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Fri 22nd Nov 2013 - Friday Opinion
Subjects: Isolated boardrooms, Ted Tuppen, waiting staff, profit split between pubcos and tenants
Authors: Tim Martin, Martyn Cornell, Ann Elliott and Peter Holden

Why isolated boardrooms need to listen by Tim Martin

The key to success in both business and politics is an accurate estimation as to which policies will bring about your desired objectives. The best-laid plans often produce the opposite effect to that which was planned – the law of unintended consequences. The key to getting it right can be summed up in one word: listen. Listen to colleagues, customers, competitors, critics and anyone else with an opinion. Once you know what people think, you can distil and decide. If you are in a minority of one, think again. The great danger to good decisions is ego. Those who have to be right all the time and hate criticism make bad political decisions and destroy companies, given enough time.

The last government’s approach to pubs was fraught with unintended consequences. It sought to reduce binge drinking by more regulation and higher taxes. This had the desired result (for them) of pushing up pub prices, but the unforeseen effect of reducing the average price for drinks, as customers deserted pubs in their droves and switched to supermarkets. Each pint consumed at home also produced less tax for the government and fewer jobs for the country.

A further unplanned consequence was that the 10,000 pub closures (so far) also had a malevolent effect on the delicate financial and social ecosystems in which they existed. Any town planner will tell you that successful high streets invariably comprise 30 to 40% or so of non-retail uses, including pubs, coffee shops, restaurants, bookmakers and so on. Since the pub is often the hub, closures have had a predictable knock-on effect on shops and other businesses, as well reducing employment and tax revenue.

The effects of pub closures and high street dereliction are most keenly felt in less well-off neighbourhoods, often in the north of England, Wales and Scotland. Customers in these areas cannot afford the widening differential between pub and supermarket prices. PLCs often boast about their exposure to the affluent south-east for this reason. There are many taxes and regulations which contribute to the problem but the main ones are VAT and rates: pubs pay 20% VAT on food sales, and supermarkets almost nothing, and we pay an astronomic 15 pence or so a pint for rates, far more than the off-trade.

In effect, the tax system, by charging supermarkets less, is encouraging the public to by-pass pubs, usually located in and around high streets, for mainly drive-to supermarkets. Faced with these economic mountains, there is little Mary Portas can do to fix the problem.

Whether by instinct or analysis, publicans at the coal-face understand the threat from supermarkets and seek fairness from their pubco and political masters. A recent survey by Cardinal Research showed that 96% believe their companies should campaign for VAT parity and 94% recommend support for the VAT Club itself. Lessees are the strongest supporters with, for example, 100% of Enterprise and Marston’s tenants backing the Club.

Yet the views of licensees are not universally supported in boardrooms. Enterprise and Marston’s, for example, have been mute, or almost mute, on the subject of VAT inequality. Why does this gap exist between the directors of some pubcos, their licensees and the rest of the industry?

I think there three main reasons. The first is a desire, perhaps subconscious, to stay on the right side of legislators, with whom they often maintain close contacts, and to avoid rocking the boat (cynics might suggest a hope of future preferment, but that is surely far-fetched). Second is a short-term approach: some companies are under vast economic pressure from past mistakes, not always of the current management’s making, so they are not inclined to grapple with knotty areas of taxation for the likely benefit of their successors. Third, in spite of the arguments of the clear evidence that each pint or meal in a pub produces more tax and jobs than those from supermarkets, some directors, amazingly, toe the government line, which says that tax parity will cost the country money. This may seem perverse, but that view appears to be held by many refuseniks.

But the most important reason is that some directors are isolated by their own reality distortion fields. They tend to live in the Notting Hills, Solihulls, Maghulls and other leafy suburbs, as I do myself. They see few empty shops in their own locales and struggle to see that the difference in the price of a pint between pubs and supermarkets, which matters little to them, can have such significance in Wallsend or Bootle.

