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Morning Briefing Strap Line
Fri 19th Oct 2012 - Friday Opinion
Subjects: Rent paradoxes, nostalgia, VAT ostriches and discounting
Authors: Nigel Ball, Chris Bulaitis, Tim Martin and Kate Nicholls

The rent paradox by Nigel Ball

All of the economic and industry evidence suggests that rental values should be falling, yet the ALMR Benchmarking Survey (phase 6, July 2012) suggests that rents in the pub sector have increased by almost 11 per cent since 2009. So why are rents still increasing? Well, the answer is that (with a few exceptions) they probably shouldn’t be. At BNP Paribas Real Estate, the rent reviews that we negotiate in the pub, bar and restaurant sector are, more often than not, settled at nil increase (more than 75 per cent in the last three years). Unfortunately, the standard commercial lease in the UK does not allow the rent to fall, but where the rent can decrease, for example at lease renewal, it often does so.

The simple explanation for this paradox is the RPI linked annual rent escalator, that inflation proofed comfort blanket for those landlords who can no longer rely on the market to deliver growth. It is to be found in the majority of leases that would form part of the ALMR benchmarking survey. A quick surf of the UK National Statistics website tells me that the Retail Price Index has increased by approximately 11 per cent since the beginning of 2009. The similarity with the result of the ALMR benchmarking survey is not a coincidence. The figures that I presented to the MA250 conference last year showed that in only one year out of the last 16 has market rental growth outstripped inflation, which tells you who benefits most from this arrangement.

Perhaps the food and drink sector can learn something from the retail market? In this sector the average lease length is little more than five years. So often for these clients we are negotiating lease renewals (rather than rent reviews) and at a renewal of the lease there is no artificial collar on the rent. The market rents that we are agreeing in some regional town centres are on average 30 per cent below the previous rent payable. Those of you paying attention will have noted that I did slip in the caveat “regional town centres”. This is because the markets are not all the same.

Central London continues to witness an excess of demand over finite supply, with the casual dining sector in particular often pushing up rental values in all main tourist and retail hubs. The same goes for strong regional centres - Manchester, Edinburgh and Leeds all immediately spring to mind. Rents are a direct function of demand against supply, and the fact is that few new shopping centres or leisure schemes have been developed in recent years, so the market must satisfy its desire for growth from either existing stock, or perhaps converting properties from other uses. But these locations are an exception.

So back to the pub market nationally, just remember that basic tenet: rental values are a product of demand and supply. Whatever the industry codes of practice or the RICS guidance notes tell you, this fundamental indicator of value should influence the outcome of your rent review; RPI escalator permitting, of course.
Nigel Ball, senior director at BNP Paribas Real Estate, helps multiple retailers in the pub and restaurant sector to reduce their property costs, including rent and rates

Nostalgia is looking backwards by Chris Bulaitis

“Sex, Drugs and Rock ‘n Roll!” That’s what this business used to be about. Well, maybe not quite that exciting, but I seem to remember it being more fun and less hassle. Am I just feeling my age perhaps? I’m not getting disillusioned with the business - I love it! But it does feel a little more like “statistics, due diligence and rules ‘n’ regulations!” than the glamour of a few decades ago. Am I simply suffering from SAD (seasonal affective disorder) due to a lack of sunshine, or has life in general turned a lot “greyer” over the last few years? It seems that just as you’ve convinced yourself that there can’t be another summer like the one we’ve just (haven’t) had, some bloody scientist produces a report that states, “due to the Atlantic Ocean water temperature rising by a tiny fraction of one degree centigrade, they are all going to be wet and stormy in the future”.

When I set up The Ever So Sensible Group just over ten years ago in Nottingham, life was full of colour, optimism, adventure and even a little bit of deviation. Now, scratching my slightly reseeding silvery-haired scalp, I feel that there is a lot more hesitation and repetition. Do you remember when you spent most of the time thinking of new things you could do to create more fun for those seemingly ever increasing customer numbers? Experimentation, innovation and challenging the traditional was the norm. Now, much like my hair, the colour seems to be dripping out of life and we are retreating back into a world of black and white television. 

I think it’s about time to get the pots of paint out and introduce some fun and colour into the business again. This Christmas I’m determined that we’re going to stop retreating into a reserved, cool, understated, timeless, traditional and boring generation. We’re going to get the glitziest, outrageously loud and brashest decorations we can find. We’re going to dress up in tinsel, get Santa to come down our chimneys, place as many colour changing LED lights on the outside and inside of our pubs and restaurants, fill the places with the sound of Frosty the Snowman and Slade (oh maybe not that far!). On the other hand simply turning into a “Chav” probably isn’t going to do anyone any favours.

