As more details emerge of how the pubs code will work in practice, pubcos are already responding with an increased focus on alternative agreements. From emerging companies to traditional family brewers, turnover related agreements or ‘manchises’ are becoming a key weapon in winning the war on talent. But with labour cost as the key concern for the operator, does the introduction of the National Living Wage present a barrier to success?
For the five key figures in the debate surrounding legislation of the pubco/tenant relationship taking part in a panel session at our Tenanted Pub Company Summit next week, an interesting shift has occurred in the last week.
Since winning what even their most ardent critics must describe as an impressive victory against the odds in securing the Market Rent Only option in the pubs code, the pubco reform campaigners have been buoyant. The pubcos meanwhile have retreated, bruised and battered, to rethink their entire business model and how they promote it. The family brewers and the wider industry have watched on with apprehension, eager to see if they too could be condemned by small print.
Then last week the first part of the long-awaited consultation on the secondary legislation needed to implement the pubs code was released. The pubcos’ prayers, or at least the key planks of their lobbying demands, were answered. Parallel rent assessments are gone, a waiver of MRO in return for ‘significant investment’ is given support along with a blueprint to extend that amnesty beyond five years.
A key question for Lib Dem MP Greg Mulholland – who led the campaign in Parliament pressing for MRO – will be whether the Conservatives still have the same zeal for tilting the balance of power in the pubco/tenant relationship now they have no need to appease a Coalition partner.
For the pubcos the intrigue centres around how this more encouraging than expected response from the Government affects their own plans. Enterprise Inns has signalled an audacious assault on the managed market while Punch Taverns is widely expected to indicate a similar direction when recently appointed chief executive Duncan Garrood updates the market at the end of next week. Does the considerable investment in infrastructure and added pressures on recruitment that these approaches will require still make add up if MRO is not quite the knockout blow it may have been feared?
One defensive manoeuvere increasingly being adopted not just by the major tenanted companies but across the industry is the turnover related operator agreements, in its various hues.
In the past week both Thwaites and Camerons have talked to M&C about their interest in the model (Thwaites is beginning to offer it to prospective operators, Camerons has recently opened its first site under the agreement). Meanwhile Elton Mouna, the new managing director of 15-strong Remarkable Restaurants told M&C he remained committed to the group’s innovative model of offering 15% of wet sales to the general managers of their sites, to pay themselves and their staff while also giving them the food franchise. Batemans recently opened its first site under what Stuart Bateman has nicknamed a ‘manchise’ agreement.
But in the same week a warning shot in respect of this model was fired by CBRE. In its latest UK Pubs Marketview the company said the industry average of 18% of turnover given to operators as part of these agreements may need to revised in the light of the introduction of the National Living Wage (NLW). Otherwise, the report warns, pubcos must surely be forced to look at pricing to make up the difference.
CBRE pointed out that with labour costs the only cost remaining with the tenant, the NLW was bound to make these deals look less attractive, unless the percentage was increased accordingly. The report also noted that product pricing was often key to these models – with the operator ad and pubco agreeing on levels in line with the local market.
Amber Taverns has been championing the operator agreement for many years and built a 100+ pub estate through it successful deployment.
Managing director James Baer told M&C he found the focus by CBRE surprising.
“NLW is surely a challenge for all retail hospitality. Are the big tenanted pubcos going to cut their rents?
“For us the operator agreement is much more than just the economics, it’s the mindest of giving a licensee the attitude that they are running their own business with the high level of support we offer. It’s admin light and the operator is encouraged to be at the coalface, communicating with customers. With our model they have the option of covering a few more hours themselves to mitigate the impact of NLW.
“One important difference for us is that we don’t have food, which is the most labour intensive part of the industry. You have a chefs’ skills shortage which just going to be compounded by the upward pressures that NLW will bring. It’s probably much more relevant to ask pure restaurant companies or pubcos like Wetherspoon’s or Mitchells & Butlers how they are going to cope with NLW.”
Baer thinks the popularity of the agreement is two-fold – for the customers it puts the focus on the hosting skills of the licensee; and for increasingly savvy prospective operators it provides a relationship in which both landlord and tenant stand to gain from the pub’s success.
Marston’s chief executive Ralph Findlay has long championed the company’s franchise agreement as a much preferable alternative to the tenanted model and continues to convert pubs under this model, with the aim of being under the MRO threshold of 500 pubs by the time the legislation is implemented.
For Findlay it will be the second tranche of the Government’s consultation on the pubs code, in which it sets out its attitude towards alternative forms of tenanted operations, that will be of great interest.
Meanwhile, the traditional tenanted model is far from dead. Admiral Taverns chief executive Kevin Georgel last week reiterated his commitment to the model insisting that if the share of risk and reward that is inherent in the relationship is effectively communicated it has a bright future.
What all parties can agree on is that the tenanted model continues to evolve and adapt, despite the pressures of MRO, NLW and whichever acronym next appears to menace this much challenged sector.
The debate continues at the Tenanted Pub Company Summit on 10 November at the Mayfair Hotel. Kevin Georgel will be the keynote speaker, while Clive Chesser will explain Greene King’s vision for the newly combined Greene King Pub Partners and Spirit tenanted and leased businesses. Peter Hansen of Sapient Corporate Finance will examine the variety of agreements in the market and impact the deals market in years to come. Plus, the topic of MRO: Meltdown or Real Opportunity will be discussed by James Staughton, chairman of the Independent Family Brewers of Britain; Andy Slee, Punch Taverns representative in negotiations on the pubs code; Brigid Simmonds, chief executive of the British Beer & Pub Association; Chris Wright, co-founder, Pubs Advisory Service and Greg Mulholland, chair of the All Party Parliamentary Save the Pub Group.
To see the full conference programme click here
