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Morning Briefing Strap Line
Fri 1st Nov 2013 - Friday Opinion
Subjects: Wine scarcity, pathways for tenanted pubcos, the future of licensing policy and tenanted pubco codes of practice
Authors: Martyn Cornell, Chris Gerard, Paul Chase and Peter Holden

The wine glass is definitely not half empty by Martyn Cornell

There were two stories about wine supplies in the news this week, and if you read them both you probably ended up distinctly fuddled.

The first was a report that shareholders in Treasury Wine Estates, the £1bn Australian wine producer that owns Penfolds and Wolf Blass, among others, were going to sue the company for failing to tell them about oversupply problems in the US that saw six million bottles of “out-of-date” wine poured down the drain, at a cost of A$33m (£19.6m). Treasury also had to spend US$40m discounting other stock in an attempt to shift the glut of wine the company held in the US, its largest export market. To the dismay of shareholders, the news hammered the price of stock in Treasury which was spun out of the Foster’s brewing business in 2011. All the same, Treasury’s chief executive, David Dearie, said that despite the company being “over-ambitious” in its forecasts for sales of new products, the US was still a “fantastic growth opportunity”, with wine consumption expected to grow 50% over the next decade.

A bare day or two after that news, however, you might have wondered why anyone was pouring away 500,000 cases of wine, when according to two Australia-based analysts, Tom Kierath and Crystal Wang, at Morgan Stanley Research, in 2012 the world wine market had a deficit between supply and demand of 600 times that – 300 million cases, around 10% of the market, which was the biggest deficit in nearly 50 years. What’s more, Kierath and Wang said, it’s only going to get worse. Poor weather across Europe last year hit Old World wine production, with France, the world’s largest wine producer, seeing an 18% fall between 2011 and 2012, and Old World regions as a whole reporting production down 9.5%. Global production fell by more than 5% last year, to its lowest level since the 1960s. Global “area under vine” is also falling. At the same time demand is booming in two big markets, not just the US but China as well, with China on course to become the world’s largest consumer of wine by 2016, surpassing France.

So – should Treasury really have been pouring all that wine away, around a million gallons, enough to power maybe 750,000 girls’ nights out, when there’s such a shortage? Well, specifically, the answer is “yes”, because it was all ageing stock, mostly, apparently, white wine, and as anyone in the business knows, despite the public’s perception that old wine is better wine, most wine will deteriorate after only a few years. Selling deteriorating wine is not good for the brand. But moving on from that, are we really facing a crisis? Is it true, as Kierath and Wang claim, that as stocks of wine are used up to fill the gap between current production and current demand, and consumption turns to the 2012 vintage, prices globally will rise “significantly”?

The trouble is that many experts believe Kierath and Wang have got their figures wrong, and are misinterpreting the current wine scene. Much of the loss of vineyard acreage consisted of vines that produced only low-quality wine that often ended up being turned into ethanol. And if China’s consumption of wine is growing, so is its production of wine. The country is now the number five producer of wine grapes in the world, and climbing up the rankings.

Meanwhile, if 2012 represented a slump in production, 2013 will be nowhere near as bad. The International Organisation of Vine and Wine said this week that global wine production is likely to climb 8.8% on 2012, to the highest level in seven years, thanks to bigger harvests in the Southern Hemisphere, notably in Chile and New Zealand, while even the 2013 French harvest is expected to increase by 7% over an “unusually low” 2012, despite poor weather in Bordeaux and Burgundy. The Dutch financial services company Rabobank reported that the Australian wine harvest was up 10% on the previous year. In California the harvest was so big this year that, according to reports, many wineries ran out of tank space, and left grapes still hanging on the vine. While prices rose towards the end of 2012, they have been falling back this year, with average bulk wine prices in Chile, California, France, Italy and Spain down by anywhere from 10% to 33% since January.

The world loves a scare story, and “World on edge of wine shortage” is a terrific “click on me now” headline. But bar and restaurant owners in Britain needn’t worry yet about having to increase the size of their cellars in order to stock up on a diminishing resource. Wine is an agricultural product, and production rises or falls every year according to the weather. Just over a decade ago, the market was facing a glut of wine. Since a peak in 2004, production has indeed been falling, but in large part because more marginal growers have left the market. You can bet that if demand is indeed increasing, and causing higher prices, then more vineyards will be started up again, or enlarged, to fill the gap. That’s how markets work.
Martyn Cornell is managing editor of Propel Info

Two paths for the tenanted pubcos by Chris Gerard

Since my first days in 1983 working as young district manger for Bass Charrington – responsible for a patch of 40 tenanted and managed businesses from Clacton to Milton Keynes, with a home in Wandsworth, London and an office in Suffolk – much has changed!