There are plenty of headlines and issues to cause anyone’s brow to furrow - the economic downturn, the changes in demography, smoking bans, supermarket pricing, youth unemployment, anti-alcohol lobby, energy prices, inflation, stagnation, pub companies’ attitudes, wheat and barley harvest, and tax levels, the late-night levy saturation zones and cumulative impact areas to offer up a non-exhaustive list. But all of these individual issues are in reality mere glitches and processes that have always occurred and lead to an ever changing trading environment, whatever it is you sell.

So where the hell am I going with this column? You may well ask! I’ll tell you. My earlier lamentations over the “good old days” were of course blatant poppy-cock - they weren’t that good. In fact they were, in many ways, bloody awful! Now, in contrast, life isn’t about loud brash statements, it’s no longer about “shock and awe”, the customers don’t just flood in. Now, it really is a John Major-style “back to basics” push. Sounds boring maybe, but I find it really exhilarating. The devil IS in the detail. Today’s customers, whatever their age, education, demographic, are more savvy then ever. They understand service, quality and value. They know when something is good or mediocre. They educate their choices through research and social media. They have a substantial repertoire where they spend their pound or £50. But I believe they are also still seeking that great local, pub, club or restaurant - the venue where they feel welcome, special, part of, where they have a small share of ownership and are proud to frequent. Our role now is to concentrate on those areas that really matter. Alright it’s not “sex, drugs and rock ‘n roll”, maybe it’s a different nostalgic view from the 1980s we should be concentrating on. Remember the sitcom based in a Boston bar (US, not Lincolnshire)? Remember the song from Cheers? 

“Where everybody knows your name, 
and they’re always glad you came. 
You wanna be where you can see, 
our troubles are all the same 
You wanna be where everybody knows 
Your name.”

Chris Bulaitis is chief executive of the Ever So Sensible Group

VAT and the ostriches by Tim Martin

In his best-selling book “Good to Great” Jim Collins identified the characteristics which propelled some world-class companies into the stratosphere while others, equally successful at one time, got stuck in the slow lane for a few decades or more. A key trait among the great companies, said Collins, was a willingness to “face the brutal facts” about their businesses, however painful to contemplate. In contrast, the less successful were more inclined to adopt the ostrich approach. 

In this context, it’s interesting to look back on the major battle in the pub business about 10 years ago between those companies which supported a switch of licensing jurisdiction from magistrates to local authorities, and those which opposed it. Those supporting the switch, often justifying the position by a government promise of later opening, were a group led by Punch, Enterprise, the big trade organisations and, by dint of their silence, M&B. Those opposing were family brewers like Fullers, Young’s, Shepherd Neame and St Austell, to name but a few. The opposers understood the implications of political control of licensing and where it would lead, and we were right. 

It is almost universally acknowledged that the switch to local authority control has greatly increased pressure on individual licensees: the new regime is a lot more expensive, there’s a lot more regulation and these effects have weighed more heavily on pubs, increasing the competitive disadvantage with supermarkets. The ostriches, especially Punch and Enterprise, failed to fight their corner and left their own tenants to pick up the pieces. 

A decade on, a debate about VAT is creating a new division in the industry. Wetherspoon and the family brewers are backing Jacques Borel, and argue that pubs can’t possibly compete with supermarkets, having already lost 50 per cent of their beer sales, unless there is tax parity – 20 per cent food VAT for us and nothing for supermarkets is the road to hell. This camp has been joined by a number of restaurant companies, smaller pubcos and, to their credit, Punch. The other camp, which includes M&B, Greene King, Marston’s and Enterprise, might like the idea of VAT equality, but they’re keeping schtum and, while not disputing the logic of the Borel camp, refuse to emerge from the closet and support it overtly. Just like a decade ago the tenants of the ostrich companies are solidly with Jaques: they know what it’s like to trade next to Tesco Metro, but their boards of directors are way out of touch.

I think it’s instructive to contrast the earnings per share (profits divided by the number of shares in issue) for those companies which vociferously supported the retention of magistrates’ control a decade ago with those which opposed it. If you look at the results for Wetherspoon, Fuller’s, Young’s and Shepherd Neame, for example, it’s as plain as a pikestaff that we have far outshone our adversaries at the time, especially since the going got tough after the smoking ban. The reason for this is that companies which face the brutal facts take a longer term approach and acknowledge and understand the threats to their businesses. Those companies that refuse to face up to reality and opt for the ostrich-like approach invariably end up with serious problems. The Jacques Borel side understand that pubs face an unfair and life-threatening VAT disparity. Boards of directors that don’t understand this threat and sit on the sidelines are ostriches which can’t see the elephant in the lounge bar.
Tim Martin is the founder of JD Wetherspoon

