Should pubcos go free of tie?

Amid the clamour engendered by the Business & Enterprise Committee report, there's one item that remains for many the holy of holies.

The argument goes that the legality of the tie has been endorsed over and over again. It's a highly-flexible arrangement that allows tenants to share the pain of any downturn with their landlord. Moreover, the industry risks losing even more of its paternalistic cask ale-brewing regionals if the tie is scrapped.

Interesting, then, to hear Clive Rayden, boss of County Estate Management giving the counter view on the tie at our recent Tenanted Pubco Summit at the Cranfield School of Management. It's worth setting out the main planks of the free-of-tie argument, not least because it doesn't get heard too often in public.

The first thing to say is that releasing pubs from the tie would mean most tenants' rent more or less doubles given that many pubcos earn as much from the beer tie as from straight-forward "dry" rent. However, it was noteworthy that free-of-tie Wellington Pub Company tenants were the least willing to blame their landlord for their problems when surveyed by CGA on behalf of the Bec.

Anyone signing up to a free-of-tie rent has a very large number of the reasons, justified or otherwise, to blame their landlord instantly removed. No-one can blame high beer prices or the beer tie for any subsequent business failure. Free-of-tie tenants do have this one major advantage over their tied cousins — the rent payable on a pub is completely and undeniably transparent.

Suspicion​

For those signing up for tied leases, provided by non-brewing companies especially, the suspicion is often that the double-income stream is little more than a highly useful way of over-renting them and grabbing a big share of outperformance. (I recall a tenant of one major pubco telling me how a £250,000 investment he had funded had delivered an extra 500 barrels a year to his pubco, effectively boosting the pubco's earnings at a single pub by a six-figure sum).

Rayden insisted that a single-site licensee can now achieve discounts in the marketplace that are not significantly different to those earned by the largest pubcos. (Whether this would be the case should the giant pubco battalions crumble and brewers market power reassert itself, is as different argument; but it surely can't be beyond someone's organisational ability to create buying unions or clubs of free-of-tie licensees to counter the brewers' resurgent market power?)

Moreover, Rayden argued, the extra discount allows single-site licensees to use a much wider range of pricing positions, session by session. In other words, the full ability to flex price points for day-parts allows licensees much more power to grab market share in a way other retailers do.

There is more generally a market distortion going on if tied tenants are not paying less for their beer when the four major brewers (most markets have just two dominant beer producers) are scrapping for market share. The market distortion is occurring if the major tenanted pubcos (for short-sighted or other reasons) are not passing on a sensible slice of their scale in beer-buying terms to their tenants.

The danger here is that the major pubcos pocket brewers' wholesale price increases at the expense of their tenants, while the brewers

find their margins are shaved ever thinner by the rise of the giant

pubcos and by dint of tough long-term supply contracts for these pubcos.

The bigger danger is that on-trade beer volume declines are actually exacerbated by intransigent pubco middle men who simply can't see the pressing sustainability argument for passing on more of their discounts.

Beer volumes​

It's worth looking at the argument from the point of view of the tenanted pub companies. Last year, former Mitchells & Butlers chief executive Tim Clarke told me he thought on-trade beer volumes would decline by 40% over the next 10 years.

Later in the year, with volumes in freefall, he told me that his original view might be a little conservative in terms of how long this would take.

For the major non-brewing tenanted pubcos there seems to be a compelling argument to dissolve the link with a declining income stream, especially if the link itself is worsening the decline. Any non-brewing pubco that chose to go the free-of-tie route would also be free to dismember or dilute the hugely expensive network of business development managers, beer-flow monitoring equipment and central support staff.

The extra margin freed up here could be pocketed or used to further enhance the sustainability of pub estates. It's a concept being examined to my knowledge by at least one very well-known tenanted operator.

The free-of-tie argument will set teeth gnashing at many of the regional family brewers. But this area of the market does seem to provide an exception to the rule. Cask ale is providing an exception to the volume decline trends in the wider market. Regional brewers enjoy margin benefits that genuinely mean they can cross-subsidise their pub estates.

It was interesting that Lincolnshire-based Batemans reports its combined dry and wet rent earnings per pub place "total" rent at around 20% below the true market value —

I suspect there are genuine discounts to true market rental values to be found across swathes of the family brewer market.

Five or six years of change in the tenanted market have been concertinaed into 18 months. It's a time to examine the health of all manner of holy cows.