Friday, July 19, 2013

Bar-room brawl from the Economist

It's refreshing to see the topic of the pub sector getting into the popular press as, it seems more often than not, journalists and editorial desks shy away from trying to get to the bottom of the dreadful, labyrinthine mess the pub industry has got itself into. But what is clear here, by omission, is that the research sourced for this article was fed more by the hand of the British Beer and Pub Association giving out the standard pubco propaganda catalogue of plausible myths which explain away the deep problems of the sector as being caused by myriad external forces of the pubco apocalypse: taxes, smoking ban, recession, changing habits, supermarket booze and lure of the telly.

These of course all play a part in the catastrophic collapse of the pub sector we are witnessing but if more information had come from the other side of the bar – the side where pints are poured and the punters get served from – the article might have been less apparently balanced and pointed the finger where it really should: squarely at the industry's boardrooms, whose appalling mismanagement of the pub industry has brought Britain's most iconic, culturally significant, economically flexible and socially essential network of small businesses to its knees. The finger's aimed at the Great British Pubco's and they've nowhere to hide.

It sounds blunt but it's true: the pub sector has been in the hands of spivs and bandits who, in just twenty five years since the beer orders of 1989, have quietly, cynically and systemically manipulated the construct of the tied lease, a completely anachronistic form of free market protectionism, to blatantly asset strip the nation's pub stock from right under the British public's nose and get away with it.

It really is a case of the Emperor's new clothes. Pubco's charge excessive rent for chronically run down pubs then deliver beer and other supplies to them, routinely charging as much as double the open market price... yet pubco's say they invest in their pubs and support their tenants. They do not. And therein is the lie; pubco's do not do what they say they do. It's not rocket science to figure out: You just have to look at the state of the nation's pubs to see this is what is really happening. Our pubs are falling apart dumps that sell beer at ludicrous prices. It's no wonder customers leave in droves; who wants to sit in a run down boozer being ripped off when there's so much better value everywhere else out there in the real world that's free of ties? Stupidly expensive posh pubs seem good value by comparison. Those pubs are the ones that have been invested in, had millions spent on training, brands and product development, offer and polish. They tend, not coincidentally, to be owned by the managed arms of pubco's who know which side their bread is buttered on... They are all getting out of tenanted pubs and investing in managed chains – this side of the sector is surging ahead, expanding and making solid returns – apparently immune to all those awful inexorable troubles in the economy that explain the failure of the rest.

The figures for pub closures quoted clearly came from the pubco side of the bar because they are wrong, as the first commenter points out. Far more tied pubs close than free of tie – the figures given out to public consumption are manipulated by the industry to show the contrary and 'proves' the beer tie 'protects' pubs and their publicans from the ravages of the free market – this is palpable nonsense when you know just how much tied pubs are really being fleeced for.

The mechanism by which most investment comes into the tied pub sector is called 'churn'. This process sees a pub trading for decades under successive tenants each running serially failing businesses out of the one pub. By far the majority of tied pubco publicans – as the article shows in the earnings figures - don't make enough profit to be able to invest in their businesses, their pubs become run down, they fail, they leave the pub. Every time one tenant's business fails the pub is marketed by the pubco as an attractive 'low cost entry' into the pub sector, an opportunity to set up a new business, move home and build up value. One failed tenant is replaced by a tenant intent on turning the business round but, as the term 'low cost entry' implies, rarely do tenants invest enough in the property (nor do the pubco's encourage them because that would put them off) to adequately make up for the decades of underinvestment it's already suffered or to radically transform performance of the business. Investment by new tenants does slow the inexorable cycle of decline in the pub's viability; curious, hopeful customers come back for a while, the tenants don't make enough profit, the pub gets run down, customers leave again, pub is re-marketed and churned again until the point at which pubco assesses that no one would ever be foolish enough to try to revive its fortunes at which point pub closes, pubco puts pub on market Freehold free of tie 'may be suitable for alternative use'. There are many ways in which this destructive churn profits the pubco's financially while decimating their estates.

That pubco's are asset stripping is so incredibly blatant it's often impossible for decent people to get their head round it. Bemused observers who can't accept the obvious ask: 'This just doesn't make sense. Why would pubco's actively seek to put tenants out of business? It's not a sustainable business model, no company would do that”.

Well they do.

And this is the point: this business model is NOT sustainable and the pubco's know it. They don't care anyway but there's nothing they can do about it even if they did. Debt was not mentioned in the article yet is the fundamental problem underlying pub closures in the tied pub sector. It's likely that the BBPA or Ted Tuppen didn't bother to mention debt. Pubco's debts are gargantuan. Unsustainable £billions. The debts are so huge that interest payments alone consume all available cashflow. Pubco's cannot rebalance the level of risk and reward with tenants because if they do they will default.

Pubco's, and the BBPA, blame anything and everything, other than the fact their rents are too high and their supply prices extortionate, to explain why their pubs are failing in droves... THEY, the pubco's, are the ones who are lying. The individual tied publicans, publican led campaign groups, consumer groups, small business organisations and the unions who make up Fair Deal For Your Local campaign have not been lying – they don't need to anyway because it seems no one believes them. Everyone who's anyone apparently prefers the lies and the b'shit to the truth when it comes to pubs. It's a tragedy that so many people have been taken in by the biggest scam in British history, one that's stripping the nation of its traditions, its cultural heritage, sense of place and is damaging communities everywhere.

It's disgraceful. It's a cultural crime.

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