Meanwhile, the vast supermarket tax breaks continue, pub closures continue and many pubs are deprived of the necessary levels of investment to equip them for future prosperity. Those in isolated boardrooms need to listen: the guys on the frontline know best. Unless you man up to the true economic challenge from supermarkets, a hard rain is gonna fall. "Let them eat cake in less affluent areas" is the implicit message from some directors and their political allies.
Tim Martin is founder of JD Wetherspoon

In praise of Ted Tuppen by Martyn Cornell

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.
Martyn Cornell is managing editor of Propel Info

Customers and waiting staff by Ann Elliott

An awful lot is expected of a waiter/ waitress nowadays. They need to be emotionally intelligent, able to handle empowerment, to smile in the face of indifference, handle diva chefs, think on their feet and pick their way around small children causing chaos. And lots more.

When restaurateur Danny Meyer writes in his book (and I paraphrase) that he looks for those who give of themselves to work in his restaurants, I can quite understand what he is talking about. It is a very giving role. For the time they are at work, they do not have time to think about themselves – they have to put others at the heart of everything they do. He looks for those who do that in their private lives so they are happy to do that at work, too: it’s just part of who they are.

They have to be intuitive, able to recognise that customers want to be "treated" differently on different occasions. Their needs when they come in for a Monday morning breakfast business meeting are quite different to those on a Sunday lunch family occasion. We talk a lot about customer needs along their journey and the operator touch points with these customers: looking in, reading the menu box, crossing the threshold, the welcome, seating, given menus, drinks ordering, food ordering, drinks delivery, food delivery, upsell, more food and drink delivery and order, asking for the bill, paying and leaving. Each part of this customer journey is a human interaction that can go well or can go badly – in a matter of seconds.

I was thinking about these need states after a visit to Le Bistrot Pierre in Ilkley this week. They aren’t a client so I have no vested interest in talking about them. It is just that in this visit they seem to address many of the subconscious things I wanted.

1)  Anxiety:
Questions going around in my head included "Will they have the booking and, if not, will I get a table?" The moment I walked through the door, the manager looked at me and said, "You must be the Elliott party?" This was the restaurant equivalent of bag check-in at an airport. I immediately could feel a worry disappear (not a big worry in the context of what I could be worried about, I have to admit, but a niggle all the same) and able to relax.

2)  Feeling valued:
It is a silly thing to want, really, out of a two-hour restaurant visit but I have to acknowledge that the feeling is there. At Le Bistrot Pierre, the manager said: “ We have a great table for you, and Sarah will be looking after you all evening.” We all had the sense that the manager really valued our custom and that our happiness was important to him.

3)  Reassurance:
The waitress made some sort of comment on most of our dishes when we ordered them – "that’s a great dish", or "that’s a favourite of mine", or "that’s brilliant with these vegetables". It wasn’t like being in a clothes shop when unctuous shop assistants say, "You look wonderful in that dress, madam," when you know you look like a bag of wriggling ferrets in it. This felt very genuine and personal. We were all reassured that we had made the right choice.

4)  Being taken care of:
Our waitress owned our table. She swept her eyes over the whole table. She asked how our specific meals were. The dishes weren’t auctioned off – "who is the chicken?" We were owned by her. She cared that we had a great time. When all this comes together and when a waitress can truly address a customer’s needs states, then going out for a meal can be a truly fantastic occasion just based on the service alone. That the food was great, too, was wonderful but a bonus on top of being made to feel so special.
Ann Elliott is chief executive of leading sector marketing and PR agency Elliotts – www.elliottsagency.com

Pubco-tenant relationships: a question of partnership? by Peter Holden

In my last piece for Propel Opinion I drew attention to the scramble to seek reaccreditation for company codes of practice and asked whether this is really the answer to the various issues facing the sector. I suggested that these issues were not caused by a lack of codes of practice, which will not, by themselves, solve the issues because it is a cultural change that is required. 

Cultural change is not going to be achieved by transferring profit or income from the pubco to the tied tenant, so as to match the tied tenant’s returns with the returns achieved by a free-of-tie tenant. Apart from the fact that appropriation of private property is morally (and probably legally) wrong, it simply does not solve the problem and certainly does not provide a solid base for the investment in both people and property which is undoubtedly required for successful pubs. Any scheme by the government that effectively props up or prolongs the life of failing pubs will not ensure the good health of our pubs, and is likely to be viewed in the future with the disdain with which we now view the Beer Orders for having produced some unanticipated consequences.

