Punch leads the way on multiples
Punch Taverns is reviewing the way it deals with its multiple lessees.
The pub company is considering whether it can "flex" its lease agreements. So far, there is no detail on what this will mean, but Punch is rumoured to be consulting with a number of multiple lessees on what changes might be made. The move is a significant one because it recognises an important commercial reality.
Multiple lessees tend to be a godsend to tenanted pubcos. The better the estate, the more important multiple lessees are likely to be. For Punch, adding 700-plus managed conversions to the top of its tenanted estate means it has to recruit the kind of licensee who can be relied upon to pay a £50,000-plus rent a year.
These large turnover pubs will only flourish if the incoming licensee has a full range of licensed trade skills. These are not really starter pubs. Some of these sites will be run by their former managers, some will be taken on by licensees graduating up from smaller turnover pubs, while others will be run by multiple operators who have proven themselves at other sites.
These multiple operators will be so confident of their skills that taking on more sites is the obvious route to expansion. For tenanted operators like Punch, the multiple operators often bring more finely-honed skills to bear than the best listed managed operator. They know their market, they manage their sites closely and they offer financial solidity and reliability - the rent gets paid bang on time and buying out is virtually unheard of.
My colleague Ewan Turney is to write a case study on Peach Pub Company's work to convert a former Chef & Brewer in Berkhamsted, Hertfordshire, to part of its estate. Takings have trebled from £10,000 to £30,000 and the pub will deliver six-figure pre-tax profits for Peach. Punch will see its earnings rise enormously and they will be at least double the current estate average of £70,000 per annum.
Not surprisingly, a pub company like Peach will be courted by a number of pub companies eager to inject Peach's operating skills into its larger sites. Pubcos will argue that the risk-to- reward ratio is already fairly balanced. They provide the keys to pubs worth a million or more for a small premium.
Many multiple operators believe pubcos could do more to recognise and reward their special contribution and value, addressing contractual, organisational and attitudinal issues. Pubco leases often have the feel of a concrete overcoat, weighing down lessees with obligations at every turn. The object, of course, is to ensure the pubco's arse is covered in every eventuality. And if you and I had the power to do it, we'd do the same.
But too often, a lease allows the tenanted pubco to "rent globally" - the truth is that the best operators are effectively subsidising the under-performers and fading pubs in the estate. But a lease could be written to incentivise out-performance by a multiple across a number of a pubco's sites. It could be written to make it clear that when a multiple lessee increases trade exponentially, the pubco will not seek a radical upward jump in rent, based on spurious notions of fair, mantainable trade. It could explain that rent will only ever rise by RPI - a handsome edge against inflation already. The pubco could profit share on sites suitable for investment in a way that balances out risk.
Mitchells & Butlers' equitable profit share with entrepreneur Paul Salisbury at managed sites converted to its Project S gastro concept, is an example of how this might work. One lesson from the M&B experiment is that fairness has to be an absolute touchstone.
Pubcos could employ Multiple Business Managers to handle the key multiple accounts in a more imaginative and expansion-friendly way than the average business development manager, bogged down with chasing debt.
They could ask their best multiples to find freeholds they want to lease - and do a deal to buy them that really incentivises the lessee. Why not offer them an option to buy the freehold at the end of year 10, for example, for the market rate with a 10% discount?
A bit more latitude for multiples could be a unique selling point for Punch. Full marks for entering into this debate.
