Inside Track by John Harrington
Managed pubs are about to make a comeback. Now, I’m conscious that comment may appear quite outdated, considering the strong performance of managed estates against their struggling tenanted equivalents in recent years. What I mean is that a combination of factors is causing some operators that previously shunned managed houses to take their first proper steps into the sector.
Earlier this month M&C Report revealed that two prominent regional tenanted operators have entered the managed arena. Batemans, the Lincolnshire brewer, opened its first managed pub when it converted the Bell Inn at Burgh Le Marsh near Skegness into a managed house. Managing director Stuart Bateman said more managed sites could be added to the 62-strong pub estate, “possibly through transfers or possibly through acquisitions”.
It represents a departure for the company, which has never previously had a policy of running managed pubs. So why do it, and why now?
“It’s because we can have complete control of the standards,” explained Bateman. “This is a pub that’s got a function room, letting, and a restaurant. We just wanted to be absolutely certain that the businesses is being maximised.”
This is a telling comment that gets to the heart of the issue. While there are a multitude of excellent tenants out there, the tenanted sector is inherently risky. Pubcos can provide as much business support and vetting of potential licensees as they like, but ultimately there’s no guarantee of success; there’s no absolute guarantee in managed pubs, either, but at least destiny is in pub companies’ own hands.
In addition, studies have shown that one thing customers want in an economic downturn is consistency, and the easiest way to achieve this is through the managed house system. National managed operators are keenly aware of this. Hence, for example, Spirit Pub Company’s decision to focus so heavily on branding its sites to give an impression of familiarity and consistency.
Meanwhile, Tadcaster Pub Company, the northern England-based pub operator, revealed that it has converted four of its tenanted pubs to managed and is looking to convert two more in the near future. These would be the first managed pubs run by the company.
Managing director James Crawford-Porter said the sites, which previously operated on temporary management contracts after experiencing difficulties as tenancies, have generated more trade under the managed structure, although Tadcaster did make investments of some form in each site.
Like Bateman, Crawford-Porter recognises the advantages of managed over tenanted. “In the right [pubs], if we do the right things with them we can sometimes make a better fist of these units than the tenants do.” He compared Tadcaster’s strategy to those adopted by national operators such as Enterprise Inns, with its Project Beacon managed tenancy agreement, and also the franchise-style Retail Agreement from Marston’s.
These are valid comparisons; it’s clear that the move to convert managed pubs to tenancies has been fueled by the same factors - a drive for consistency combined with a need to reduce risks - that have led pub companies to go down the franchise route.
Meanwhile, back in January, M&C Report revealed that Oxfordshire-based Hook Norton had opened its first managed site, the Coach & Horses, a failed tenancy in the centre of Banbury. The key difference here was that the venture was under an agreement with a management company, Flagstone Inns. However, the over-riding principle of wanting a greater say over how the outlet traded was the same.
Bruce Benyon, operations director at Hook Norton, said: “We now have more access in seeing what works and what doesn’t at the site and have greater control on the offer.”
It wasn’t always like this. In the middle of the last decade - pre-recession, pre-smoking ban, and before investors started to lose confidence in the major listed tenanted operators - converting pubs from managed to tenancy was seen as a good way to avoid the burden of rapidly increasing running costs: utilities, wages, food price inflation, business rates et al. An extreme example of this was Provence, the discredited company that sold pub freeholds at auctions with a leaseback to itself. Provence finally folded in 2006 in a large part due to its disastrous decision to covert failed tenancies to managed pubs under its Countrywide Inns division, which was rumoured to be losing £360,000 per month on c.60 outlets.
One well-respected operator to exit the managed sector six years ago, via conversions and disposals, was Charles Wells. The company does still operate a managed estate: its seven-strong John Bull Pubs business in France, but chairman Paul Wells told M&C Report that the administration required is relatively light. “We are running it with nearly every back office function outsourced so we don’t have a big head office. We have three people in the office, and two of those are part time.”
Running a managed operation is less of a burden now than it was, Wells suggested, because there's more opportunity to outsource back office functions such as HR and accountancy to external companies.
Wells has no intention of re-entering the managed sector in the UK, seeing the leased and tenanted model as “the best way to grow a partnership with someone running a business”. Nevertheless, the company is looking at the principle of taking greater control of the retail offer via trials of a franchise-style scheme that are currently underway.
For Wells, this has become possible because licensees are now far more willing than they were to share information and take advice from their pub companies. “It’s easier now to experiment with different ways of doing things,” he explained. “These days retail partners are happy to share information with us.
“[In the past] the last thing you did was discuss your turnover with the brewery. That has genuinely changed for good. In our work it’s entirely normal now to help the licensee look at all ways to grow the business. We are aligned to good retail growth in that building.”
Wells’ view is that “we are all operating in the grey now”, with the traditional dividing lines between tenanted, managed and franchised blurred. As the challenging conditions put strength of trading above licensees’ operational freedom, more pub companies are likely to look at the managed system as a way to maintain and increase business. But in the current climate, when operators are enthusiastically embracing new trading styles and concepts, it’s clearly not the only game in town.
