While the narrative of the tenanted pub sector in recent years has often been defined by legislative squabbles and a greater focus on managed and franchised models, Red Oak Taverns has quietly gone about building a now 170-strong estate. James Wallin speaks to co-founder Mark Grunnell about the company’s commitment to invest in its pubs and its people
“The tenanted sector has had a lot of bad press over recent years – and in some cases that was merited – but at its heart is a partnership and a great basis for a sustainable business. It’s a simple business really.”
Mark Grunnell, co-founder of Red Oak Taverns, is swimming against the tide in a sector where tenanted operators are building managed empires and setting up commercial property arms.
In an era where pubcos are desperately seeking to redraw their business model in the aftermath of the pubs code and family brewers battle falling beer sales, Red Oak Taverns has been quietly building a solid estate of tenanted pubs with a mixture of tied and free-of-tie agreements.
Grunnell insists the secret to the now 170-strong estate’s success is its relentless focus on ensuring the right person is matched to the right pub. So far, so on message, but Grunnell pinpoints numerous examples – backed up with testimonials on its website – of Red Oak putting its money where its mouth is. Recent innovative schemes include a partnership with Spennymoor Town FC to incorporate its clubhouse within the refurbished Moors Tavern pub.
Grunnell is far from a faceless boardroom hermit and points out that he and co-founder Aaron Brown visited every one of the 146 GRS Pubs package (with the exception of three on the Isle of Wight – two of which have now been sold) it acquired last August. Now the group is eyeing further expansion, with the pubs code threshold – and what Grunnell describes as an inevitable “paperwork paralysis” that would ensue – as the only barrier.
The group was formed in 2011 when Grunnell and Brown – who had previously sat on numerous pub company boards – bought 32 pubs from a package operated
by Scottish & Newcastle. The pair sold eight of the pubs in order to invest the proceeds in the remainder and added four through individual acquisitions.
Grunnell says: “We wanted to learn about the operating side of the business so we thought 32 pubs was a good number to start with and from the beginning we threw
ourselves into the business. In those early days the business was largely run by just Aaron and I. We studied the pubs very closely – we spent a lot of time in them and did a lot of demographic work and competitor analysis. With that analysis and the focused investment that has followed, the original portfolio is running well.
“What we learned very quickly is that once you get a pub in the right area, it’s all about people. Everything else we can fix but ultimately it comes down to having the right people in the right pubs.”
The pubs were operated across a variety of models and Grunnell stresses that as of today only a third of its estate is tied. It also operates three managed and two franchised pubs.
“The whole relationship only works if the tenants make money. If rents are unaffordable or tenants aren’t able to make a decent margin, then at some point that pub is going to fail and then everyone suffers.”
Third time lucky
Red Oak’s interest in the GRS estate dates back to 2012 when an unsuccessful offer was made for what was then a 343-strong estate. A further bid was made when it came to market last year but Red Oak was passed over for a higher bidder who later pulled out, making it third time lucky for Grunnell and Brown. Grunnell says: “It was a deal that probably wasn’t right for everyone because it was largely free-of-tie. But for us it was a perfect fit. We knew the estate well from the previous diligence we had performed and [that] there were investment opportunities.”
Since the acquisition, 66 new leases have been signed and more than £750,000 of investment has been ploughed into 23 schemes. Eight pubs have been disposed of during this time.
Grunnell describes the company’s approach to new tenants as a flexible “try before you buy” arrangement, with publicans on a Tenancy at Will initially while Red Oak and the tenant assess each other’s performance. Subject to both parties being happy, moving to a substantive lease will follow with discussions over what the pub needs in terms of investment.
The GRS estate has seen Red Oak continue its partnership with LT Management, which takes on responsibility for telesales calls, credit control, invoicing and management reporting. All operational functions and investment decisions stay within Red Oak’s head office.
On plans for the future, Grunnell says: “We’ve always had a strategy from day one – to build a portfolio of between 200 and 300 pubs. We are always open to opportunities and what we do next really depends on what comes along.
“We have a very supportive group of private backers, many of whom have been with us since the start. When we bought GRS, everyone stayed with us and almost all increased their investment. Some new investors also joined the group.
“The important thing is that the deal has got to be right for us and there has to be room to build on the business. With the GRS portfolio we identified opportunities within the estate and a year on we’re on plan with all aspects of our business.”
Spectre of the pubs code
The only thing that could curtail Red Oak’s ambition is the spectre of the pubs code, Grunnell admits. “Unfortunately the code may present a ceiling for us because going beyond that point means a fundamental change to the way we look to run and invest in our business.
“It risks taking away much that’s entrepreneurial about a tenanted pub company and how it works with its tenants. The increase in paperwork for BDMs and other frontline staff can only divert their time and efforts away from their core task – to spend time developing the business and identifying the next tranche of investment opportunities. That kind of paperwork paralysis simply does not work for the way we choose to operate.”
Grunnell admits that the working through of the pubs code could potentially create opportunities for Red Oak Taverns, but the says the market rent-only option has ramifications for the whole industry.
He says: “If there’s one thing that concerns me it’s where is the investment going to come from? There are schemes we undertake that we simply couldn’t do unless it was on a tied basis because it would otherwise require a large increase in fixed rent. Where are tenants going to find the capital? The banks are unlikely to lend against a leasehold interest. That concerns me for our industry.
“But, whatever the longer term future holds, our focus remains on of finding and investing in great British pubs and our tenant partners.”