Tuesday, May 15, 2012

Reality of pulling a pint leaves bad taste in the mouth

FINANCIAL TIMES 1 November 2008
By John Walter
Who has not dreamed of owning a pub? The reality, however, can be much tougher.
Mark Dodds took over the lease of the Sun and Doves, on Coldharbour Lane in south-east London, from a previous tenant in 1995 when it was turning over £1,000 a week and losing money.

He had spent 11 years in catering and hospitality, including stints at Joe Allen's, Kensington Place and the River Café in London, but always working for other people. So, when the opportunity came to run his own business, he already had a lot of experience.

Although he did not pay for the pub lease, as is common practice now, he had to present a business plan and evidence of being able to pay for planned refurbishments. Since taking it on, Dodds has spent approximately £230,000 on doing up the pub.

The Sun and Doves is in a very mixed London neighbourhood with some of the poorest wards in the UK as well as many middle class professionals. It is also close to King's College Hospital and is a regular for many health workers in the area. Dodds knows that he has to keep turnover high enough to cover fixed costs and generate an income for his family.

Attracting customers means refreshing the menu regularly, having polite and friendly staff, quiz nights, films, theme nights - such as the one he has planned for the US presidential election - and art shows. He advertises all this through his website, e-mails, posters and flyers.

To mitigate an expected downturn in business from the smoking ban last year, the pub invested £25,000 in improving the outside areas, which now have heaters and comfortable all-year-round seating. One upside of the ban is that the pub attracts more people, who were previously put off by the smoky environment.

Staff are a critical part of the business. Although Dodds spends eight to ten hours a day in the pub, he is reliant on employees to turn up and be polite to customers. And in an industry where the whole staff can turnover every six months, this is a real challenge.

The pub employs a manager, a head chef and 19 shift workers behind the bar and in the kitchen. The staff appear keen and motivated, but could leave at any time. To deal with this, Dodds pays well and employs management practicessuch as weekly meetings to discuss and evaluate performance and to look for opportunities for improvement.

He is clearly doing a good job as his manager has been with him since he started 13 years ago and several of the staff have worked there for more than four years. Although Dodds has grown the turnover to some £620,000 a year, he still faces considerable headwinds.

Under the terms of his tenancy, he is obliged to buy his beer from Scottish & Newcastle Pub Enterprises (S&NPE). He believes that companies such as S&NPE exploit their commercial position by taking the ever-increasing bulk discounts they get as middlemen from the breweries and passing on little to publicans.

According to , a campaign to remove the tie from leased pubs, co-founded by Dodds, large pub companies get discounts between £190 and £215 a barrel, yet discounts to tenants range between nothing and £40. The Sun and Doves sells some 300 barrels a year and Dodds estimates he is overpaying for beer by about £45,000 a year.

The irony of the situation is that legislation was introduced in 1989 to prevent breweries, which used to own large pub estates, from over-charging for beer. The large breweries were forced to sell off their estates and were capped at the number of tied pubs they could own. But the large pub companies that were created to own the pubs are now just as dominant as the breweries that preceded them.

Dodds also believes that the five-yearly upward-only rent reviews penalise successful tenants who run a good business and have personally invested in developing premises. This is because rents are based on valuations, which in turn are derived using a multiple of the turnover or profits. So if these increase, the value of the business goes up; and so does the rent. And if a landlord is making less than the pub company expects (they have their own methodology), you can get an increase regardless. This looks like a good each way bet for the pub company and a poor deal for the tenant.  Dodds is in dispute with S&NPE over an increase in rent from £54,000 to £82,000 in 2005, a rise of more than 50 per cent.

Over the past 20 years, pub companies have bought freeholds at high valuations with lots of cheap debt. The problem they now face is that valuations are falling and debt costs have spiralled upwards. This means having to charge tenants higher rents and more for the beer to cover higher debt expenses at a time when the overall economy is faltering.

In the current environment, being a tenant pub landlord is very tough. Rents are high, beer is expensive, costs - such as the minimum wage, utilities and rates - have been rising, and customers are spending less.  Buying a freehold or freehouse is the most attractive option but it is expensive, and requires plenty of hard work and dedication. This is not a career option for someone looking for an easy life.

Tied down by costs

Large companies, such as Punch, Enterprise Inns and the breweries (eg Greene King and Marstons), dominate the pub industry.  These groups own the freeholds and lease pubs to tenant landlords - normally in return for an upfront payment, ongoing rent and an agreement to buy their beers, cider and soft drinks.  Pubs owned by the large pub companies are known as "tied" leaseholds.

Buying a leasehold pub is like buying a business. The lease is valued either on a multiple of the last year's profit or a percentage (between 20 per cent and 30 per cent) of annual turnover.  This valuation will also take into account the fixtures, fittings and stock.

The alternative is to buy a freehouse (this can be a leasehold or a freehold, but not tied to a brewery or company).  A freehouse gives the landlord greater operational freedom, in particular the ability to source drinks much more competitively, but requires a much larger up-front capital investment.  Freehouses are usually valued at between one and three times annual revenues.  Prices can be pushed higher if one of the larger pub companies is interested in the purchase - but, at the moment, most of the big chains are constrained by the large amounts of debt on their balance sheets.

No comments:

Post a Comment