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Morning Briefing Strap Line
Fri 30th Sep 2016 - Friday Opinion
Subjects: ACVs – from an operator’s viewpoint, joint ventures in pubs, business rates – are the storm clouds gathering, and community research – moving with the times
Authors: Mark Brown, Glynn Davis, Ben Peers and Ann Elliott

ACVs – from an operator’s viewpoint by Mark Brown

“Assets of Community Value (ACVs) are, without any exaggeration, one of the major causes of pub closure” was the reaction of the managing director of a family brewer and pub company, on the effects of the Localism Bill. This is of course the very opposite of what was intended by the legislation, which was expected to protect assets which were of real value to the local community. However, like much government interference affecting the licensed trade, it raises unforeseen consequences. Just as the Beer Orders were supposed to widen beer selection in pubs, the legislation only spawned property owning pub companies instead of brewery ownership, which further restricted beer choice for commercial reasons. 

In the same way, nominating the local pub as an Asset of Community Value, thus preventing it from being developed or the use being changed, ironically can further increase the ultimate risk of closure. These scenarios will be familiar to many operators:

In the freehold sale of a site in Sussex, the pub was saved because the date of sale preceded the ACV by just one day, meaning the decline in its value hadn’t compromised the sale. There was never a question of change of use. It is now a very thriving gastro-pub, but it would have been closed had the ACV been registered sooner.

A pub was rescued when a pub company bought the freehold, following a disastrous period under community consortium ownership. This involved a very lengthy experience to re-establish it, which the company said it would not try to repeat today.

A common opening question today when it comes to buying a pub freehold is “Is it free of an ACV?” If the answer is “no” then discussion over the possible purchase is likely to come rapidly to a halt. No serious pub buyer is going to wait months for a moratorium to consider a local bid, which nine times out of ten is not forthcoming. There are dozens of examples of pubs that have not been acquired by family brewers and pub operators because of an ACV status. The consequence of a delay in sale (due to uncertainty) is an increasingly depressed pub due to an increasingly depressed operator/freeholder. The ongoing value will also be suppressed, and the future liability of a marginal pub that risks being run at a loss or boarded up.

An operator comments on how remarkable the frequency is at which he has been contacted by genuine pub patrons offering the opportunity to acquire their local pub, enthusiastically citing the fact that: “You will be pleased to know that it has been registered as an ACV” – as if this demonstrates the amount of local customer interest (when in fact it illustrates the opposite). People in the community rarely understand the issues. Most tend to think registering an ACV is like endorsing a council amenity; “of course we want our pub to remain, even though we don’t use it, just as we want our bins to be emptied”.

A director of a national pub company is of the view that: “ACVs are being used as a brute tool to obstruct otherwise genuine and acceptable redevelopment, particularly when the units in question are not economically viable. I have personally interacted with over a dozen communities in the past six months (including local community groups and parish councils), where the sole aim was to obstruct development rather than retain a community facility for the benefit of the local community. In each case the local community did not bother submitting their intention to bid nor did they engage in exploring the potential for raising funds to finance a potential community led acquisition.”

More examples include some very distressing stories from free trade customers of family brewers, describing slow death by ACV. A rundown pub 20 years ago, with no customers, was bought by the current owner, who spent years and no small investment building up the business to become an award-winning Campaign for Real Ale pub for his retirement. Then came an ACV nomination. Now there is no community bid and no question of a change of use. 

Sadly the routine death throes process goes as follows: 

A successful pub – that could be sold to an enthusiastic pub operator – sees an ACV granted
The ACV listing drives away the operator buyers who will not wait to invest
This in turn undermines the opportunity for freehold sale and the pub’s future 
A lack of operator interest brings about a slump in quality, which leads to fewer customers.
As the value of the pub declines, so does operator interest in the venture – leading ultimately to insolvency
As a result the pub is boarded up 
Years may pass, during which time pub customers are potentially obliged to drink uncontrolled at home
Finally, a development site is the only option for the local authority and planning change of use is granted

How has a listing of the pub as a community asset helped in this scenario?
Mark Brown is a partner at Freeths and handles property disputes for hospitality businesses and has been heavily involved in challenging nominations of pubs as assets of community value

Joint ventures in pubs by Glynn Davis

In the summer of what must have been 2006 it was extremely hot (unusually) and I was sat in a pub (not unusually) and it suddenly struck me that almost every person around me was drinking pints of an orange liquid on ice (rather unusually). The barman informed me it was Magners Cider and that he was selling box loads of the stuff. Having found out the company producing the product was Ireland-based C&C Group and that it was a listed company this looked like an ideal share tip for a publication I was writing for at the time called The Fleet Street Letter.

