The trade press
and the multitude of online fora (or is it forums) have been quite exercised
this past week with the findings of an investment analyst's research and
opinions on the just closed government consultation into the pubco/tenant relationship.
I wasn't sure why
this piece of research and analysis has caused quite so much furore even though
it's authored by one of the architects of the current pubco business model, one
Nigel Parson, who now earns a living under the banner of Dryburgh Research. I
say "wasn't sure" about all the fuss until I began to dissect the
analysis and concomitant opinions expressed.
It didn't take me
long to realise why Parson has so upset the cyber-sphere of the pub trade as
the first sentence of the report goes like this:
"We are astonished at the
government’s intervention in business-to-business
negotiations that are freely entered into, with no
overt consumer angle"
I think thousands
of tied pubco tenants, their customers and CAMRA might disagree with this
astonishment and Parson's premise of "no overt consumer angle" ...
even thought the latter's super-complaint to the OFT failed, common sense
dictates if a tied tenant is paying on average 1.6% more in turnover for their
dry rent (property only rent) than their free of tie counterpart whilst paying
often twice or more for their beer under the tie then the consumer drinking in
a tied pub might just be disadvantaged by the pricing a tied tenant has to
achieve to make a profit compared to the bar prices of a free of tie operator.
The report goes
on to claim the government intends to "shift up to £234millions of
profit from landlords to tenants" with a range in benefit for tenants
of nil to the average of £4,250 and in some cases up to £9,750. This would be
great news for the 80% of tenants who earn less than £10,000 a year from their
pubs (according to the recent CAMRA survey carried out by respected pub
industry research company CGA Strategy).
My guess, from the dozens of calculations I have undertaken for pub clients
using the government's sample Rent Assessment format in the pubco consultation
is this may yet still prove to be a conservative estimate.
The report
bemoans the potential drop in profits before tax for companies most likely to
be affected by a 500 pub estate floor.... 65% for Punch, 41% for Enterprise,
18% Marstons, 9% Spirit, 8% Greene King. Surely these profit warnings alone,
especially for the first two companies is just proof of their rampant profiteering
and another justification for government intervention into the pub trade.
As the
consultation does not call for the abolition of the beer tie, rather a guest
beer provision, free of tie option (emphasis on the option) and open market
rent assessments I am somewhat bemused at Parson's assertion of these
consequences:
"we would expect them to go completely
free-of-tie, trigger rent review clauses, remove all SCORFA benefits, sell
hundreds of smaller pubs and convert to REITs"
Ignoring the
issue of REITs (Real Estate Investment Trusts), which bigger brains than mine
understand or care about, would a renewed equilibrium of risk and reward hoped
for by hard-pressed tied tenants really push the likes of Punch or Enterprise to go completely free-of-tie? Would tied tenants
really miss the benefits of the pubcos so-called "SCORFAs" if they
were withdrawn? Would hundreds of smaller pubs be sold off?
(See bottom of
article for a note on SCORFAs if you don't know what they are)
If the pubcos had
only moved somewhat on a "fair divisible profit" by passing some of
their gargantuan beer discounts on to tenants and set more realistic Fair
Maintainable Trade(FMT)/Rent Assessments then perhaps this whole
consultation would have never taken place. However, the pubcos continued to
gouge their respective tenants, relying on the transfer of tenant assets to the
pubcos through the mechanism of "churn" whilst claiming any protest
was from a minority of failed (read bad) publicans or vociferous malcontents.
Their corporate greed has undone them, the buying spree resulting from the exit
of brewers from the pub-owning property market as a result of the original Beer
Orders and the speculative bubble this fuelled has resulted in billions of
pounds of unsustainable debt, which, if applied to an SME such as pubs would
result in insolvency, but due to the vagaries of accounting has meant these
behemoths have continued to trade in their current "zombie"
state. (See graphic below courtesy of LifeLongLandLady)
More likely is the increase
of tenant discount to compensate for high rents, thus redressing the balance of
risk/reward giving the pubco the best of both worlds, high fixed dry rents and
lower variable wet rents (read the opposite for tenants). Not perfect but it
would be a step in the right direction and would go some way to justifying the
pubco mantra of "low cost entry" for their business model.
I believe the
most contentious of issues is the SCORFAs using the BIS impact assessment figures for the consultation these are valued in the
range of £1,500 per pub per annum, to the mid-point of £7,500 and in some cases
as much as £10,000. I think what scares the pubcos so much isn't the issue of
high rents and high beer prices being put under the microscope by the pubco
consultation, after all the figures relating to these tenant costs are well
within the public domain, it's the possibility they will have to clearly
identify and accurately quantify the benefit of SCORFA in the setting of rents.
