It's time for some facts when it comes to the beer tie

By Andrew Delahunty

- Last updated on GMT

Related tags: Renting, Pet shop boys

Andrew Delahunty argues that the simple use of a calculator shows that pubcos are not being honest with tenants
Andrew Delahunty argues that the simple use of a calculator shows that pubcos are not being honest with tenants
Andrew Delahunty, managing director of DLHY Pub Company, argues that the simple use of a calculator shows why tenants should be given a free-of-tie option as part of any new statutory code of practice.

I am a bit confused that as of yet I have not seen a simple maths table or graphic to explain the most blatantly obvious which is that the tied beer option ring fences profit for the brewery and results in a clear in-balance of the so called 'partnership'.

For years the pubcos have said that the cost of the beer tie to the tenant is reflected in a reduced rent. It's clever terminology which they have started to move away from as far from being a reflection (the same image in reverse) it is a distortion.

Take this basic example:

Let's say the 'divisible balance' (profit before rent) on a tied property doing 250 barrels a year is £80,000. The "discount" is £100 a barrel (so really a premium of around £100 per barrel).

The basic tied model would have a rent of £40,000 and the additional cost of beer would be £25,000 (250 barrels at £100 p/brl premium). Thus the rent is £65,000.

In the free of tie model the £25,000 beer tie premium would return to the divisible balance of the property. Thus it would be £105,000. Thus the 50% profit share rent model would produce a rent of £52,500.

That is a £12,500 additional rent or lost profit to the tied tenant based on this simple calculation. This has clearly been worked on very hard over the years with marketing jargon and 'smoke and mirrors' to detract from the simple truth.

FMT and REO

I now refer you to the article that quotes a recent report as saying that a mandatory free of tie option would increase the risk of business failure. This however contradicts some of the most basic (and flawed) notions upon which this industry rests. Namely 'Fair Maintainable Trade' and 'Reasonably Efficient Operator'. Please stick with me on this one!

The PMA​ has been very good in the past at questioning the real basis of FMT and the figures that are being used. Clearly it has a huge impact upon the rent as in nearly all cases the costs are a percentage of turnover, so this one single input drives everything. We all know it is worked out on the back of a stamp by someone who has little to no local knowledge and appreciation for the business, its challenges and its lifestyle threatening risks upon the tenant (in the event of failure). BUT it is the second concept that undermines this latest article.

We are told that the rent is based on what is achievable by a 'reasonably efficient operator'. Such an operator is hard to define but logic dictates that they would be no better than average for otherwise Pubcos would be signing leases knowing the majority of pubs were not going to achieve that profit, and as such the whole model would be proven a complete farce.

So in this case the average reasonably efficient operator would be £12,500 better off per year in a free of tie lease. Any business person worth their salt would tell you that this provides greater flexibility and in business it is the most flexible business models that survive over a long period of time.

The source of the article would however then retort quite wisely that their assertion is based upon leverage (a concept which I sadly believe many tenants do not understand for if they did there would be a mass exodus from the industry- see last paragraph). Again this only emphasises the flaw in the system because what they are really saying is that if a tenant doesn't achieve the FMT then there is a greater risk in the business not covering its costs.

Let's firstly return to our example sums:

FOT gross profits on wet generally run at around 60% (an assumption which you may wish to question). VAT is at 20%. That means that to end up with the same income as the tied beer model the tenant could do £25,000 less turnover than the FMT prediction and still not be any worse off than the tie deal (£12,500 from rent *100/60 for GP*1.2 for VAT).

I agree that more than £25,000 below FMT the tenant would be worse off but then how far below the status of a 'reasonably efficient operator' have they become and in this case are they not going to fail anyway.

So actually if the concept of FMT being based on what is achievable by a reasonably efficient operator stand up to reason everybody average or above would benefit significantly in an FOT agreement and even a sizable portion of the lose who are less than average would be better or at least no worse off.

Risk and reward

Let me also point out that all leaseholders are highly leveraged to begin with. They have deposits between £5k and £30k held by the Pubco. They either own the F&F or are paying it off whilst all the time it is depreciating leading in many cases to serious negative equity. There reward is to have to work long hours for rewards that are mostly less than the value of the F&F and certainly less than the F&F plus the deposit. That is being leveraged but it is still not the whole story and the one that really should be being reported.

Leverage is most important in understanding risk and reward. It is not mentioned in any of the pubco's training courses and yet it is the single most important concept to understand. The true leverage has to incorporate all that is at risk.

If a leasee/tenant doesn't manage to stay in business for the term of their agreement they could still be held responsible for the full rent payable and the cost of keeping the property running in their absence. This means that if they fail they could lose hundreds of thousands of pounds even after working endless hours for no pay or profit.

Ask someone who understands leverage (banks and insurance companies are the experts here... well supposedly lets just overlook the 2008 global meltdown) to do a proper overview of the financial operation, remuneration and inherent risk and they I am sure will conclude that taking on a tenancy or lease is a big gamble.

Smoke and mirrors

And so back to my point. The source of the article has a point but it's only applicable to tenants who are far worse that average which I think it is fair to say the pubcos are not going to tell all the tenants this description applies to them. A free of tie option would be of benefit to the vast majority of tenants and if nothing else it would clear the smoke and smash the mirrors of the marketing 'fog' that the pubcos have worked so hard to create.

Better than that, tenants would be better able to compare different properties and pubcos to see which is better for them.

Will it happen, probably not. But I think the PMA​ has a moral obligation to show its loyal readers that the simple use of a calculator comprehensively shows that the pubcos are not being honest with us, and that they either have to admit this and change their misleading practices or actually action the concepts they readily promote by giving tenants the right to decide on a free of tie option.

Least of all though every BDM should come to a meeting armed with a calculator because it's about time we made this a fair fight based on real, indisputable facts. 

Related topics: Beer

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