The industry has streamed, it has focused, it has invested and it has seen the emergence of food and coffee as new social catalysts that have changed nearly everything. Perhaps the most interesting convulsion for folk with both an appetite for risk, and the skills to mitigate those risks, has been the past 15 years’ easing of barriers and low cost-of-entry into the sector.

Back in the day (the late 1980s) Wetherspoon founder Tim Martin was pretty much alone, building new businesses on the back of two personal competencies. The first: an insightful recognition of the merit of scale, relevance, value and style as an opportunity. (An opportunity disregarded by brewers who at the time literally owned the sector). The second: the key to new sites – personal skills at law. These skills enabled him to overcome the disabling ownership of brewers "outlets’’ by obtaining new public house licences and change of use.

Today all is changed and is still changing. The ownership of the sector has become fragmented. Today the skills that are leading the sector, that have emerged from entrepreneurs in the US and the UK, have resulted in the pub vaulting to food, with large operators developing templated restaurant brands, releasing many crumbs off the table, in the form of businesses that did not fit, for entrepreneurs to then acquire and capitalise on.

The old tenanted model used to take unskilled operators and gave them a franchise complete with a building and an offer based around beer – and then policed it. Curiously what is true today in terms of franchising success (and is still oft missed), the need for the franchisor to determine and manage price, was probably the killer of that tenanted model.

Today the owners of most of our country's pubs don’t have a franchise to offer – they simply have not packaged up the skills, systems and product to enable unskilled operators to succeed. They just have property to let.

The skills, and therefore the opportunity, are now with the operators that have been steeped in the past 20 years’ changes – or those that have been mentored and influenced by these agents of change. These new highly skilled people have, and are, seizing the crumbs off the table and are developing small and highly profitable multi-unit businesses.

Working with tenanted and leased pub companies, these little multi-unit businesses are reshaping the pub and its reputation for food and service. The French were once blessed with extraordinary food and drink in virtually every far-flung town and village, while we were a laughing stock. Today, however, this position is reversed, our pubs, unfettered, are becoming really special, while French employment practices have done for their little businesses.

God bless the tenanted and leased companies of today. At their best, they get this completely and they are investing heavily to recruit change-agents and enable them, both with capital and property. This can be, and often is, a most rewarding experience for both sides, a true win-win. Where and when this fails, and it does all too often, is when one of the sides does not understand what it brings to the party – or if the operator does not have the skills needed. The unfortunate truth is that there are presently too few excellent operators and the tenanted pubcos let to a weak, second-choice operator because their P&L is hurting too much.

Looking forward, there is work for the tenanted pubcos to do. There is an opportunity to strengthen what they bring to the party and halve the number of failures, not to say consequential bad debts!

The tenanted and leased companies must begin to offer added value in order to reduce failure and enable young people to continue to enter and prosper. All the countries entrepreneurial operators need elegant and low cost solutions to provide their controls, their payroll, their reportage and their purchasing. All of these areas should not and do not need to intrude into the area of the offer. Low cost, outsourced, solutions offered as part of a pubco lease or tenancy would leave the new entrepreneur free to focus on ensuring that every guest leaves feeling super special, with a burning desire to return.

What I describe here is a genuine partnership between the pubco and the operator. One in which the retail offer is undistorted by tied beer prices, supported by smart systems, quality weekly profit reportage, experience measurement, the very best purchasing price for food and drink cost of sale, with earnings for both the operator and pubco agreed up front; earnings which are simply and transparently a function of the net sales of the business to an agreed level. This would be a solution that rewards the pubco owner for their capital investment but allows the operator to grow equity from the goodwill they create.

By linking the earnings of the pub to pubco earnings you really do focus area managers mind on quality of operator. 

The software and the providers to do all this is are available, off the shelf, now.

