Inside Track by Simon Townsend, chief operating officer at Enterprise Inns
This is an abridged version of a speech he made at the Tenanted Pub Company Summit on Wednesday.
Prior to the Beer Orders, enacted in December 1989, the leased and tenanted model was very simple. It was a tenanted model. The vast majority of tenancies were tied to a brewery. And then the pub lease was invented, first by Grand Metropolitan and quickly followed by Whitbread and subsequently most other national brewery pub owners including Bass, Allied and Greenalls.
From 2002 onwards, and until as recently as 2007, we saw between 750 and 1,000 assignments taking place in our leased estate every year, at an average value of little short of £100,000 – average. That means that successful publicans who assigned their leases were taking between £75-£100m of value out of their businesses each year.
Even in 2008, almost 500 assignments took place at an average value of £80,000 each. The market for the assignment of pub leases has, of course, changed markedly since then. If you wanted a great pub a few years ago, you were more likely to have to pay a premium to acquire it by assignment. If you want a great pub now, you’re more likely to be able to negotiate terms for a brand new agreement directly with the landlord.
The second, very challenging, consequence is that, unless the new publican was using their own available capital, the costs of servicing any borrowings which were used to buy the lease in the first place then put additional strain upon the business, and may make it more difficult to make any further investment in the business.
The third, very unfortunate, consequence is that publicans who bought their leases from their predecessors at the top of the market, as recently as 2008, may no longer be able to crystallise the capital value of their lease – indeed there may be no capital value.
And the final, very difficult, consequence is that publicans wanting to exit their pub, perhaps because of financial difficulty, or for personal reasons, may no longer be able to rely upon assignment as an exit route. This is the backdrop to some of the biggest developments that have occurred in the leased and tenanted marketplace, over the last few years.
Even today, over half of all the publicans occupying an Enterprise pub did not negotiate the original terms of their lease agreement with their landlord – us. They bought their pub business, including all the terms and obligations in the lease, from the preceding publican, and paid a significant capital sum to their predecessor for the privilege. A substantial number of the publicans in Enterprise pubs who have got into financial difficulty over the last few years have been those who paid assignment premiums to their predecessors.
And what the downturn has highlighted is one of the most significant features that has been prevalent in the leased and tenanted pub model in recent years – something that the vast majority of small businesses don’t enjoy – and that’s the availability to leased and tenanted publicans of financial support from their landlord, both in terms of rent concessions, and additional discounts and CAPEX.
I don’t believe there is any other business sector in the UK where this has occurred to the extent that it has in ours. At its height, discretionary assistance being given in our estate was costing us around £18m per year. Of course, in return for providing such assistance, we had introduced additional controls to help us to ensure that the financial support a) really was justified and b) that it was being used effectively. We needed to see, and be able to monitor, much more detailed financial information from our publicans – monthly management accounts and stocks in addition to audited accounts and VAT returns – and the provision of this information was an understandable condition of our continuing support.
And that took us increasingly into what I would describe as my first theme of material development in the model – a more interventionist approach in the provision of services and support which are essential to run a pub business effectively. As the downturn took a firm hold on our industry, we found that basic business disciplines were clearly not as widespread as we had either expected, or desired.
It was extraordinary to find how many publicans were not utilising the services of a proper accountant, or stocktaker, to help them control their business. We had to produce a panel of accountants and stocktakers quickly, to enable businesses in difficulty to get the advice they needed, and that has itself developed into a permanent panel of advisers, available at pre-agreed rates, which any publican can take advantage of.
And intervention hasn’t stopped there. The activity I’ve already mentioned might give publicans more time front-of-house, but it doesn’t necessarily help them to do a better job front-of-house, understand their competitors better, service their customers’ needs better, drive sales better.
Again as a pre-requisite condition of providing financial support to any publicans, we required them to undertake certain training courses – at no cost (other than their time) – to help them spend time looking on their business, something they find difficult when they spend so much time in their business.
I believe that the much tougher trading environment of the last few years has required us to introduce disciplines into the model that are designed to increase the likelihood of business success (or reduce the risk of business failure), but which have increasingly become a requirement, rather than an option.
Nowhere is this clearer than in the evolution of the pub franchise or franchise-type agreements which are now appearing.
In a nutshell, landlords are taking increasing control of the front-end of the business of the pub – the customer-facing end – in an attempt to further de-risk the business for the publican, by making certain behaviours, disciplines and controls a pre-requisite.
In Enterprise’s case, this is what our Beacon project has produced. Our results to date in a total of around 170 sites have been very encouraging, although our greatest challenges have not arisen from the pub or its location, but from the publicans themselves, whose idea of their business pub is just that – theirs – not necessarily ours.
That’s why we’ve been happy to run our Beacon estate on Tenancy-at-will agreements for as long as it takes to make sure that we have obtained the right combination of pub, proposition and publican. That’s the nature of control and intervention that we have had to develop in order to ensure the success, and sometimes the survival, of some of our pubs. We even opened a carvery operation under the Beacon control environment two weeks ago, and with weekly sales of over £13k in week-two.
I believe the degree of landlord interventionism has been the biggest single influence at play in the evolution of the leased and tenanted pub model over the last few years, and I have no doubt that this direction of travel will continue. And there’s no question that raising the bar for entry into a lease or tenancy agreement, and enforcing a regime of higher standards of protection for publicans from the outset, has been positive.
Pub-owning companies are seeking to demonstrate that their company Code of Practice is better than anybody else’s. That’s got to be good for the market, and ultimately for the pub industry. The PIRRS process has been a hugely welcome development. With a successful track record of operation behind it, I believe it would now be opportune to ask the PIRRS Board to enable a landlord company to invoke PIRRS as well as a tenant. We strongly support the development of the PICAS-Service. All of these developments add even greater structure and support to the landlord-tenant relationship in the pursuit of a mutually satisfying and profitable outcome.
The third, and final, theme I want to briefly explore is one of flexibility. The current market for leases and tenancies could not be more varied, more flexible and more competitive. The range of beers available to a pub company tenant or lessee is extraordinary, in our case some 1,400 beer brands from over 350 breweries.
Free-of-tie supply agreements for wines, spirits, minerals, amusement machines, guest ales, even all cask ales are now commonplace and as I’ve said before, at Enterprise we’ll negotiate almost anything with almost anybody, as long as the outcome works for us both.
Competitive product discounts now feature in the vast majority of agreements – in our case 83% of our pubs have contractual discounts built in, and over 90% of all new lettings now include contractual discounts. There has never been more flexibility in agreement term and type.
All of these features have arisen over a relatively short period of time, reflecting changes in the market in which we operate, dynamic competition between landlords, leading to increasingly demanding tenants.
The leased and tenanted model is only successful if its publicans are successful. We are all in business to attract, train and retain the best publicans to run our pubs, and without great publicans, we simply own buildings.
In the case of my own company, where the average length of publican occupancy is over five years, that is our mission and we will continue to develop a vast array of products and services designed to help Enterprise publicans be more successful, more profitable, more satisfied.
