The Great Pubco Myth - Investment and Support

By Robert Sayles

- Last updated on GMT

The Great Pubco Myth - Investment and Support
The pubco propaganda machine has focused primarily on two key benefits of the tied model – investment and support. If what we’re told is true then the removal of such benefits would result in many more pubs closing.

However, closer scrutiny illustrates the extent to which truth has been manipulated, creating an illusion of partnership; one geared toward both ‘support’ and ‘investment’. The stark reality is that neither actually exist.

“It’s all smoke and mirrors. Nothing more than smoke and mirrors.”

This was the curt response one reform campaigner gave when I enquired about the level of investment and support on offer from pubcos.

Perpetuating the Myth

In an effort to quell growing momentum for reform, the BBPA have cited investment and support as key pillars of the tied model. If they’re to be believed, millions of pounds are invested in pubs annually, whilst vast amounts of additional support are provided to ‘partners’ via special commercial or financial advantages (SCORFA).

The theory is these additional benefits compensate tenants for the obscene mark-up they’re obliged to pay for their products. Of course, should MRO come to pass these supposed benefits will cease to exist.   

Sounds quite convincing, doesn’t it? Many of you out there are probably thinking:

“My God, the way things are at the moment, pubs need all the help and support they can get. The last thing pubcos need right now is to lose the tie. Without it, lot’s more pubs will close, thousands more jobs will be lost.”

That of course is exactly what Pyongyang wants you to think. The reality for many tied tenants is unfortunately a million miles away from this idealised portrayal of convivial partnership.

Expansion

During the great rush to become the biggest and best, both Enterprise Inns and Punch embarked on massive spending sprees; borrowing huge amounts of money to fund rapid and unprecedented expansion.

The downside to this period of unprecedented euphoria was a marked reluctance to upgrade newly acquired acquisitions. (Many of the pubs purchased had suffered years of neglect and were in dire need of upgrading).

This reticence to invest can be explained by an insatiable urge to maintain expansion. This drive for growth fuelled rapid rises in property prices; thereby providing further incentives for pubcos to continue growing property portfolios. (Pubcos quickly concluded a lot more money could be made acquiring additional pubs than ploughing investment into those already purchased).       

Complacency became the common currency - pubcos never for one minute believed people would fall out of love with their beloved pub. People would always want to go to the pub, wouldn’t they? And of course, as long as that remained the case they’d always be a queue of aspiring tenants eager to embrace the dream.

The dilemma

For pubcos still frantically targeting further expansion, there was only one area of uncertainty. Where would the funds required to maintain and upgrade their rapidly expanding estates come from? Of course, any sensible business model would have ensured money was ring fenced for just such a purpose.

Not so in pubco world - they came up with a far more ingenious solution to the problem - the FRI lease.

Tenants would be responsible for all repairs to the pub, thereby absolving pubcos of the need to allocate funds which could be more profitably utilised funding additional acquisitions.    

That left only upgrades to worry about – to address this issue the ‘refurbishment opportunity’ (RO) was born.

The marketing of the RO was done with a view to convincing gullible tenants that this was an ‘opportunity’ not to be missed; one that would allow them to acquire a newly refurbished pub capable of generating a decent living, both for them and their families.

The reality is that the RO demands a great deal of tenants yet asks little of pubcos. Consequently, the very notion that pubcos invest in their pubs is misleading. The term ‘invest’ suggests costs should be apportioned to the expenditure column – the truth is that the RO is a massive income generator for pubcos.  

So, how does it work?

New tenant agrees to take on a pub earmarked for refurbishment.

Step 1 – Tenant moves into pub, paying a seemingly challenging rent

Step 2 – Refurbishment is carried out and rental premium raised to cover the cost of the work

Sounds like true ‘partnership’ at work, doesn’t it?

Closer scrutiny however, illustrates the extent to which the arrangement is heavily weighted in favour of the pubco.

The tenant is obliged to pay for works undertaken through an uplift to the rental premium. The pubco receives favourable concessions from surveyors and contractors, all of whom are literally falling over themselves to obtain regular work from a large and prestigious property company.

Of course, none of these discounted quotations are ever passed on to the tenant, in fact quite the reverse. Not content with these substantial discounts, pubcos inflate all costs associated with the project in order to generate additional profits.

(The same mind-set is applied when it comes to dilapidations. Many tenants leaving pubs do so with little if any money in their pockets. Of course pubcos are fully aware of this. Consequently, all dilapidation costs are hiked to obscene levels; invariably absolving them of the need to refund deposits or the value of fixtures and fittings to outgoing tenants. 