Can I suggest that a possible solution lies in the notion of “partnership”. This should be not a difficult concept, at least in principle, for the industry. Indeed, a cursory examination of accredited company codes on the BIIBAS website reveals various references to “partners” (this means the tenants) and “partnership” (this means the pubco and tenant relationship). I invite you to consider the following points with a view to achieving the partnership that might just provide an answer to the current impasse:

1)  Evidence available to me from up and down the country tells me that, far from failing, the traditional tenancy (ie a shorter term arrangement) is, generally, in good health. Those who propose abolition of the tie would do well to recognise this. There is nothing wrong with the tie and there is nothing wrong with the traditional tenancy model. It is just that it has been applied in some cases which have proved unhelpful. If this sounds like the government’s line the conclusions drawn will be very different.

2)  The same cannot be said, alas, for leases. There are certain profiles of operator and pub that are suitable for longer terms arrangements which go beyond the traditional tenancy. However, these are often limited to cases where one or, preferably, both the landlord and the tenant have the operational skills and financial resources to invest in the outlet. We can all think of good examples of these houses (I had lunch in one of them in Saffron Walden the other Saturday) but unless there is a willingness and ability to invest (in both the people who run the business and in the property), this is unlikely to work. Accordingly, a different financial model and different rules should apply to leases. The treatment afforded to leases in the IFC version 6 is simply not far-reaching enough to address these underlying issues. Unless there is investment in outlets, there will be decline. Long leases do not necessarily lead to the correct levels of investment to make them succeed. The correct treatment for leases is a subject I may return to in the future.

3)  The way pubcos derive their income from the tied model can be easily summarised by the following equation:

R + PM + MI = PI

Where:
R means rent
PM means product margin
MI means machine income
PI means pubco income

What the pubco makes (PI) is not equal to what the tenant makes and is never going to be. However, tinkering around by reducing or removing one part of the landlord’s return and adding it to the tenant’s return does not go to the essence of the problem which is that, in practice, the pubco will get its return first, and then the tied tenant gets whatever is left.

This has been presented by various commentators as an issue for rent-setting or discounting or not double-counting machine income, and there is no doubt that there are issues with the way in which the individual constituents of PI have been calculated. But the net effect of these proposals is to transfer an element of PI to the tenant to increase his return, which is broadly similar in principle to the government’s plan to transfer profit from pubcos to their tenants. In contrast, in a genuine partnership each side gets their return, but without any priority for one side to get their share first. An answer to this is to have the tenancy turnover related – but there would have to be some limits and conditions in the model. These would include:

• Minimum levels of return for both sides so that no one has to support a failing operation.

• Possible sharing arrangements in respect of the tenant’s profit. If the constituent elements of PI are reduced so as to increase the tenant’s potential share of the house income, there can be no objection in principle to some elements of tenant profit-sharing.

• Some priority of returns to reflect the requirement for returns on invested money (in much the same way as bank borrowings would be prioritised).

4)  The government’s perception seems to be based on the view that there is not enough left in it for the tenant. This might often be true, but pubcos and tenants should get the rewards they deserve. This means, in the context of turnover rents:

• If your reward is a share of turnover you (the pubco) are going to take a lot more effort to ensure that the tenant is the right person to take it forward. This means ruthless tenant selection and vigorous training, in order to minimise the risk. 

• If your reward is turnover-based you will increase your return if you invest. The principal objection to the government proposal is that it does not encourage investment and, candidly, the comments made in the consultation paper and the impact assessment relating to investment are laughable. 

I realise that there are range of deeply held objections to these proposals which I have no doubt the industry will be quick to voice. However I note, as we go to press, the announcement in the trade press that Enterprise is considering a move to turnover related rents.
Peter Holden is a partner at Kimbells Freeth. He wrote the above article with input from fellow partner Christopher Ainsworth. 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. Christopher works with both tenanted and managed operators and has been involved in advising several pub companies on their codes of practice

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