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Morning Briefing for pub, restaurant and food wervice operators

Tue 22nd Apr 2014 - Breaking News - Tim Martin launches scathing attack on pubco leadership
Tim Martin launches scathing attack on pubco leadership: JD Wetherspoon founder Tim Martin has made his strongest criticism yet of fellow pub company bosses for not supporting the sector’s campaign to reduce VAT. Martin argues that the financial record of a number of major sector pub companies has been poor – and draws a parallel with their failure to support the VAT campaign. Martin stated: “In “Good to Great”, author Jim Collins identified a key characteristic of successful companies as receptiveness to criticism and the concomitant ability to listen. Criticism is the engine for improvement and top managers instinctively encourage and distil it. When I criticised Enterprise Inns’ chief Ted Tuppen for campaigning for lower personal taxes for himself, rather than joining Jacques Borel’s campaign for VAT equality with supermarkets for his own tenants, I was surprised to be told by a well-known CEO that this criticism was “unhelpful”, especially since tax is the number one issue facing the trade. For some, protecting the fragile egos of CEOs is more important than creating a level playing field for pubs. We all expect politicians, football managers and others to take it on the chin when they balls it up. By the same token, pubco directors who have failed to support Jacques Borel’s VAT Club deserve to be taken to task for their poor commercial judgement and appalling track records. Tuppen is a classic example of someone who is renowned for hostility to criticism and who has consequently made mistake after mistake over the years. In spite of the fact that almost 100% of Enterprise tenants opposed the last government’s plans to transfer licensing to local authorities, Enterprise took the contrary view, leaving licensees to deal with the higher fees and greater bureaucracy - significant factors in the downfall of many pubco tenants. At the same time, Enterprise embarked on a mad borrowing binge, while hiking beer prices and rents to unsustainable levels, with dire personal consequences for their own licensees when the downturn arrived. Enterprise’s profits have halved over the last few years, as it has fought to survive by selling pubs, and many feel that its current business model is doomed, in any event. Five years of like for like declines testify to the tribulations of its tenants on the front line. Perhaps Tuppen’s most catastrophic error of judgement was the foolhardy decision to spend about £1 billion of mostly borrowed money as Enterprise bought its own shares and cancelled them (the opposite of a rights’ issue) just before the credit crunch. In the 12 months to September 2007 alone Enterprise bought 102.9 million shares for £658 million. This left the company strapped for cash at a crucial time- and the price Enterprise paid for its own shares was many times higher than the price today. Marston’s and Greene King are other notable absentees from the VAT Club and their commercial judgements in recent years have also been desperately poor. Marston’s, like Enterprise, embarked on a borrowing extravaganza in the years leading up to the credit crunch, partly to finance the purchase of its own shares. In the 2 financial years to 2008 Marston’s bought and cancelled £150 million worth of its own shares at about £4 per share. However in 2009, in order to shore up its finances, it raised about £165 million in a rights’ issue at only 59 pence a share. The effect of the rights’ issue was to more than double the number of Marston’s shares in existence, thereby halving the profits attributable to each share. In 2007 Marston’s earnings per share were about 26 pence, yet in 2013 its earnings had declined to about 12 pence as the appalling dilution of the rights’ issue took its toll. Greene King’s history tells a similar story of chronic financial misjudgement. In the 2 financial years up to 2008, it bought over £180 million worth of its own shares at about £10 per share. Yet in 2009 it reversed tack and raised about £210 million in a rights’ issue at only 270 pence per share. Ouch! Greene King’s earnings per share have also suffered, declining from 65 pence in its 2007 accounts, to 57 pence in its last financial year. All that work by so many people and all those new pubs, yet the earnings have gone down! Ian Payne, formerly of the failed Laurel and now of Stonegate, and Mark McQuater, formerly of the failed Barracuda and now of Inventive Leisure, are other notable non-members of the VAT Club - the private equity boys, with a small coterie of honourable exceptions, have been especially poor at supporting VAT equality for the pub industry. Their financial records in the pub world have also generally been diabolical. The multi-billion dollar question is why patently dreadful commercial judgement and non-membership of the VAT Club, along with a failure to campaign effectively for fair taxes, seem to be common characteristics of certain companies. Elitist attitudes and intellectual superiority are undoubtedly part of the answer. Widely-reported recent market research from trade experts Cardinal showed that pub tenants overwhelmingly want their landlords to campaign for VAT equality, yet Enterprise, Marston’s and Greene King have not done so. There is evidently a feeling among the relevant directors that they know better than the folks on the front line - almost always a precursor to corporate decline. Failure to listen and abhorrence of criticism are closely linked to this elitist trait. Legendary investor Warren Buffett has said that you should only invest in a company that’s so simple it could be run by an idiot - because one day it will be. The shareholders of the companies I have criticised will have to decide if that day has arrived for them. Does a refusal to campaign for tax equality with supermarkets when pubs have lost 50% of their beer sales to those businesses make you an idiot? That is the question for shareholders, but also for their companies’ customers, employees and tenants.”
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