It is a truth universally asserted, at least in the comments section of the Morning Advertiser, that Pubcos Are Evil, their business model consisting solely of luring the naive into their sticky webs, where, entrapped, the poor victims can be sucked dry of all their money and spat out, poorer and sadder. All their policies, the pubcos’ highly vocal opponents proclaim, from charging their tenants more for their beer than the cost of that beer to freehouses to the ways they deal with struggling publicans trying to stay afloat, are Evil, Evil, Evil. Pubcos, the antis assert, should be broken up, or at the least highly regulated, with the dreaded beer tie taken away.
Now, there’s no doubt that one model, the highly leveraged pubco, turned into a slow car crash, as running up billions of pounds of debt to buy thousands of pubs and grow as big as possible turned out to be an OK plan in an economy that was doing well, but an absolutely dreadful idea in an economy that was tanking and with income from pubs falling.
But it doesn’t need much analysis to realise that the idea that pubcos constantly, cruelly and deliberately exploit their tenants, that they maximise the tenants’ pain for their own gain, is nonsense. The best, most efficient way for a company owning pubs to make the maximum amount of money is to ensure the people running its pubs make the most money they can, too. A failing tenant is no use to any pubco – indeed, every tenancy that fails costs a pubco thousands of pounds, in lost revenue and lost rent, plus all the associated expenses of closing a pub up temporarily, finding new tenants, dealing with the fall-out and so on. Pubcos, I can tell you, because I’ve talked to them about it, invest much today into trying to attract the best possible tenants, and providing them with training and support.That’s rather more than used to happen 30-plus years ago when it was the big brewers who had all the tenancies, and too often all they wanted to see in a prospective tenant was a pulse and a deposit.
Yes, you can point to cases, some of them high-profile, that show pubco tenants who have put huge efforts into their pubs, and subsequently crashed and burned, with, allegedly, only hindrance from their pubco. But I’d bet on most/nearly all pub failures being down to people simply not having all the necessary talents to run a pub: as I am about to assert several more times, it doesn’t make economic sense for a pubco to do anything other than put as much effort as it can to keeping a tenant on the road and a pub open.
The claim is that the big pubcos take an unfair share of the profits made by the pubs they own, that they make “huge excess profits” by forcing “the publican and ultimately the consumer” to pay high prices for the beer they buy. But there is no evidence I know of that beer in pubco pubs is more expensive to the consumer: how could it be, for very long, when the consumer is free to go where the beer is cheapest? Nor would it make business sense to restrict the choice of beers in a pubco pub compared to free-of-tie houses, if a wider choice of beers gives freehouses a business advantage over pubco pubs, because once again pubcos would be damaging their own revenues by driving customers away through restricting beer choice. And, indeed, the evidence is that even tenants of the biggest pubcos can choose from many hundreds of different beers from several hundred different breweries. Oh, and there’s not a lot of evidence right now of “huge profits” at the pubcos, though that, of course, is down to trying to pay down the huge debts the bigger ones accumulated when they were expanding.
In addition, it is claimed that as well as high “wet rents”, over-the-market-price charges for beer, pubcos also charge their publicans above-market-rate “dry rents” for the pubs they let out to them. But there are two things going on here. Again, there is the nonsense that a pubco would demand from its tenants such a high return that it damages the tenant’s business. I repeat: the pubco wants the tenant to keep going. The pubco wants the tenant to succeed. The pubco is not going to act against its own interests by charging its tenants so much that they quit.
Second, the pubco looks to get a return from its asset, the pub, balancing the “wet rent” money made through imposing a beer tie (where the return, while volatile, will go up quickly if the tenant does well and sells more beer) and the “dry” rent, which is less easy to adjust quickly. Removing the “wet rent” aspect means the pubco – which is, after all, a stakeholder in the pub – loses its share of any rising success in the pub. Is that fair? You might think so. I don’t believe a pubco’s shareholders – again, stakeholders in the pub, just like the tenant – would agree. The pubco and its shareholders provide the tenant with the opportunity to increase his (or her) profits, and deserve a rising slice if those profits do increase.