It proved to be one of my better calls as the shares tripled in value in pretty quick order. At around the same time I was less successful with my thesis on the impending collapse in the share prices of the large pub companies Punch and Enterprise Inns. As they both grew ever larger on the back of debt-fuelled acquisitions, which were reliant on rising property prices, it was destined to all go very wrong. I just happened to be a number of years early with my prediction, which in investment terms is as good as wrong.

The reality is that a decade later we are still feeling the impact of the acquisitive sprees of that period involving both Punch and Enterprise. They are both still with us but they have had to go through an extremely arduous period to get to this point. Enterprise had built itself into a behemoth with more than 9,000 pubs and has since been slimmed down to a slightly more modest 5,000 outlets. This is clearly still an enormous number. The reality, therefore, is that even at this reduced size the profitability of its portfolio will cover the whole spectrum – from massively profitable pubs to downright poor performers. It would be pretty impressive for any business with 5,000 operating units – especially ones that are as individualistic as pubs – to have each one firing on all cylinders all of the time. There will always be problem children. 

Part of the problem for Enterprise – and Punch too – has been the ability to recruit a sufficiently high standard of tenant and manager into its pubs in order to really make them hum. In complete contrast, some of the very best pub operators in the country have the problem of sourcing new properties. They have the expertise but finding affordable pubs to add to their estates is a bit of a killer. Wouldn’t it therefore be a genius idea to put these two parties together? Enterprise supplies the pubs and it gives top-notch operators the access to run them. And they each take a cut of profits as well as sharing the refurbishment costs etc. Well this is exactly what has taken place under what Enterprise calls its “managed expert partnership”. 

These are joint venture arrangements and the first Hippo Inns launched in late 2015, having been created with Geronimo Inns’ founder Rupert Clevely. In double quick time the partnership is operating six outlets that will undoubtedly call on the food-led and creatively designed interiors that made the Geronimo Inns model so massively successful before it was acquired by Young’s. The second partnership involves Mash Inns that has been created with the Laine Pub Company. This was followed by Frontier Pubs that was formed with Karen Jones’ Food & Fuel and that has just opened its first unit in south east London. Another two are expected to follow in the capital before the end of the year.
 
Next up was Hunky Dory Pubs with Oakman Inns & Restaurants, which has been created by top food-led operator Peter Borg-Neal, and the first unit opened in Solihull in August. The most recent partnership is the Marmalade Pub Company that has been formed with Marylebone Leisure Group that operates six sites in London. The fact this young group has a focus on its own in-house made spirits and liqueurs suggests a very different market opportunity than that being pursued by the other joint ventures (that are predominantly food-led or beer-focused) and highlights the potential broad upside to Enterprise’s managed expert partnership model.

It seems such a simple and obvious idea that I’m struggling to spot the weakness in the proposition. If anybody out there has identified the fatal flaw then I’d be keen to hear from them. Otherwise it might be time to recommend the shares of Enterprise. But with as few as ten pubs presently operating across the five partnerships it could again be a case of my calling it just a little too early.
Glynn Davis is a leading commentator on retail trends 

Business rates – are the storm clouds gathering? by Ben Peers 

We read a lot in the press concerning the government’s commitment to creating a fair tax system, but is the treasury missing the point when we look into the issue of reforming the business rates system? With the 2017 draft rating list due for publication today (Friday, 30 September), operators will be looking into the implications of their new rateable value and how they might appeal.

In simple terms, business rates are a tax on business occupancy, with periodic valuation (typically every five years) to reflect changes in commercial property values. Business rates and the current 2010 rating list have been particularly sore issues amongst operators. There was firstly the unpopular postponement of the revaluation, which should have been implemented in 2015. Then there was the 31 March 2015 appeal deadline restricting the ratepayer’s ability to claim backdated business rates refunds to April 2010. The outcome of this has led to the embarrassing situation whereby the Valuation Office is now swamped with a backlog of 300,000 unsettled appeals. The spring budget gave a few soun bites, which may have provided a glimmer of hope for some, namely the increase in the small business rates threshold being doubled from £6,000 to £12,000 from 1st April 2017. 

