Monday 24 February 2014

Carbonised Cookware...

The hospitality industry, and the pub sector in particular, is populated by "big personalities", none less than Tim Martin, founder and CEO of the ubiquitous JD Wetherspoon (JDW) chain of managed pubs. So when these captains of industry speak out their words are taken note of and afforded a level of respect concomitant with their standing. But we should be cautious about accepting all their promulgations without applying a critical eye. In the latest edition of the JDW "Wetherspoon News" Mr Martin attempts to analyse why so many pubs have closed their doors for the last time in the past decade.

“Who killed Cock Robin? I, said the sparrow, with my bow and arrow, I killed Cock Robin…” Unlike the sparrow, no one has stepped forward to accept blame for the killing of 10,000 pubs which have shut down in the last ten years – about 15% of the total number of pubs in the country. A large amount of blame can be attributed to the VAT inequality between pubs and supermarkets. Supermarkets pay no VAT on food sales, whereas pubs pay 20%, allowing supermarkets to subsidise their drinks prices with their massive ‘tax break’. Another huge factor relates to the business rates disparity between pubs and supermarkets. The average pub pays around 6% of its sales as rates. This amounts to about 15p a pint, believe it or not. Supermarket chain Morrisons’ chief executive, Dalton Philips, told the Financial Times (11 July 2013) that his company paid £240 million of business rates in the previous year. Morrisons’ accounts for the year in question (to February 2013) show sales of £18.116 billion. Supermarkets, therefore, appear to be paying rates somewhere in the region of 1.32% of their sales. So, a pint purchased in a supermarket for about £1.25 will have a business rates cost of roughly 1.65p. This analysis clearly demonstrates that each pint purchased in a pub has approximately nine times the level of business rates as a pint purchased in a supermarket. You don’t have to be Mark Carney, governor of the Bank of England, George Osborne or Ed Balls to work out the economic consequences of the disparity in VAT and rates between pubs and supermarkets."
Can't fault you there Tim, VAT and Business rates in their current incarnations undoubtedly disadvantage pubs compared to other retail businesses, for despite all the mythology surrounding our national watering holes, they are just that, retail businesses, it's just their stock in trade is food and alcohol and not other commodities. Jacques Borel has been campaigning, to mixed success, throughout the EU to bring VAT rates down for the hospitality industry citing the advantages of increased tax revenues, more employment and enhanced inward investment as the benefits to national exchequers. Unfortunately it seems the current occupant of No. 11 Downing Street has firmly set his face, and his administration's, against this much needed tonic for the British economy and hospitality industry, despite hard evidence from countries which have adopted this progressive tax regime. Perhaps it was too much to think reducing beer duty by a penny a pint and scrapping the beer duty escalator last year was a herald for a more sympathetic (one could say enlightened) approach to taxation for our benighted industry.

"However, there are a lot of other tax disparities in addition – for example, the coalition government increased taxes on fruit machines and introduced a ‘late-night levy’, taxes which apply only to pubs, further increasing their economic disadvantage. I doubt that the government or the treasury has malicious intentions towards pubs, but I strongly suspect that they haven’t thought through the financial consequences of their actions, a malaise which also afflicted the previous Labour government. No thoughtful or sensible economist, presented with this information, would deny the huge impact of the tax system on pub closures."
Again, not a lot to argue with there, when as I write we still endure the second highest level of alcohol duty in the EU.

"However, the situation is complex and there are indeed other factors, less important overall, which have contributed to the demise of so many pubs. The main additional reason for pub distress is the high level of debt assumed by some pub companies in the years running up to the credit crunch. Two of the main architects of the debt-fuelled pub boom were Guy Hands, formerly of Japanese bank Nomura, and Hugh Osmond, a financier who has been involved in substantial debt-raising exercises in respect of public companies. In essence, Hands and Osmond bought the large tenanted pub estates of the major brewers, using borrowed money, and then hiked up the rents and the beer prices paid by the tenants. As a result of the increased income which they generated, they were able, in effect, to remortgage the pubs, extracting tens of millions of pounds of ‘profit’ for themselves. The problem, in my opinion, is that the so-called ‘business model’ which they helped to pioneer was unsustainable – and thousands of tenants have gone to the wall – and thousands of pubs have closed. Not all pub closures were formerly tenancies, but very many were. After Hands, Osmond and their acolytes and imitators sold out, the majority of the pubs in the tenanted estates ended up with public companies called Enterprise Inns and Punch Taverns. They continued to buy pubs and increase debt (as well as continuing to increase rents and beer prices for tenants) right up until the credit crunch hit. When the individual licensees/tenants started to suffer between the hammer of high rents and beer prices and the anvil of the tax-subsidised supermarkets, unprecedented numbers of publicans went bankrupt – and the Enterprise and Punch shares plummeted on the stock market to a fraction of their former value."
Bang on the money, but let's not forget the infamous Giles Thorley who trousered a reported £35 millions from his time at the helm of the now sinking Punch Taverns.