The call has been made for a mandatory free-of-tie option to be offered to pubco tenants. I can tell you what will happen if that is brought in: large numbers of the best currently tenanted/leased pubs will be turned into managed houses, and those pubs not suitable for a managed operation that look as if they will not bring in an adequate return to their pubco owner as free-of-tie operations will be sold to the highest bidder – likely to be Tesco, Sainsbury’s or Morrisons.
All the above springs from my musings last week on the announcement that Ted Tuppen, chief executive of Enterprise Inns, one of the two biggest pubcos, will be retiring early next year. That went up on the Propel Info website: here it is again, below. I don’t expect anybody commenting here to agree with me in my analysis: indeed, I expect to be told, as I already have been, that I don’t know what I’m talking about. I’ve had enough people comment favourably on my analyses to think that actually, I do. You all know you’re free to add comments disagreeing.
When Ted Tuppen spoke this week at a results meeting for City analysts right after it was announced that he would be resigning as chief executive of Enterprise Inns after 23 years in charge, he joked that he felt like Sachin Tendulkar walking to the crease for the last time, “but without the talent and without the adulation”. It’s a regrettable fact that to many people, who fail to understand how the pub industry works, and what Tuppen has achieved, he is less the “little master” and more the moustachioed, top-hatted pantomine villain, cloak swirling, evicting a stream of innocent struggling publicans into the snow. Alas, the tens of thousands who have been given the opportunity, through Enterprise Inns, to achieve their ambition of running a pub, and who are happy to be doing so, are nothing like as newsworthy as one angry publican in a North London suburb with lots of media types living nearby.
It’s a too-little-recognised fact that the rise of the big pubcos was not the result of the “law of unintended consequences” it has been presented in, for example, the book “Government Intervention in the Brewing Industry”, published earlier this year. It is certainly a fact that everybody involved in the Beer Orders of 1989, which ordered the then Big Six brewers to dispose of a large swath of their pubs, never realised that they would lead to massive pubcos dominating the industry: but they should have. Indeed, the rise of large, non-brewing, pub-operating companies in Britain was predicted almost 40 years before the Beer Orders. In a display of astonishing foresight, an economic analyst called Arthur Seldon, writing in The Economist in 1950, foresaw the rise of dominant, heavily advertised national beer brands, and the eventual division of the industry, as a result, into specialist brewers who had disposed of their pubs and “chains of ‘free’ houses … selling the beer in greatest demand.”
The Beer Orders, then, applying Seldon’s analysis, merely pulled the bolts from the dam gates, releasing the long-existing economic pressures on the big brewers to sell their outlets and concentrate on brewing. In the end, it did not matter that the Beer Orders watered down the original proposals of the Mergers and Monopolies Commission, and only ordered the big brewers to sell a proportion of their tied estates: once they had to sell some of their pubs, there was little remaining economic logic in keeping any of them.
The result was that hundreds of small pub companies arose to buy the blocks of pubs the big brewers were selling off. Among them was Enterprise Inns, founded by Tuppen in 1991 with the purchase of 375 pubs from Bass. Even in 1995, when it floated on the Stock Exchange, Enterprise still controlled fewer than 500 pubs. But clever manoeuvring and a stream of takeovers of other now forgotten pub companies, such as Mayfair Taverns and Century Inns, plus purchases of blocks of pubs from the remaining holdings of the big brewers, saw Tuppen’s baby grow to 3,400 pubs by 2001, and, just three years later, to more than 8,500 pubs, with the purchase of Laurel and Unique. In 13 years, then, Tuppen had grown his company to become more than 22 times larger than when it started. That’s a very rare achievement: positively Tendulkar-like.
