparable to the endowment mortgage scandal - that really is unfair on the pubcos! There's no excuse for not reading a lease before you sign it. I can tell you that the standard form Punch lease is very clearly written.

    And finally, here's something to chew on: I doubt the average tied operator in London makes less money than those with free-of-tie leases. Untied leases over proper pubs are rare, and tend not to be in the best areas.

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  7. 'you'll almost certainly pay a premium to them for the fixtures and fittings and the goodwill in the business'

    I see I misunderstood - it is almost certainly this I was (mistakenly) referring to. And it makes sense. Why should a pubco sell a lease to a terrifically profitable pub without taking this stuff into account?

    'You've also got to factor in the effect on their business model caused by falling property values.'

    This is the single most important reason for the - I think - quite noticeable improvement in pubco pub beer lists over the last two years.

    That there are fewer mugs in the market will, I hope, mean more serious candidates. I think a lot of licensees are simply not up to it.

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  8. Why should a pubco sell a lease to a terrifically profitable pub without taking this stuff into account?

    I'm afraid you've misunderstood again. When you're talking about a leased pub - as opposed to the tenanted or managed model - the pubco does not own an pub business - the owner of the business (the operator) does. The pubco just owns the freehold interest in the property where the business operates. So the business is the operator's to sell, provided they can assign the lease (which is the key asset). Of course the pubco would have to consent to that assignment, but there are limited grounds on which they can withhold that consent.

    If a pub lease expires or is surrendered (which is what happens when an operator goes bust and wants to walk away), a fresh grant is made to a new operator. There normally wouldn't be any premium charged (although the pubco would want cash for F&F (if any) they might have taken from the previous lessee).

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  9. Ooh hi it's affects not effects and ebr?

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  10. I had a meeting with Enterprise a few months ago; I'm looking for an equitable deal, I said. You've come to wrong place, was the reply. I kid you not.

    The area director then went on to admit they, as a company, had been forced by their own business plan to 'take too much out the business' resulting in lower incomes for their tenents and a subsequent drop in the overall standard of publican as the best jump ship in favour of a business that will deliver a return for their efforts.

    A different experience than your's Jeff.

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  11. Fatman, I have no personal experience with Enterprise, but I find it hard to believe that one of their relationship managers would have said something like that!

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  12. It's still a fact (or it was the last time I wrote the Moaning Sadvertiser's guide to tenanted and leasehold pubs, three years ago) that taking on a tenanted or leasehold pub is the cheapest way to start up your own business: you can (or could) get four pubs for the price of one pizza restaurant franchise, and some people have done just that. That said, you have to have enough business nous to run it properly - and the old joke among pubcos when talking about whether or not someone was suitable to take on a tenancy used to be: "Is there breath on the mirror?" I'm sure things have got better, but it used to be a fact that as long as the tenant/leaseholder was paying the rent, many pubcos simply didn't care if the tenant/leaseholder's business was slowly spirally down the pan, as there was bound to be someone else along to take over the tenancy/leasehold. Fortunately, economic conditions have made this wasteful and cynical method of doing business a real danger to the pubco's bottom line: if you've securitised your rental income up to its oxters, you need that income to be coming in unfailingly.

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  13. "The likes of ABInBev and SABMiller (and, for that matter, Fullers and Greene King) would still have access to huge marketing advantages and would use their clout to sign up all the newly freed publicans to tempting barrelage contracts."

    But surely that would be preferable, in that:

    a) Any agreement to stock would be consensual as opposed to conditional

    b) The landlords would enjoy access to a less distorted market pricing

    Not an industry expert - just my thoughts.

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