Matt Saunders: in defence of the tied pub model

The tied pub model — the root of all evil or an inexpensive route to market? The Fat Cat Group boss defends the tie.

When I spoke on Radio Five Live last week to say that I thought that the tied pub model wasn't such a bad thing, I didn't expect quite the reaction that followed. It was as if I'd suggested that Hitler was misunderstood or that Fred West might be quite a nice bloke to share a pint with.

As you may recall, I was just getting into my stride when Declan Curry cut me off mid-flow. The Morning Advertiser asked if I would explain my thoughts in more detail, so here goes.

My friend Stanley wants to open a pub and he has a budget of £75,000; from where I'm sitting it appears that he has three options.

Firstly, to take a lease on a town or city-centre outlet from a commercial landlord who isn't a brewer or a pubco. This first option assumes that Stanley can't afford a city-centre freehold and also that the potential landlord will accept Stanley's strength of covenant and award him a lease.

Lease prices peaked at around £30 per square foot in 2007 and are now being offered at around £20 for a fairly prime location. Stanley finds one that he likes that is an empty shell of 3,000sq ft, so giving an annual rent of £60,000. Stanley then has to fit this out from scratch at a cost of £140 per square foot, so his refurbishment investment will stand at £420,000 if all goes to plan.

Stanley feels that he will need around £10,000 in working capital and so, with a £65,000 deposit needs a bank to come up with a loan of £355,000.

Finally, Stanley finds the last bank manager in Britain who is prepared to lend to the city-centre pub sector, but in agreeing terms Stanley has to offer up his house, wife and two kids as security.

But here's the good bit. Stanley can now buy his beer from whoever he wants! This would mean that Stanley would be able to buy a good standard lager for around 90p per pint, net of VAT. So in short, option one would involve a high rental charge, a high fit-out cost, but a low cost for beer purchasing.

Freehold option​

Secondly, Stanley considers the cheaper freehold option of buying away from the town centre, either in the country or a decent-sized village.

There are plenty of outlets available, especially those at the lower end of the market, but consequently these tend to be in poor state of repairs, often after years of lack of investment by the big pub companies.

Finally Stanley finds one he likes with a good catchment area that is on the market for £395,000 and Stanley reckons he'll need to spend another £100,000 to refurbish it.

Stanley's biggest challenge is going to be finding a bank manager who will lend towards the cost of the freehold and the fit-out, but Stanley does his sums based on an 85% mortgage (£430,000) plus his own £65,000 deposit. His sums assume a 10-year loan fixed at 5%, meaning that his annual mortgage liability will be £64,500.

Once again, Stanley can buy his beer from whoever he wishes at circa 90p per pint and the annual cost compares favourably with the town-centre lease, but this time there are bricks and mortar for security.

Similarly, this option offers Stanley a high start-up cost but low beer prices free of tie.

The tied model​

And thirdly, the final option — the last resort, if you will. The option that is only for the gullible, the insane or the masochistic type who has a burning desire to pay through the nose for beer — the option of taking a tied house.

Stanley, however, doesn't think it looks all bad. The choice and the number of tied houses is immense, which gives Stanley a much greater choice of location. Some are in

great condition and some are not. Some even offer licensees funds for refurbishment investment.

Stanley reckons he's found a good one. It's in a busy little village near where he lives and although it needs £100,000 spending on it to bring it up to a suitable standard, the pubco that owns it has offered to go halves with him.

His £50,000 would buy Stanley his fixtures and fittings, which would include new kitchen equipment. He thinks that if he can recruit the right chef, he can reduce his reliance on the tied element to less than 35% of his turnover. This is something he would need to do as he would be paying 40p per pint more than the freehouse in the next village.

So these are Stanley's choices. Two of them involve extra debt and the associated risk that comes with it, and one will mean his beer is more expensive but the investment needed is much less.

So this is how I see the options when one wants to open a pub. The tied model is not for everyone and it is far from flawless, but then again options one and two above don't only have an up side to them either.

And if Stanley does follow the tied route and it doesn't work out for him, he's always got someone he can blame.

Matt Saunders' company Fat Cat Group and its sister company Moleface Pub Company runs a total of six tenanted pubs — four belonging to Punch and two belonging to Enterprise.