In any other part of the world, practices such as this would be labelled ‘exploitation’; here in pubco world they’re laughingly referred to as ‘partnership’.

Now of course in an ideal world, one where true partnership prevails, tenants should be able to enjoy the benefits of the discounts their partners have managed to negotiate. Unfortunately the process is blatantly abused; to the benefit of one party and at a substantial cost to the other.  

The result is pubcos are able to drive up profits by vastly inflating costs. Not content with that, post-refurbishment rents are then manipulated; realigning them to inflated ​rather than actual ​costs.  

How does this square with claims that pubcos offer tenants a below market rent?

It should also be remembered that once raised, rental premiums rarely come down. This effectively condemns tenants to pay the inflated costs of the refurbishment for the entirety of their tenure; long after the pubco has recouped its investment.

And of course, if as anticipated the RO generates additional footfall, then subsequent rent reviews give the pubco further opportunities to justify further increases to an already inflated rent.

Benefits to the Pubco

  • Income received from inflated rental increase
  • Income received from revenue generated by increased sales
  • Income received from any additional rent increases generated as a result of increased sales
  • Income received from the increased value of the property as a result of the work carried out

Such practices make a mockery of pubco claims of partnership. The net result is rental premiums do not reflect the market; they merely highlight the extent to which pubcos have inflated costs.

How can that possibly be sustainable in the long term?

It’s no co-incidence so many pubs labelled ‘refurbishment opportunities’ are located in prime areas. RO enables the market value of these properties to rise, whilst at the same time ensuring all costs are borne by the tenant.

Of course, one additional benefit is the pubco now has in its possession a fully refurbished pub, one which will undoubtedly attract new tenants should the current incumbents buckle under the onerous yoke placed upon them. There is clearly only one real winner in this supposed partnership.

Any additional income generated by the refurbishment is invariably more than offset by all the additional costs placed upon the tenant. Pubcos on the other hand enjoy the benefits of the additional income streams I’ve highlighted.  

Support

The other great myth perpetrated by the Pyongyang propaganda machine is the extent of support on offer.

Christopher Snowden (‘CLOSING TIME: Who’s killing the British pub?’) rightly points out “the pubCo business model is supposed to work as follows: the PubCo makes economy-of-scale savings from buying insurance, legal services, satellite television, fittings etc. in bulk”.

There is little doubt that pubcos do benefit from such economy-of-scale savings. The fundamental flaw in Mr. Snowdon’s argument is the notion that tenants are the beneficiaries.    

An obvious example is insurance. Pubcos obtain exceptionally favourable terms given the size of their estates; tenants nevertheless are obliged to pay full premiums, allowing pubcos to pocket sizeable profits.

Such attitudes make a mockery of the notion of support. The sad reality is tenants are compelled to pay considerable amounts of money for a commodity that to all intents and purposes does not exist.

If you’re still in any doubt, then consider how the recently introduced maintenance fund works. Tenants are now required to pay a monthly amount into a maintenance fund to cover the cost of future repair liabilities.  

Sounds eminently sensible, doesn’t it?

The problem is there’s no ceiling on the amount paid in and pubcos conveniently neglect to mention the procedures put in place to control distribution of funds.  If you think you’ll simply be able to pick up the phone and draw money from your fund then think again.

All work undertaken needs to be signed off before tenants can get access to THEIR money. Given that Mr Builder will want paying upon completion of the work, how are tenants, many of whom are living on a daily knife edge, be expected to find the additional funds to pay up front?

Step in the pubco. “Don’t worry about all the hassle. We’ll be only too happy to carry out that roof replacement on your behalf.  We’ll merely deduct the money from your MF. We’re here to make life simple for you.”

Just make sure you’re sitting down when the itemised bill arrives!

Examples such as this only serve to illustrate the extent to which the ramifications of the tie go far beyond the supply of beer. Over time, it has evolved into a mechanism which allows pubcos to control, manipulate and ultimately exploit.  

Ask them to quantify what they mean by the term ‘support’ and you’ll encounter nothing but ambiguity. Token gestures, by way of beer mats and POS products, are all tenants can realistically hope for. The reality of course is such insulting gestures cost pubcos nothing; merely products provided by suppliers keen to keep their ever demanding customers happy.

The concept of ‘support’ suggests a helping hand, one available in times of need. The reality is that it’s a commodity in name only. The pubco hand has become far too accustomed to taking, it has long since forgotten how to give.

