The trade's year to forget

2008 turned out to be a tougher year than many expected. The PMA Team looks back on the themes that emerged during the year.

Toxic leases and the rise of the pre-pack adminstration​

A number of companies — Laurel, Candu Entertainment, Herald Inns & Bars, Food & Drink Group — were reshaped with an extreme form of surgery, the pre-pack administration. Gone were the days of patient attempts to assign over-rented leases or negotiation with property landlords for lower rent. Instead, loss-making leasehold sites were left behind in administration to allow a chance for viable sites to move forward. The problem was well-illustrated at Herald Inns, where viable pubs bounced out of administration into a new company called Cougar Leisure — one property landlord had previously declined the offer of £200,000 to cancel an onerous lease. Pre-pack administrations are not without controversy because they amount to an abrupt stepping away from obligations to property landlords. Others hold the view that not too many tears should be shed for those landlords who prove intransigent in straitened times.

Debt became unfashionable​

The direct effect of the credit crunch was to create extreme wariness in respect of companies with high levels of debt. Enterprise Inns, for example, reported a 1% drop in earnings per share but suffered an 89% drop in its share price. Punch Taverns, whose shares were described by Numis analyst Douglas Jack as having "option value" only, has stopped paying dividends to ensure it can pay off £209m of convertible bonds in December. Some analysts believe that Enterprise Inns may also stop paying a dividend next year as it tries to pay off half of £1bn of bank debt that matures in May 2011. Enterprise's business model has turned 360° from releveraging through expansion and share buybacks to deleveraging. Pub acquisition stopped on a sixpence in the early part of 2008 and the team buying pubs has now been given the job of trying to sell as many as 200 pubs on a site-by-site basis.

Tenant support​

Lots of wet-led tenanted pubs have had a terrible year. Beer volumes are down between 8% and 10%. With managed companies mostly out-performing the market, the tenanted sector's pain has been greater than these figures suggest. With no buyers of batches of pubs left in the market, the only option has been "special support". Thousands of pubs owned by the big tenanted companies have been receiving help in the form of bigger beer discounts and rent concessions. Another answer for the tenanted companies is an attempt to be more creative. Greene King's solution to "a growing tail" is to place 400 pubs (24% of them are on cash with order) in a new division, Independence Pubs. Here, all options are open, with Greene King offering "total agreement flexibility". The division's tagline is "Free thinking for the licensed trade". A more fundamental question hangs over the large tenanted estates: does the contractual right to impose Retail Price Index increases each year alongside wholesale beer increases eventually and inevitably create over-renting?

The importance of value offers​

With gloomy headlines a daily occurrence in the nationals, the consumer is looking to save money. The managed sector saw ever greater stress on the value offer. The weeks after the arrival of new Spirit boss Mike Tye saw the appearance of a host of offers such as a pie and pint for £4.99. It's powerful Two for One food offer, where its simple "twofer" mechanic has proven so strong, is being rolled into smaller pubs. Marston's reported last week that its strongest sales performance was coming from value offers such as Two for One (90% of its managed pubs are offering promotions). Mitchells & Butlers bosses say that market share gains are accelerating, not least because it is sticking to its price points, while many in the tenanted trade can't afford this option. Drinks prices will stay the same in the wake of the Chancellor's latest tax grab on alcohol, while VAT reductions on food are being passed on to customers. Boss Tim Clarke says the plan is simple for the coming year: "Exploit increasing distress in large parts of the on-trade."

Corporate activity dead​

With the credit markets closed, mergers and acquisitions are a non-starter. Admiral Taverns, the key buyer of tranches of unwanted tenanted pubs, is now focused on selling pubs, often at sizeable discounts, to pay down debt. Punch Taverns is stuck with its managed division, Spirit, for a couple more years at least in all likelihood. A host of short-term owners of managed pub companies must wonder what their exit strategy is, and whether there will be much in the way of equity gain when an exit does become possible. Selling a leased pub for any kind of premium has become a lot harder. For the buyer of individual pub freeholds, though, the tide turned in 2008 with competition much diminished and prices much more realistic.