Perhaps Tuppen and other gravy-train drivers have suddenly realised they cannot
justify the "added value" they bring to their respective
"partnerships". After all, I would say the average tenant (and I
daresay investor) would like to know exactly what benefit these handsomely
rewarded pubco executives and managers bring to the table.
As for selling
off hundreds of smaller pubs I'll keep it simple for you, the pubcos, the
estate agents and the government... BRING IT ON! Without the ever-expanding
belly of corporate pubco greed to feed I reckon many of these smaller pubs
would suddenly become viable. There are plenty of examples of ex-pubco pubs
(large and small) who have made a go of it once relinquished of the burden of
pubco "management" and debt servicing. Unfortunately, some of these
smaller pubs will not be viable, for instance land-locked, wet-led pubs which
have suffered so disproportionately since the introduction of the smoking ban
and having to endure what is still the second highest level of alcohol duty in
the EU. Whilst I decry their conversion to other retail or residential or
demolition this may be a small price to pay for bringing fairness to the tied
pub sector.
One thing I have
noticed is the increasing reliance of pubcos, their agents and spokespersons on
what is becoming their new mantra of "unintended consequences" and
the Dryburgh Research report is littered with "examples". Now, I
don't know it Parsons is in the pay of pubcos but it strikes me some of his
analysis is scare-mongering of the worst kind. "If the pubcos go under
this will mean the end of pubs and brewing in the UK" seems to be a developing theme, just witness
the chief pubco stooge Brigid Simmonds and her various utterances on the
subject.
The Dryburgh
report " would
expect higher business failures among tenants
as the higher fixed rent increased the
operational leverage on their businesses. The
tie is a ‘safety-valve’ where profit and
risk are shared. If a licensee sells more
beer, they pay more ‘wet rent’, whereas in hard times they
pay less." I would argue the only time the
"safety-valve" works is when the initial 'dry rent' is based on
reasonable FMTs and when beer pricing is not designed to punish the tenant
whether their respective beer sales are in decline or growth.
Parsons goes on
to say he would expect "most of
the profit pool released by pubcos going to free-of-tie to flow to
the major brewers, and not to tenants. We would expect brewers to increase
wholesale prices to reflect the higher costs
of servicing small customers with little
purchasing power, and consolidate their efforts
behind fewer brands to extract further economies of
scale." This bears special attention as it flies in the face of
evidence. So going free-of-tie would result in major brewers gaining the
benefit? So no chance of smaller brewers actually picking up volume from pubs
who are crying out for locally brewed beers? No chance the margin smaller
brewers might generate from their brewing would increase without the pubco
mouth to feed? And absolutely no benefit to the tenant in having to pay
significantly less for their beer or from their respective customers being able to afford even one pint a week more in the pub?
How silly of me,
of course it will go the way Parsons predicts, as ordinary tenants (who let's
face it are no good at business or the pub trade wouldn't be in the mess it's
in if they were even half-decent entrepreneurs) don't have the wit or expertise
to either join one of the many buying groups or set one of their own up?
Parsons brings a new understanding to the word "patronising" with
this drivel. If one can have an economic "fact" it's that pricing is
determined by demand and if the demand for globally brewed beer diminishes as
consumers and their hosts turn to craft, cask or locally brewed keg then I'll
bet you'll see some quite aggressive discounting by the big brewers.
The same can be
said for his assertion "some of the
weaker, mid-scale family brewers to exit and close their breweries as a
consequence of loss of protected route to market. The micro-brewers are
flourishing, helped by tax breaks and consumer demands but the major brewers
seeking to foreclose the market could squeeze them hard." One can
almost imagine Jonathon Neame hovering over Parson's shoulder as he typed this
gem. With an ever-more sophisticated consumer base, especially the "Gen
X/Y" and "Millenials" influencing many market places including
the hospitality sector does Parsons really think the current mood of localism,
artisanship, sustainability is just a flash in the pan and we're all going
back to drinking Double Diamond? I would posit the smaller brewers (whether
pub-owing or not) will more than take care of themselves if they provide their
tenants with a reasonable balance of risk and reward as envisaged under a
regulatory regime.
I'll even go one step further and say that the likes of the
SIBA direct delivery service will blossom if the market is freed up from pubco
domination... who knows they might even buy their own logistics company to service
the demand for over 6,000 brews from over 1,000 brewers who have restricted
access to some 24,000 tied pubs.
There's precious
little I agree with in the opinions expressed by Parsons, however, I can agree
with this:
"Unlike the ‘Guest Ale’ provision that was
abolished with the recall of the Beer Orders in 2003, there is no definition of
type of draught product. Hence, it is fair to assume that the tenants would
opt for their most profitable line. A
standard lager (Carling, Carlsberg, Foster’s,
Heineken,) could amount to as much as 30% of draught sales. The international
brewers would not care if this option were to be endorsed by government."