The discounting conundrum by Kate Nicholls

To discount or not to discount – that is the question. And it is one that was scrutinised in detail at the latest ALMR Autumn Event in Nottingham, providing a whistle-stop tour of pricing strategy and practice in the sector. Pricing for growth has to be one of the most pressing operational issues in a period of prolonged austerity and the resulting consumer confidence crunch. But this was an event packed not only with incisive and insightful advice from one of the country’s leading specialists, Robert Browne of KPMG. It also showcased the operational response of a representative sample of businesses, keen to prove the sector’s vibrancy, dynamism and rude good health – and how they used pricing as one component to stay ahead of the pack.

Unilever Food Services set the scene, reviewing consumer research to highlight the growing acceptance of vouchers amongst customers. The latest Taste of the Nation research may show 24 per cent of customers seeking out discounts on-line and using them to inform their going out decisions. But Unilever’s assessment was that these customers were looking for everyday good value, not necessarily discount vouchers. A quarter of customers said pricing was important in their choice of where to eat, but that translated into trading down in outlet and meal terms and only six per cent said a promotional discount was important in deciding where to eat.

This was a view reinforced by Robert Browne, of KPMG, who warned of the dangers of general price cuts and deep discounts. He argued that general offers seemed like a good idea initially but over the long term damaged businesses. I took two messages away from Robert’s presentation – and they were both stark warnings. He argued, “Most price cuts do not stimulate enough volume - most price cuts fail”. Reducing prices by ten per cent means companies have to stimulate 17 per cent more volume to break even. He also said, categorically, that “cutting price has repeatedly been shown not to increase market share” - it only ever shifts stock.

This was echoed by Peter Marks, chief executive of Luminar, who said that this was an accepted part of his pricing policy: you cut prices aggressively to generate footfall – the hospitality equivalent of shifting stock volume. When prices are increased again, you lose customers, and the trick is knowing when to stop. Peter called it: “10p til it hurts!”

So which type of promotion should pub, bar and casual dining operators look to introduce? Robert Browne pointed to those that encourage repeat purchase, such as offering a discount on the next purchase - ones which added value. And he highlighted the advertising war in America between McDonald’s and Starbucks over the price of their coffee. McDonald’s traded on price, with slogans such as “Why pay four bucks for coffee”, whilst Starbucks led with the quality and value of a decent cup of coffee. And it was the balance between pricing competitively and aggressively which four operators stepped up to debate: can discounting ever work, or does it drive volume whilst damaging brand value? Perhaps spurred on by the sagacity of Robert’s arguments and cautionary tales, the audience was initially equally split. Mark Ashley, of Geronimo, and Alex Reilley, from Loungers - speaking in favour of the motion - favoured the Starbucks approach of providing value added offers and services, free nibbles and loyalty rewards to attract their customers.

Speaking against the motion, Peter Marks, of Luminar, and Nick Crossley, of Mitchells & Butlers Sizzling Pubs brand, argued that in their market they had no choice but to discount. Their business model was predicated on driving footfall – and it worked. Luminar’s “VIP” approach of leading with aggressive pricing to deliver Volume, Income, Profit had generated a 20 per cent increase in traffic at its venues since the start of the year.

Interestingly, as the debate progressed, it became clear that the differences between the two sides were more apparent than real – and related to the nature of their customer base and their expectations. In fact, the real debate was around the meaning of the word discount. Was giving your customers more for their money any less of a discount than a blatant price cut? Robert Browne had earlier described discounting as any offers designed to incentivise action from your customers. So in order to be effective and not damage brand value, you needed to know and understand your customer demographic.

Speakers from both sides of the argument talked of using offers, discounts and incentives to capture data about their customers. Geronimo’s customers were invited to join the G Club to get special offers – free champagne on their birthday for example – and a database of 40,000 had been gathered as a result. At the other end of the spectrum, Sizzling Pubs have a database of over 300,000 as a result of their offers. Cutting prices had not only created brand awareness but converted five per cent to loyal customers. So, does discounting damage brand value? The lesson seems to be: only if you are not in control of it or you do it in a way which is counter to your brand. Whilst slashing prices might not appeal to a Loungers or Geronimo customer, free sausages or tapas plates would do nothing for businesses like Luminar or Sizzling Pubs. 

Whatever your pricing policy and strategy – discount or incentive, value-led or value-added - you need to use it to capture and reward your customers. How you do that is down to your business and your customers – understand why you are doing it, target it precisely and above all, limit it to deliver not just volume but value and profit as well.
Kate Nicholls is strategic affairs director of the ALMR

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