The alternative is not so happy for the great British pub and public. The pubcos, frustrated by the imbalance of profits being earned by their top multi-unit operators, take back their tenanted and leased estates to become directly managed. These jewel businesses become templated in order to manage them. And in 15 to 20 years' time, these pubs, currently run by some our most extraordinary and entrepreneurial operators, will have been suffocated – and the cycle repeats itself.
Chris Gerard is chief executive of Innventure and formerly ran Vintage Inns at Mitchells & Butlers

The future of licensing policy by Paul Chase

The government’s proposal to abolish the personal licence has united a famously fractious trade in a collective wail of apprehensive opposition. And not only the trade, but police licensing officers, council licensing practitioners and lawyers all see this proposal as a retrograde step that will add complexity and cost. But we need to take a step back and recognise that this proposal is only one of a clutch of licensing policy changes that seem to be pushing in the same direction – backwards.

One of the things that governments sometimes do when they find themselves dealing with a seemingly intractable problem at national level, is to shift responsibility down to local level. It becomes someone else’s problem. We see this happening in two main ways: a localism agenda that has passed responsibility for public health to local authorities, and the fashioning of a series of "licensing tools" that local licensing authorities can use to recreate the failed national licensing policies of the past, but at local level. I’m thinking here of the Late Night Levy (LNL) and what are usually, and incorrectly, referred to as "EMROs". They’re not "Early Morning Restriction Orders", they are Early Morning Alcohol Restriction Orders (EMAROs) – it is only the sale of alcohol that is restricted by the order – not entertainment or late night refreshment.

The LNL is designed to make it more expensive to operate after midnight, and the EMARO provides for the possibility of reducing the termination time at which alcohol sales must cease – potentially to midnight. The favourite termination time chosen by councils who have been pushing for EMAROs appears to be 2am. Those of us who remember the old licensing regime, under the Licensing Act 1964, will recall that 2am outside London, and 3am in London was the termination time for a Special Hours’ Certificate which enabled alcohol to be sold in premises with music and dancing and substantial refreshment. The provision of these tools is part of the government’s attempts to systematically row back from the main provisions of the Licensing Act 2003 and to recreate, at least in part, the provisions of the old licensing regime. Essentially, they want to recreate the situation where everyone goes home at 2am, or at least, stops buying alcohol at that time. They just don’t want to directly legislate for it.

Just imagine where we would be if all the EMARO applications that have been made had succeeded. 2am would begin to become the norm and the floodgates would open for more applications. But the strategy has to a large extent unravelled because of the dogged refusal of the trade to accept these outcomes as inevitable. While some LNL applications have succeeded, every EMARO has been opposed and so far not a single one has been granted. This is what makes the “Battle for Blackpool” so important. If the object of an EMARO is to curb the youthful carnival in city centres, then Blackpool is where the police, in particular, would choose to make a stand. With a clutch of QCs on both sides of the dispute Blackpool has taken on a symbolic significance that goes well beyond the relatively small area the police are seeking an EMARO for. If the application fails, after huge amounts of time and money has been spent, mostly on lawyers, then the EMARO is likely to suffer the same fate as the Alcohol Disorder Zone. If it fails, then the floodgates could open for further applications. Keep your fingers crossed.

One of the features of the proposal to abolish the personal licence that hasn’t received a lot of attention is the government’s stated intention to make the DPS, and only the DPS responsible for authorising alcohol sales. Again, the gold-plating of the DPS is an attempt to recreate the old licensee whose name was above the door, even though the DPS won’t actually hold a licence! It is part-and-parcel of this government’s "back to the future" approach to licensing.

The alcohol issue, and the noisy opinion of public health activists in relation to it, are both a problem for the government. Media stereotyping about "binge Britain" obscures the facts about declining levels of alcohol consumption – particularly in the on-trade. The government’s attempt to hive these problems off, under the guise of "localism" is part of clearing the decks for an election that they want to be about the economy and “let us finish the job”. In its attempt to recreate a perfect licensing world that never really was, the government is mindful of the fact that the more restrictive regime of the past was also much less politically controversial.
Paul Chase is a director of CPL Training and a leading on-trade licensing and health policy commentator

The industry code of practice; how did it get to this? by Peter Holden

As the three yearly deadline looms – and, in some cases, has already passed – for many tenanted pub companies to apply for reaccreditation of individual company codes of practice, it seems timely to reflect upon who is the winner in all of this. With many applications already made to the BIIBAS, and many more in the pipeline (I know that because I have been helping with some to ensure compliance with the 6th edition of the Industry Framework Code), the industry should pause and ask itself whether this is actually improving things or whether there is a better alternative. 