He's absolutely
right about that, global drinks companies, for all their PR spin, don't
give a toss where their product is sold, hence their complicity in the scandal
of deep-discounting and "pocket-money pricing" in the off-trade. To
borrow the pubco mantra of "unintended consequences" perhaps a shift
from off to on-sales brought about by tied tenants being able to make a living
whilst still reducing the price they have to charge their respective customers
wouldn't be a bad thing.
I sense, dear
reader, your interest may be waning at this point, so off you go and make a
cuppa/crack open a beer... but I promise we're nearly done and it's about to
get interesting.
Parsons next
talks about "abolishing the machine tie proposal" as he vainly tries
to defend the SCORFA of the machine tie
"A pubco can vet an operator to ensure they are
reliable operators and ensure better quality of service than a tenant might be
able to procure.
Governments originally supported the machine tie as a
means of protecting individual operators from criminal
elements. Machines can also be used in money
laundering scams.
Pubcos can use estate trends
to influence the introduction of new models
and the rotation of machines positively with the aim of optimising
income. "
I will refer
Parsons and the pubcos to the Independent Operators Association who
number some 14 machine operating companies who list as their customers (yes you
guessed it) the likes of Greene King, Wetherspoon, Marston's, Punch, Star
to name but a few. So all the "expertise" the pubcos offer can be
found elsewhere. And without the "rebates" and "discounts"
the pubcos demand from operators in addition to the split they take from
tenants, I would hazard a guess that tied tenants freed from pubco
"management" would make a little more from their machines than they
do now and certainly enough to allow pubcos to increase the dry rent to
compensate for some of their lost income. How about this for an
"unintended consequence"? It might even allow the pubcos to slim down
a bit as their "machine controllers" move out of their offices and into
the likes of the IOA.
And finally the
issue of beer flow monitoring equipment, one which has vexed tied tenants for a
long time not least of all because the major player in the market, Vianet
(formerly Brulines), has come under the scrutiny of the not only tenants but
the government in its investigations into the pub trade. For a long time Vianet
has resisted the call for its equipment to be subject to testing and
calibration by Weights & Measures and the National Measurement Office whose
raison d'etre is:
"Confidence
in trade" - The National Measurement Office (NMO) ensures the UK’s system of weights and measures is fair, accurate
and legal so that consumers and businesses have confidence whenever they buy
and sell by quantity. Each year in the UK, £622 billion worth of goods and utilities are sold
on the basis of the measurement of their quantity."
They've resisted
as there is plenty of other independent evidence that proves their equipment is
not fit for purpose in the way it is used to quantify "buying out"
and were it not for a Tomlin Order preventing me from discussing the testimony
of representatives of Vianet in a court case I was involved in I would be able
to share some startling admissions... suffice it to say perhaps if it was
written into any proposed regulations that pubcos could not use information
derived from beer flow monitoring equipment to "prosecute the tie" or
within rent assessments then, perhaps the albeit flawed information a tenant
can derive from these iniquitous systems might be seen to be of benefit. After
all, it's the tenant that pays for these wretched machines and the least they
can expect is the equipment can do even the basics, such as differentiating
between water and beer flowing over through its meters.
So there you have
it out of 13 major points in the Dryburgh Research report only one has any
merit, if this were a school report then 1/13 would deserve a resounding F and
the admonition "Nigel
has a vivid imagination, but he really needs to try harder, if he is to
successfully master the interpretation of facts"
But as with
opinion I'll daresay there are many who would say the same of me... in any case
the sun is shining and I must away to the nearest beer garden as the weekend
starts here... cheers!
SCORFA
The SCORFA
principle says that there must be
compensating benefits to lessees (or free
trade customers) who accept ties or exclusive trading agreements.
‘SCORFA’ is
an acronym for ‘Special Commercial or
Financial Advantages’. The acronym was first used in EU Regulation
1984/83, the block exemption applied to brewers and pubco ties. Pubcos do not
deny that their tied tenants pay higher wholesale beer
prices than free-of-tie operators, but the tenant
receives a lower dry rent and special
or financial advantages (SCORFA) to offset the
higher beer prices.
Examples
include: accounting services, code of practice,
design and financial support, gaming machine
management, management and marketing support, product service
support and discounts, rating services and training.
(I'll leave it to
others to explain whether SCORFAs are of benefit to tied tenants, especially as
many SCORFAs attract a charge from the pubcos to the tenant for the provision
of these "services".)
