Punch unveils new operating format

By James Wallin, MC Allegra FS

- Last updated on GMT

Punch unveils new operating format

Related tags Drinking establishments Public houses in the united kingdom

Punch Taverns has revealed details of its new operating models including a turnover based agreement, its first managed house and commercial free-of-tie arrangements as well as the potential to franchise out some of its concepts.

The update on Punch’s future strategy came as it reported preliminary results for the 52 weeks to 22 August in which it reported core estate net income up 0.3%. Underlying EBITDA was £196m (2014: £205m) and there was a statutory loss before tax of £105m includes £166m of non-underlying charges, principally due to the capital restructuring and transition to accounting for properties at market value.

The company has set up a Retail Contracts division, which currently has 31 sites with plans to grow to 100 across the country by August 2016. The agreement sees Punch retaining 100% of the sales and cost of sales and pub costs, excluding staff costs, and pays the publican a percentage of the retail sales. The company said it had seen significant (15% to 20%) volume growth in the first sites under the Retail Contract.

The company’s first managed pub opened last month, and it said “while we do not currently anticipate building a significant managed pub presence, we will take learnings from a small managed pub trial to support the development of new consumer offers”.

Punch already has a small but growing commercial free-of-tie operation with a number of fixed rent commercial free-of-tie leases and variable turnover-linked agreements in operation. The company said it expects this division to grow over time as “new innovative agreements” are introduced, particularly in the premium and destination food led segments of the estate.

The group also said it had launched atrading partnership with Harry Ramden’s within which both will jointly invest in selected sites across Punch’s estate. Harry Ramsden’s had previously been in talks with Spirit Leased to offer a branded menu offer in selected sites.

Punch said it had restructured its operations based around three key areas – the tied tenanted & leased division; the Retail pub division (including the managed pub trial); and commercial leases (free-of-tie); which will move into a separate division managed under the property team.

The group also plans to exploit the potential of under-utilised upper floor areas and excess under-utilised land bank.

It said: “Through more active property management we expect to be able to release additional value, which is not currently recognised in the external property valuation, in our freehold property and land estate over the next five years.”

The company said it had seen excellent results from our Champs and Mighty Local concepts which now number 6 and 13 outlets respectively with further rollouts planned for 2016.

It said: “The majority of Punch’s core estate (c.84%: c2,400 pubs) is in the drinks led, mainstream and value pub segments. Having seen positive results from the early concepts where Punch has developed a clear and consistent consumer offer, we are now in a position to accelerate our programme of developing and rolling-out new concepts.

“We have a high level of confidence in the upside opportunity in rolling-out retail concepts across a meaningful proportion of the estate, but have purposely not put a target on how many pubs will operate under a defined concept as the scale of any roll-out will be determined by their financial performance, which is still in the trial phase. There is also the potential to franchise these retail concepts at a future date.

“While we are taking a much more active role in defining and overseeing the consumer offer in our drinks led mainstream and value pub segments, we will take a different approach in the premium and destination food led segments which accounts for c.16% of the core estate, (c.450 pubs). These sectors require specialist skills to maximise the opportunity in these sites and we will continue to work with specialist operators, such as Harry Ramsden’s, the iconic British brand, world famous for its fish and chips, and have formed a trading partnership within which we will jointly invest in selected sites across the Punch estate.

“We have seen significant uplifts in pub sales and profit where we have invested, alongside setting the right consumer offer. It will take time to implement our strategy however which will be phased over a five year period. Investment will be directed to those pubs where we have input into the retail offer and have control over the terms of the agreement. Subject to the above, we plan to invest in up to 500 pubs per year, investing between £250 million and £300 million over the next five years.”

Punch’s full year results showed the core estate is now expected to deliver c.95% of pub profits in the 2016 financial year (up from 88% in 2014) and that average profit per pub was up 4%, benefiting from the disposal of non-core pubs.

The property estate was externally valued at £2,097 million; £692 million in excess of nominal net debt.

Nominal net debt was down £513 million in the year to £1,406 million.

Comment by M&C deputy editor, James Wallin

Since Duncan Garrood took the helm at Punch Taverns, every word he has uttered has been dissected for clues of his vision for taking the company into a post legislation word – not least by me.

His background in the franchise world was an early indicator of where the group was headed before he had even posed for his first pint pulling photo shoot. Enterprise’s bold statement of intent the month before he arrived must have only added further pressure for Punch to show its hand.

Other reasons to be unsurprised? In short, what else could Punch do? No one expected the swashbuckling approach of Enterprise but managed, franchises or turnover agreements were the obvious solution to the challenges presented by the pubs code.

The retail agreement itself has become an increasingly popular option across the industry, underpinning Enterprise’s Craft Union model, becoming the focus for a number of the most prominent regional brewer / pub operators and championed long ago by Amber Taverns.

Peter Hansen’s words at M&C’s Tenanted Pub Company Summit earlier this week were particularly telling about the expectations for Punch.

The Sapient founder told delegates: “It is going to be the desire of the pubcos to take control of the destiny of their pubs that will change the sort of agreements they offer.

“You can imagine that Punch is going to go down a similar route to Enterprise – although maybe not quite in the same proportions between pure managed and more operator style agreements.

“I don’t think, however the pubs code consultation turns out, that we will see pubcos returning to the old model of 20/30 year tied leases.”

Hansen estimated that by 2020 Enterprise and Punch will own around c6,000 pubs between them (from c8,500 now and c17,000 in 2005), of which approximately 1,500 would be managed or operator style agreements, 500 free-of-tie leases and possibly 2,500 traditional tied tenancies.

Whether Hansen’s crystal ball proves accurate is still an unknown (although he’s not usually wide of the mark) but finally the starting pistol has been fired on Punch’s post code journey.


Related topics Punch Pubs & Co

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