The politics of drinking
            January 06, 2015

Prizes and cabbages: the pub industry and the MRO

It was Friday, it was five-to-five, and we all tuned in to Crackerjack, the climax of which was a game in which kidscompeted to hold in their arms as many prizes as they could without dropping them. And a cabbage. Whatever they hung on to they got to take home. Plus a Crackerjack Pencil, of course. Gone are the days when a pencil was an object of childhood desire.

Anyway, trying to get to grips with all the issues involved in what I will, for short, call the MRO, I feel a bit like one of those kids. Every time I pick something new up, I drop something else. But there are challenges in life that must be ventured.

First, we need to clear up a number of misunderstandings and assumptions.

MPs’ decision  to go against the government and add a Market Rent Option to the Statutory Code regulating the relationship between pub-owning companies and their tenants is NOT the end of the tie.

As the name suggests, the right of a tenant to buy beer from whoever they like in return for paying a market rent is an option. I’m not sure how it’s been calculated but the consensus among industry experts, Deutsche Bank’s Geof Collyer for instance, is that only 20% of licensees eligible for the MRO deal will take it up.

If this is correct it suggests that the other 80% do not see the benefit of going free-of-tie. Or at least don’t want to take the risk.

And MRO only applies to companies with more than 500 pubs. Family brewers and smaller tenanted pubcos, which tend to operate what are known as ‘traditional’ tenancies that are often fully tied not just for beer but other products, can grow their estates up to the 500 threshold – and many probably will.

Between them they could end up with 10,000-plus tied tenancies, a fifth of the pubs in the UK, serving a much more restricted range than that available to a pubco house.

Although family brewers haveprovided more variety of late, it could mean that microbrewers are shut out of more pubs than they are now, a point made to me by SIBA chief Mike Benner, who is less enthusiastic about the benefits this so-called ‘end of the tie’ may have for his small brewery members than you might expect.

But I’ve already dropped a cabbage. The bigger question is how will the big companies, the prime target of this legislation, respond? What strategy will they adopt?

As Geof Collyer has also noted, it may be commercially sensible for them to go completely free-of-tie and truly become what they are already accused by some of being – a property company. They will get rid of most of their support services and make a bigger profit by charging a market rent. There is already one major outfit like this, Wellington Pub Company with 800-odd pubs. But I’m not sure that’s an aspirational model.

You see, the problem is that in the competitive modern market pubs require high levels of capital investment. Where is that going to come from?

One of the main factors that brought the practices of the pubcos under scrutiny was their failure, until recently, to invest in their estates. I’m talking mostly about Enterprise Inns and Punch Taverns, of course, which had to spend their money paying off the ridiculous amounts of debt accrued from their mad scramble for market share.

In the last few years they’ve sold off great swathes of their estates, and that’s made it possible for them to invest a bit more – as well as improve their relationships with remaining tenants. I take the point that the MRO will dissuade them from such investment, but if they’d invested in the past they probably wouldn’t be in this position today.

They might not take the whole business free-of-tie, though. They might go in the opposite direction and convert tenancies to franchises, or even managed houses.

Franchises do not require an MRO in the agreement and typically provide the licensee with enhanced support plus a sales incentive element in return for ‘open book’ accounting. They’re a kind of halfway house between managed and tenanted pubs, and though they don’t suit the out-and-out entrepreneur they offer a little more security to both sides of the deal. Marston’s is one large company that’s been aggressively exploring this route.

A growth in managed pubs would also be cutting with the grain – Enterprise is already experimenting with a managed division.

Another solution, one I quite like the sound of,falls to the proliferation of multiple operators that have been turning around pubs while the headlines have been on those that have sadly closed. Unlike most individual licensees the best of these have the resources to maintain and improve the fabric of pubs as well as deliver the levels of service and sharpness of offer that the market demands. And unlike most individual licensees they can borrow, too.

These multiple operators could well be another beneficiary of MRO should numbers of free-of-tie houses come onto the market, and that might prove to be a good thing for pub industry, lifting standards and bringing fresh ideas.

But that’s some way down the line. It could take seven years for the MRO to be fully introduced, and that’s a long time in pubs.

All we can be sure about at the moment, assuming the House of Lords lets the legislation through intact, is that this thing will neither save the pub industry nor result in its collapse. The MRO is merely a new chapter in a long history of prizes and cabbages that I’ll attempt to gather upin a future diary.

Meanwhile, here area few preparatory readings:

The Beer Orders 20 years on (2009)

The Beer Orders and Me (2009)

Thatcher’s Alcohol Legacy Part 1 (2013)