"A depressing aspect of this sad chain of events has been the attitude of the former pub Titans to the plight of the tenants. Guy Hands and Hugh Osmond, joined recently by former Enterprise Inns’ boss Ted Tuppen, have said nothing at all about the tax disparity with supermarkets which weighs even more heavily on pubs than their own financial engineering. Yet they have been exceptionally vociferous in criticising high tax rates which apply to them personally. Guy Hands, in high dudgeon, removed himself some time ago to the tax haven of Jersey. Hugh Osmond and Ted Tuppen remain residents, but have been shouting from the rooftops at the injustice of the Labour Party’s proposal to increase the top rate from 45 to 50%. There is a justifiable argument for a reasonable top rate of tax which encourages hard work – Britain did not benefit from the Rolling Stones hiding from the taxman in the south of France in the 1970s. However, the disregard of the financial engineers for the plight of their tenants and their egocentric concentration on their own positions, dressed up as national concern, might even have caused Maggie Thatcher to side with Ed Balls.

 How true Tim, although I doubt the late (not)lamented Baroness would go as far as that, let's face it, it was under her administration the ill-conceived Beer Orders came into force, which paved the way for the likes of Hands, Osmond, Thorley, Tuppen et al (the agents and brokers of one of the biggest property bubbles in British business history).

What Tim neglects to mention are the societal changes, engineered by government, which have occurred over the last decade too, for instance the introduction of the ban on smoking in public places in 2007 which in spite of the health lobby's assurances that pubs would fill with non-smokers who had previously eschewed our smoke-filled pubs, must have been a significant factor in the closure of many "land-locked" pubs which simply couldn't provide outside facilities for smokers. And I would wager, there isn't a pub in the land which permitted smoking prior to the ban that hasn't seen a drop off in trade as smokers remain in the comfort of their own homes drinking cheap supermarket tinnies.

Tim also neglects to mention, not surprisingly, his own company's part has to play in the demise of many independent pub businesses throughout the land. Whilst one tries not to be a "poppy reaper" and lambast the entrepreneurial skill of self-made tycoons, it is somewhat disingenuous of Mr Martin to omit his own creation's contribution to the decline of the national pub estate. For, every time a new "Spoons" is announced independent pub landlords in the vicinity must shudder as the prospect of the lowest common denominator comes crashing into their local micro-markets. Many a publican will be able to tell you of the devastating effect a new JDW site has on their business as the "pile it high, sell it cheap" business model adopted by Tim Martin is the economic equivalent of a sink hole opening in the middle of their neighbourhood. 

Note to self, go to my local independent pub tonight (not usual on a Monday) and have a pint, for if we all did that even just once a week instead of drinking in managed chains (or quaffing on the sofa) we might help reverse the seemingly inexorable decline of the pub trade in this country.

Thursday 30 January 2014

Sauce for the goose...

Regular readers will know I have been somewhat silent from the blogosphere over the last couple of months and part of the reason is increased work elsewhere (on consultancy work and the How To Run A Pub website) and partly due to my increased frustration over the Government's seeming inability (or more likely) lack of political will to deal with the pubco/tenant relationship.

Even though there's a new parliamentary tradition, the annual January opposition debate on the pubcos now in its third year, and despite a staggering 9,000 submissions to its own consultation of regulation for the tenanted/leased pub industry (or as Vince Cable et al say because of it) no government response has been forthcoming.

Even the dullest of nuMPty must realise there is something fundamentally wrong with the current system when one reads of Greene King and its dealings with its pubs both let out and directly managed by themselves.

Former Greene King tenants Dominic McCartan and Tony Leonard, who have had enormous success runaway success at The Snowdrop in Lewes, a backstreet freehold acquired from Punch Taverns four years ago, publicly fell out with Greene King and surrendered the leases of their former Brighton pubs, The Hop Poles and The Eagle, after running them for 12 years, in March 2012, after Greene King refused all attempts to negotiate rents that had become unsupportable. 

Under their management, turnover at The Hop Poles rose from £2,000 a week when McCartan took it on in 1999, to an impressive £50,000 a week ending August 2008, making it the highest trading pub per square foot in the Greene King estate. At the time of leaving, rent at The Hop Poles had risen to over £79,000 (114% of divisible balance) plus 10% of turnover for free-of-tie on all but one Greene King product. This fixed rent plus the turnover rent amounted to 199.99% of divisible balance, the couple claimed. 

But in true cut their own nose off to spite their corporate face style, Greene King took the pubs back. Although I can't find any details relating to the current levels of trade at these pubs, I'd be happy to put a tenner down on them not trading at anywhere near those levels now. 

In stark contrast is Greene King's experience with The Golden Fleece in Queen Street in the City of London, trading under the Capital Pub Company banner, which has seen nil uplift in rent on review thanks to agent AG&G, who's director Anthony Alder says:
“Both Greene King and the owners knew that the venue was experiencing strong demand and buoyant trading, but that wasn’t enough on its own to justify an increase in the rent,” 
“We were able to prove that buildings with an A3 designation were not seeing any increase in value in that location, so there was no reason for an increase. This was accepted and the result was a nil uplift. Current market knowledge once again proved crucial.”

Which brings me back to the beginning, surely what's sauce for the goose should be sauce for the gander? A multi-billion pound company takes advantage of even it's most successful of tenants (who no doubt thought long and hard about walking away from 12 years hard graft as the rent being sought by their landlord was unsustainable) whilst bleating to its own landlord that good trading figures weren't enough to pay more rent... really, you couldn't make this shit up even if you had a Pullitzer on the mantelpiece. And Greene King wonder why they're lampooned and reviled in equal measure as "Greedy King" by many in the pub trade.

Vince... pull yer finger out and get the pubco mess sorted as the price of my medication has soared in the last few years and I'm now having a cost of sanity crisis!

Nurse... you know the drill!