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Hands up all those who love the beer tie?

By Robert Sayles , 02-Aug-2011

Related topics: General News

A FOT option with open market rent review is now the only way forward, writes Robert Sayles in his latest blog.

Robert Sayles: 'Time for politicians to replace words with deeds'

Robert Sayles: 'Time for politicians to replace words with deeds'

Is it my imagination or has there been a gradual shift in the pubco stance regarding the tie?

 

For years the line has been that tied agreements offer tangible benefits to both tenant and pubco, operating on the basis of the following equation.

 

Discounted Rent + Drinks Tie = Sustainable Model

 

In return for a discounted rent, tenants agree to pay higher prices for their beer. It all sounds fair enough, doesn't it?

 

However of late we're hearing less of this particular argument, rather more of '.......err actually we need the tie, without it we're pretty much err ........buggered.'

 

The obvious response to this of course would be why?

 

After all, if rents were indeed discounted then relieving tenants of their tied obligations wouldn't be problematic; pubcos being adequately compensated by the fact that premiums would rise in line with open market valuations.

 

Of course, critics would counter that the notion of a 'discounted' rent is fanciful in the extreme, pubcos having hiked rents to such an extent that any correlation between the ideal of 'below market rent' and reality has long since passed.

 

This in turn leads many to conclude that it's pubco debt/greed not the market place that is determining rental premiums. The equation below therefore is probably a more accurate reflection of the reality for many tied tenants.

 

Full Market Rent + Drinks Tie = Whopping great profit for pubcos.

 

Forget everything else that is going on around you and look closely at this equation. It is, I would suggest, the reason we are where we are today.

 

Property portfolios were built on the basis of his equation.

 

Huge sums of money were lent on the basis of this equation.

 

Property valuations rose on the basis of this equation.

 

Share prices rocketed on the basis of this equation.

 

Pubco debt soared on the basis of this equation.

 

This is the 'model' sold to shareholders, banks and anybody else who was prepared to listen. And boy, did they listen.

 

All piled in; desperate to be part of the 'gold rush'.

 

It's hardly surprising therefore that nobody now wants to step forward and say 'err.... we've got a bit of a problem on our hands, the model ....err....no longer seems to work.'

 

Of course it doesn't really need to be said, does it? Boarded up pubs the length and breadth of the country bear testimony to the boom and bust era. The city has long since passed judgement, trashing both Punch and ETI shares.

 

It is clear to the overwhelming majority that the 'model' has had its day; the tied sector can no longer compete in the current market. The volumes required to sustain it are simply no longer there.

 

Of course the 'collective', (BBPA, BII and pubcos) refute this, seeking to apportion blame elsewhere.

 

It's down to the recession they say.

 

It's down to government taxation they say.

 

It's down to bad tenants they say.

 

Their attempts at reassurance appear equally inadequate.

 

'Don't worry, we have the code. The code is a truly wonderful thing, the answer to all our problems.'

 

Pitiful; absolutely pitiful. You couldn't make it up, could you?

 

Brigid Simmonds (BBPA chief executive) informs us that the business model is 'evolving'. It's evolving all right, but not in ways that offer any tangible benefits to existing tenants.

 

Discounts

 

I was struck by one of the comments on the forums recently. To my mind it offers a much more realistic appraisal of the plight of the tied tenant.

 

This is what the gentleman said.

 

'We acquired a *********** pub about 8 years ago and succeeded in raising the volume from around 320 barrels to 440 barrels within the first 30 months or so.

 

'Then the smoking ban hit us quite significantly, ours being an almost totally wet led community outlet. Then the recession took effect and we now find ourselves in the position where volumes are back down at around 320 barrels.

 

'Rent however is up from the £38,000 we paid in 2004 to £52,000+ today, rates have almost doubled, up from £13,000 per annum to £22,000 and energy prices are probably quadruple what we were paying at the outset.'

 

This I would suggest is the reality for the majority of tied publicans today; falling turnover, rising costs and depleted margin. How does the code or the evolving business model begin to address these issues?

 

And what of brewers? Phil Dixon recently stated they needed to bring prices down, to give tenants a bigger slice of the cake.

 

What do you think their response is likely to be?

 

'Well Phil, I'm glad you brought that to our attention, it was an oversight on our behalf it really was.

 

'Now you come to mention it, our prices are obscenely high, aren't they?

 

'Rest assured we'll rectify this immediately. After all, if our tenants aren't making a decent living then our industry has no real future does it?'

 

Yes; I'm sure they're bringing their prices down as we speak.

 

The truth of course is that they're somewhat preoccupied at the present time; trying to convince all and sundry that they can't possibly survive without the tie.

 

Do you know what? I don't have that much sympathy for many of them and I'll tell you why.

 

Quite simply they appear to want it both ways. Continue to dump their product on supermarkets at give away prices yet charge their own tenants top dollar. How can that be sustainable in the long term?

 

They refuse to offer their tenants guest ale provision because it will have an impact upon their margin. Who do they think they're kidding?

 

Supermarkets

 

Let it not be forgotten that brewers oppose minimum pricing, content as they are to supplement lost margin in the off trade by hiking on trade prices, pubcos being mutual beneficiaries.

 

If they're that concerned about margin why don't they stop bleating to government and inform supermarkets that they're no longer in the business of giving beer away?

 

Brewers have been complicit in the creation of a two tier market, one that has had a devastating impact upon pubs. Over time the price divergence between the on and off trade has become too great, people will only pay so much for the pub 'experience'; particularly during recessionary times.

 

What this industry needs more than anything at the present time is competition. Let me say that again, 'competition'. You don't hear too many within the collective bandying that particular word about now do you?

 

In a competitive market prices invariably come down as suppliers compete for market share. Severing the tie will open up the market, incentivise aspiring entrepreneurs to enter the market, give a boost to upcoming microbrewers by allowing them to develop beers that can compete in an open market, free from the rigid constraints currently in place.

 

Going forward the key criteria for customers will be affordability and choice. Removal of the tie will allow the industry to meet these challenges head on. New exciting beers coming into pubs at prices that people can afford to pay, whilst providing sufficient margin for publicans to make a decent living.

 

Ultimately, this has to be the way forward. It's a wonderful vision, isn't it?

 

But it can only come to fruition if politicians have the courage to replace words with deeds. To put the interests of a small minority to one side and do what is right for the future of this industry.

 

An FOT option with open market rent review is now the only way forward. We've reached the stage where quite simply, nothing less will suffice.

 

Be under no illusion as to the alternative; Armageddon awaits.

 

Robert Sayles used to help his wife run the Hakuna Matata pub in Birmingham.

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