Consider the following:

1.  There is a predictable scramble to get companies’ codes accredited within three years of the original accreditation. This follows Rule 13. The overwhelming impression given is that everyone is merely trying to make the changes to their individual code in order to fit in with IFC 6 and no more. Even a cursory inspection of codes already reaccredited show uncanny resemblances to the wording of IFC 6. The result is that, by and large, many company codes of practice are saying much the same thing.

2.  Any tenant or lessee is likely to be daunted by the number of issues that they are facing when taking on a public house. Yet anyone taking, for example, a pub from Punch, will find their code of practice comes in at 108 pages. Are we really saying that any operator coming into the estate is going to be able to take all of this on board? The answer is pretty obviously "no". A justification given is that tenants and lessees must know where to look if an issue arises. If that is the only justification you might as well have a standard Industry Statutory Code. I have seen at least one pubco requiring new tenants to confirm in writing that they have read the company code in question before it goes any further. Is this what it has really come to? That the pubco seeks release from any obligation to ensure that its tenants or lessees have had the code disclosed to them and seeks an audit trail? That’s what it sounds like to me.

3.  Some of the code is quite difficult to follow. A good example, is: “… the Landlord … agrees to be bound by the decision of the independent arbitrator delivered through PICA-Service”.

Several lines on but in the same paragraph: “… acceptance of PICA-Service terms and conditions … cannot … prevent the parties seeking further redress through the Courts …”

Did you find that clear? I don’t think so.

4.  It must be pretty obvious to everyone that successive BISC reports have shown a remarkable degree of antagonism to some of the larger pub companies and Enterprise and Punch have been first in the firing line. Readers of my commentaries on will have seen this in some detail. Why have some pub companies chosen to seek accreditation (and subsequent three-yearly re-accreditation) for their codes and others haven’t? There are plenty of smaller pub companies with leased or tenanted estates who have not subscribed to this scheme – and why would they? What possible advantage would there be to them in doing so since, unlike Enterprise or Punch, they have not been seen as the “bad boys”. 

However, if a small pubco wants to buy even one pub from a company which has had its code of practice reaccredited under IFC 6, the selling pubco has to procure a deed of variation which binds the purchaser by incorporating IFC 6 in the lease. This leads to the ludicrous position where, for example, an entrepreneur considering buying one leased pub from one of the big players would be bound by the Industry Framework Code. Bearing in mind that the purchaser may have no resource or ability to comply with it, this does not appear to provide an advantage to anybody. The inconsistencies and contradictions within this must be apparent to everybody. 

5.  It is questionable whether the BIIBAS will be able to cope with the workload which is heading its way, with a rash of applications to approve. It is of course the industry which is funding this, and we have to ask whether this is money well spent. 

Can I suggest a solution to this which many may find unacceptable:

1.  The industry should accept that self-regulation is seen by the government to have failed. Whether it has in fact is not the point, because the government thinks it has. 

2.  Accept that there should be a Statutory Code which should apply to all pub companies except for those with less than, say, 20 or 30 outlets. The logic of this is that there is absolutely no evidence to suggest that smaller operators are perceived to be the problem. It would be open, though, to anybody to take advantage of PIRRS or PICAS.

3.  The industry should get over any fixation it has in opposing a Statutory Code. Everybody knows that the issues within the leased and tenanted pubco sector relate more to cultural issues. The problems which are causing the government so much anxiety did not arise as a result of companies not having a code of practice. Although a code of practice will help, it will not, by itself, engender the cultural change that is in fact required. 

4.  Commission a senior industry figure(s) to prepare the draft of the code. This is probably not going to be the person who wrote the consultation paper and the impact assessment for the government as part of the consultation process (Phil Dixon – where are you when the sector needs you?)

5.  If a company wants a code for its own commercial purposes then let it get on with it, but don’t confuse it with the statutory framework.

6.  Exclude commercially astute operators from the protection of the Statutory Code if you want to. To be quite frank, they don’t generally need the protection of codes of practice and are perfectly capable of looking after themselves. Who should be excluded could easily be ascertained by a minimum turnover figure, or the number of outlets currently operated by them. 

Peter Holden is a partner at Kimbells Freeth. Peter has worked with the drinks, hospitality and leisure sector for many years, advising on the legal implications of industry regulation, and taking an active interest in the impact of various government consultations on the future shape of the licensed trade

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