After all, how can those who take by way of inflated rents and extortionate beer prices with one hand claim to offer support with the other? It’s tantamount to stabbing someone in the chest and then offering them a plaster.

As long as a tenant’s nostrils continue to protrude above the waterline, there is little incentive for pubcos to intervene. After all, as long as the tenant continues to pay the rent and beer, any evidence suggesting the tenant is on a downward spiral is of little consequence.

Pubcos are all too aware that churn can be a highly lucrative business. It allows dilapidations bills to be obscenely inflated and older, tenant friendly leases surrendered and replaced with agreements more in line with the pubco ethos.     

As the end draws near and the vultures begin to circle above, the reality of the ‘partnership’ becomes all too evident.

Imagine yourself at the bedside of a close relative in intensive care after you’ve been informed there’s little hope of recovery.

Now of course you could ask the surgeons to run more tests in the hope the illness has been misdiagnosed. Alternatively, you could merely sit back and wait for the inevitable to happen.

And that is what pubcos invariably do. Sit back, patiently allowing events to run their course.

Why don’t they intervene I hear you ask? Why don’t they offer some of the widely publicised support we hear so much about?

The answer is very simple. In many cases there’s a lot more money to be made by doing absolutely nothing.

BDMs instinctively know when the end is near. As the priest is summoned to issue the last rites, they’re quick to move in; attempting to resuscitate the lifeless body in the hope of maintaining a pulse for a little longer. Perhaps the tenant would like to pay the next instalment of rent and beer by credit card? 

When all attempts to revive the patient fail, thoughts inevitably turn to rather more pressing matters.

‘How much are we going to inflate the dilapidations bill by? How much can we levy in fines for non-payment of rent? How much estimated data can we generate to prove buying out? How much are the fixtures and fittings worth? How much deposit did these tenants give us? Do they own a house we can take out a compulsory purchase order on?’

That is the reality of pubco support; the legacy of the supposed ‘partnership’.

Smoke and mirrors are all very well; but problems inevitably occur when the harsh winds of change begin to disperse those seemingly impenetrable clouds of smoke.

Those winds of change have now reached gale force proportions; exposing pubco claims of investment and support for what they really are.

The products of some very fertile imaginations. 

Related topics: Legislation

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252 comments

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Bully Boys in the #Pubco Playground

Posted by J Mark Dodds,

Robert Sayle's article is well researched and accurate. What irony that all the sceptical posts here trying to pick every bit of it apart are clearly trying to make the case that everything Robert has highlighted is misinformation. Obfuscation and misrepresentation are pubco's stock in trade, the entire business model is based on lies and misselling, just as Robert's article exposes. The British tied pub sector is riddled with bad business practice, spivs, bullies and criminals. That's why beer is so expensive in Britain and that's why appallingly run down and dilapidated pubs that are simply not fit for purpose dominate the market. The pub sector is failing because of appalling mismanagement by irresponsible pubco executives who can't run a pissup in a brewery but are adept at sending in the card sharps and henchmen with knuckle dusters.

People posting here to obfuscate the truth of the piece are either

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Secret Squirrel

Posted by Interested Observer,

Inez: A brief description of the works would have assisted in a sense check of their value.

But it's not to be - it's a secret so it's business as usual in 2015 (as I said 200+ posts and almost a month ago).

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Enough said indeed....

Posted by Inez,

95 posts!

Whilst you may be more than content to place a tenant in the position of potential jeopardy, I am not! It is intriguing that you are not prepared to reveal your own identity (for the fear of potential jeopardy to your alleged former employers!), but are more than happy for a tenant (who wishes to remain anonymous for similiar reasons, to potentially reveal theirs and face potential jeopardy, sort of says it all really, good enough for you but not good enough for them, typical pubco chappie reaction!

I believe that you have posted 95 comments on this thread (happy to be corrected if required!)and no proof of your claims and yet you, ad nauseum, demand proof from any poster who dares to question your tenuous position! Quite frankly if it's good enough for you then why the hell shouldn't it be good enough for anyone else, if it's not good enough for anyone else, then why the hell should it be good enough for you?!

And, for now, back to our discussion, you have been given the differential in pricing, you have been given the beyond similarity in specifications, you have been given our interpretaion of specs, you have been given planning and building regs compliant (I am presuming that you do know what that means!) and finally it has even been put into your own wording ie same carpet!, now if you can't draw conclusions from that info...

Your games, imho, are infantile and quite pathetic, my apologies, I mean no offense, just saying.

We should be beyond this!!!

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