The code, which is still yet to have an enforcement date laid down by the department for Business Innovation and Skills, has already encouraged Punch to rethink its business plan to focus heavily on turnover related agreements rather than tied leases.
“We are disappointed with the legislation doesn’t give more encouragement for transformational investment. It doesn’t give sufficient time to be able to make a return on large investments in pubs,” Garrood explained.
“It won’t stop investment, but it will restrict the amount of money we can spend.”
The pubs code has granted a waiver for significant investment, but Garrood argues it’s inadequate and will impact the industry in the long run.
'No business person would invest'
“Undoubtedly if you’re looking to spend transformational amounts of money, and you can’t guarantee making a return, no business person would ever invest their money,” he said.
“It’s like the average person in the street saying ‘I’ve got £50,000 to spend and I’m guaranteed a return for the next two years but after that I might lose half of my money’; typically they won’t put their money into it.”
The proof of the impact on the industry is evident before the pubs code even comes into force.
Punch has shifted focus to its attention on turnover-related agreements such as its partnership with Harry Ramsden.
No impact from legislation
Garrood continued: “They’re doing incredibly well. Because we have a turnover related lease, rather than rent and tied, there is no impact from legislation.
“It’s very high investment. You could never put the investment in something you cannot guarantee your investment over a period of time. I would not be a good CEO if I took shareholders’ money and invested in something they might lose their money from.”
Then there’s Punch’s retail agreement, Falcon, which gives an open-ended time frame for licensees and offers a percentage of turnover, with publicans only responsible for paying staff.
Transformational investment in Falcon ‘makes sense’ for Punch, Garrood explained. Licensees only have to front a £5,000 deposit while Punch takes care of everything else.
“But Falcon is not about justifying investment, it’s a new way of working with publicans. They are responding to this model very positively, and are happy because they are earning a reasonable amount. People feel it’s fair, and fairer than the previous lease model,” he explained.
All costs of running a pub such as stocking ingredients, paying contractors, fixtures and fittings and investments are taken care of, as well as administration, cash flow, VAT, and stock control.
“They can focus on making customers happy and treating staff well, which is what most publicans like to do,” Garrood added.
The chief executive reported a 25% volume uplift in its retail agreement, and a 10 point improvement in net promoter score on customer advocacy.
'Mature and sustainable'
“The model is much more sustainable, and a much more mature arrangement of two people who both benefit from the success of the pub. It gives a degree of focus to the pubco and to the publican,” he says.
Currently there are 70 Falcon pubs.
“As this model gets better known in the industry we get publicans approaching us asking to be considered - there’s a whole pipeline of people wanting to take this on. Over the course of a few years the current picture of the estate is going to shift,” he added.
Tied model not dead
But though Punch is focusing more on retail agreements and only striking a limited number of tied leases, the tied model is not dead yet, he argued.
“It’s very easy to say the word ‘tie’ and everyone goes ‘boo’ as if it’s a pantomime baddy that has been around for 500 years and should be eliminated,” he explained.
“I’m only one year into the industry and came in with an open mind, and I think the tie is very good for some people.”
Garrood noted the benefits of a tie, such as licensees having less exposure to fixed costs - paying a pubco more when takings are higher, and less at quieter times of the year.
Objective, independent advice
And the chief executive said his biggest concern with the pubs code is licensees getting ‘objective advice from an independent advisor’.
Punch has ruled itself of advising licensees on the best option to take, which has upset some tenants.
He explained: “We are an interested party and so have to put our hands up and say – this would be the equivalent of you paying into a pension fund and asking the manager of the pension if you should switch your savings into someone else’s fund. Guess what their answer is? ‘Stick with mine’.”
And after a hard fought battle to get the pubs code in place, those at the forefront of campaigns might not be the best to advise on the MRO option, according to Garrood.
“People who have been campaigning are not necessarily independent. If you start from the position of saying ‘the more people we have going MRO, the better’, you are automatically saying you are not independent.
'Open and honest'
“We owe it to publicans to enact this legislation in as open and honest and helpful way as we can. I would hope people who suggested and campaigned for legislation have a real desire is to make publicans happier, because that’s what we want. And the situation of whether or not to go MRO is different for every publican.
“I really hope none of us judge the success of legislation on how many people go for the MRO. It introduces good competition, makes us behave appropriately, attract the best publicans and gives choice, which is a good thing. Even if no people take up MRO the legislation is still a success.”