Of course, much of this growth was powered by some pretty considerable borrowing: at the peak, Enterprise’s level of net debt was £3.8bn, equal to more than 250% of shareholders’ funds. But – and for once this IS a good excuse – everybody else was doing it, or at least, Enterprise’s main rivals were, and it was a case of borrow to grow, or go under and be swallowed yourself. In addition, it is difficult to blame Tuppen for the exuberance – what he himself this week called “massive over-excitement” – that pushed Enterprise’s share price to a peak of 774p in 2007. Nor was he responsible for the global financial crisis, and all the other problems which hammered pub incomes, and saw that share price plummet to 32p at the start of 2009.
Earlier in the presentation to analysts, Enterprise’s chairman, Rob Walker, had declared that Tuppen’s contribution to the success of the company he founded “cannot be under-estimated”, an unconscious slip (he meant “cannot be over-estimated”). But after presiding over such huge growth, Tuppen appears to have shown himself a leader for bad times as well as good. Today, Enterprise looks like a company on its way back. It has slashed the poorest performers out of its estate, which is now down to 5,500 pubs. It is now no longer having to sell better-performing pubs in order to cut its debts, though it has reduced its debts by well over £1bn in total, and its bank overdraft is now just £41m net. It is into its second quarter of like-for-like growth in income per pub. The shares, from being as low as 27p in January 2012, are now around 150p. There have been worse times for Tuppen to announce his retirement.
Not that his achievements are likely to stop the sneerers, who seem to want to blame Tuppen for every Enterprise pub that shuts down. But one of many points that critics of the pubco model fail to grasp is that a pubco doesn’t want its tenants and lessees to fail, because every failure costs it thousands of pounds, in lost income and other expenses. Last year the average cost of a pub failure to Enterprise was £18,000 – a total of more than £5m. This year it has managed to cut that cost per failure to £14,000, and reduce the number of failures by 21%. At the same time it is investing considerable effort into trying to ensure its publicans do not fail, including setting up an “intensive care unit”, the Beacon estate, where it takes over much of the running of the pub from struggling tenants. The idea that Enterprise is simply out to screw as much money out of its publicans as it can by pushing up rents as much as possible and charging them as much as possible for their beer is one only someone who doesn’t understand how businesses operate could hold. The pubco-tenant relationship is one of balance – if Enterprise’s bosses did not understand that, the company would have disappeared many years ago.
And there we come to another point that pubco critics fail to grasp: what the pubco does for the tenant. It is still a fact that by far the cheapest route into running your own business in Britain is through a pub tenancy. It’s a route thousands of would-be entrepreneurs find extremely attractive: Enterprise is still getting 70 applicants a week from people who would like to run one of its pubs, a figure than has risen 40% from last year. That’s more than 3,500 people a year. The company could replace every one of its current publicans in 18 months. What those applicants get from Enterprise is a choice of hundreds of pubs across the country, and, if they taken up a tenancy, the considerable amounts of aid and assistance that make up the “scorfa” – the “special commercial or financial advantage” – on which the pubco tied house business model is based. To quote Simon Townsend, Enterprise Inns’ chief operating officer and CEO-designate, “it’s inconceivable that these levels of investment, resources and discretionary financial support would be available were it not for the tied pub model.”
What seems to particularly rile people who don’t understand how the business works is that the “tied house” aspect allegedly “limits the range of beers the pub can sell”, and at a higher price than those beers can be bought for in the free trade. But Enterprise offers its publicans beers from 489 brewers (that’s more brewers than even existed in the UK ten years ago) and more than 1,400 cask ales, all of which can be ordered via one phonecall and delivered on one vehicle. Some limit. At the same time, the higher price of the beer is keeping the pub rent down, and helping pay for the other benefits of being a pubco tenant, including training, support services, marketing and promotional advice, one-stop supply ordering, and deals such as free wi-fi installation, and cheaper sign-ups with Sky and other broadcast providers.
There’s a good argument for saying that if it wasn’t for the pubco model and the support it provides licensees, even more pubs would have gone under in Britain than have so far. As one of the longest-lasting and most-successful pubco chief executives, having outlasted at the wicket most or all of his rivals from the early 1990s, Ted Tuppen can walk away from the crease, pulling off his batting gloves, with plenty of satisfaction.