This is possibly great news if you run a small business ie a village pub, as you may be one of the lucky few exempt from paying rates altogether. However, there will be limited enthusiasm particularly from multiple operators with combined rateable values of hundreds of thousands of pounds. Last month, a consultation on the statutory process began and the government is proposing an even more draconian minefield consisting of a “three stage” process as follows: 

1. Check: Whereby facts concerning a property must be agreed between the Valuation Office and the ratepayer 
2. Challenge: The period during which the majority of appeals will be resolved, according to the government 
3. Appeal: Whereupon any involved parties will focus on outstanding material issues 

The most concerning point in these proposals is the Valuation Office being potentially granted a “margin of error”. These proposals state that, when considering an appeal, the Valuation Tribunal for England should only order a change in the rateable value where the valuation is “outside the bounds of reasonable professional judgment”. The impact this will have on the number of successful appeals is still unknown and will all depend on how much leeway the Valuation Office is granted.

The government would seem to be unaware of the real implications of these measures, particularly for businesses with sites in prime central London or indeed prime regional centres already feeling the pressure from high rents. Commercial rents leading up to 1 April 2015 should theoretically mirror the 2017 rateable values. These increases will be more severe in those areas where there has been fierce competition by corporate operators willing to pay eye-watering rents to secure the best sites.

However, we are hopeful of some respite for those occupiers exposed to large increases, this is known as “transitional rate relief” which limits the impact on changes in rates bills between the business rates revaluations. A consultation on the scheme is due to take place shortly, this will determine the maximum increases and decreases in the rates payable which will be phased in over the duration of the 2017 rating list.
Ben Peers is a surveyor at Fleurets. The article is taken from the company’s latest On Market issue, which can be accessed here

Community research – moving with the times by Ann Elliott

As consumers' habits and the technology they use continues to develop, so does market research in order to make it conducive to obtaining feedback. One of the techniques we’ve made a concerted effort to embrace over the past 12 months has been with online communities, an emerging and developing area in market research that takes advantage of the recent innovations to internet browsing on computers and smartphones alike.

The premise is simple, recruit participants (either on-site or via a survey), and host an online discussion over two or three days. Every few hours post a topic for discussion, and participants provide their feedback. In essence, online community exploration is “taking the focus group online”. Not only is it arguably easier to “mine” for extra insight and ask follow-up questions, in an online community experience participants talk to each other as well as with the moderator. They exchange their ideas, debate them, disagree healthily and discuss the burning platforms. Furthermore, unlike a traditional focus group, participants are usually more comfortable asking questions themselves, regardless of whether they are sitting with their laptop in their living room or on a train using their tablet or phone. 

There’s also value in “reading between” the lines. What’s lost from face-to-face moderation, such as the ability to see emotion and body language, you gain from the language customers use and how they describe elements of their experience. For an industry where developing the right tone of voice is paramount, that’s incredibly useful. There’s a real richness to each and every response. Every client can find value from seeing what sort of questions consumers ask about their brand.

There are other, more obvious benefits. They’re great for testing hypotheses quickly and decisively; most communities can be recruited, facilitated and analysed within a working week. They can be revisited – after each group we have a roster of participants nationwide who are willing to take part in online research and provide concise feedback. Having said that, whilst communities are normally more cost-effective than their face-to-face counterparts, there are still benefits of traditional focus groups. On average, it’s only possible to ask around half of the questions a group will cover, so the more in-depth, exhaustive research is better served by a more comprehensive group. 

There’s also the reality that not all consumers will be comfortable contributing to online discussions on more sensitive topics. Nevertheless it’s simple to screen this kind of participant out when recruiting for a community. It’s also true that the younger generations, those who’ve grown up digitally native, are more likely to participate. Older generations who are more technophobic are less inclined to embrace such a platform, but with every panel conducted experience shows this barrier slowly coming down. 

Overall, every brand will have something to gain from an online community. Several have already established a retained panel of consumers they have a conversation with on a monthly basis. Thai Leisure Group is one example, whom Elliotts conducts a panel with each month. They’re a great way of obtaining consumer insight about the brand’s burning platforms on a regular basis. That’s not to say communities don’t work on a more ad hoc agenda. Marston’s was an early adopter here, and recently worked with us on a panel as part of a wider project, and it was a great way of rationalising feedback from other research streams with a panel of articulate consumers.
More and more businesses are seeing the value of this new methodology – and will continue to do so until research again moves on to its next innovation!
Ann Elliott is chief executive of leading PR and marketing company Elliotts – www.elliottsagency.com

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