Pub Companies Part 4 – How They Make Money

Series: Guide to Pub Companies

Tags: Pubs

It goes without saying that pub companies are first and foremost businesses whose main objective is to make money. There is no reason, though, why companies cannot both be profitable and own pubs that offer customers great pub experiences; either directly or via their tenants/lessees. Also, pubs are not just businesses; they are an integral part of our social network, so community responsibilities are attached to their ownership (and hence the protections afforded to pubs by the planning system). Some companies have been accused of putting short-term profit ahead of long-term commitment to their pub estates — and we’ll return to this in a later article.

Paul Ainsworth

A CAMRA member since 1980, firstly in Cambridge and most recently in Barnsley, Paul is chair of CAMRA’s Pub Heritage Group and is CAMRA’s National Planning Policy Adviser. Paul is a former regional director for East Anglia.

Managed Pubs
Tenanted/Leased Pubs
Pub Disposals
The Pandemic and Beyond

Managed Pubs

We saw in the previous article that pub companies are increasing the number of pubs they manage, either directly or through retail agreements. The advantage for them is control over every aspect of the pub operation — stock, pricing, staffing, opening hours, décor and so on. The bigger companies can use their buying power to command significant discounts from suppliers, including brewers plus they can standardise elements of the customer offer, like menus, which also bring economies of scale. Efficient practices can be identified and then applied across every outlet.

The danger, of course, is that pubs become identical and certainly some branded operations are pretty much the same wherever in the country you find them, with choice and character being sacrificed to conformity. Other companies, though, take great care to ensure the individuality of their pubs, notably through the way they are designed and fitted out — so a balance can be achieved. It must also be said that many customers value consistency and like to know in advance what they can expect to get.

Tenanted/Leased Pubs

Companies derive income from their tenants/lessees in two main ways — ‘dry’ rent and ‘wet’ rent.

The dry rent is what you pay to occupy the building. Typically, there will be an initial deposit then a monthly rent, agreed for a three to five year term. Pub companies claim that their rent levels will generally be lower than the market rent for an equivalent property and so represent a relatively low-cost entry to a business that also provides a roof over your head. In fact, surveys by the Association of Licensed Multiple Retailers show that rent as a proportion of turnover (the key figure) is on average higher for tied pubs than free-of-tie leased pubs. The rent will be reviewed at the end of the term; we’ll come back to the issues that can arise in a future article.

The wet rent is what you pay the company for beer and other supplies. As a tenant, you’ll normally be ‘tied’ to the company and obliged to buy the products they offer at the prices they ask. With beer, for instance, that price will usually be 50%-100% higher than the free trade price. The company, because of its bulk buying powers, will pay less than that price anyway so the profit for them from this income source is considerable — a minimum of £210 per barrel. Some companies offer free-of-tie tenancies and tenants can also try to use the Pubs Code (more later) to obtain freedom from the tie — but in both cases, the quid pro quo will often be a significant increase in the dry rent. There are other ways in which companies can extract money from tenants/lessees but, again, we’ll get onto these later.

Pub Disposals

Pubs often occupy attractive, well-located buildings. In many cases, particularly in villages, they are worth hugely more as houses than as pubs. Others are on large plots of land which make them attractive to developers. A little while ago, over a hundred pubs a year were being lost in conversions to convenience stores, mainly in suburban areas. The temptation for pub companies, therefore, has been to capitalise on their assets and flog off pubs to make a quick profit.

Fortunately, and thanks to campaigning by CAMRA and others, it’s now more difficult to do this, in England at least (the planning laws are less helpful in the rest of the UK). Before 2017, planning permission wasn’t needed to demolish a pub or convert it to a restaurant, a shop or most kinds of office. A change in the law means that consent is now required for any change of use or demolition. Pub losses have fallen greatly since then despite all the recent difficulties for the trade. Where a pub is clearly valued by the local community, CAMRA will always support objections to unwanted planning applications. On the other hand, it must be acknowledged that some pubs find themselves in the wrong place at the wrong time. Either the previous clientele is no longer there or because of demographic changes in the area and change of use in these circumstances would be reasonable and even welcome.

The Pandemic and Beyond

The pandemic did, of course, hit both pub companies and their tenants/lessees hard. Stonegate, for instance, reported a loss of £746m for the year ending 27/9/20.

Some pub companies were criticised for their attitude to rent reductions or payment holidays for their tenants. Others, like Admiral Taverns, behaved better, cancelling rents for three months during the crisis.

Come the summer of 2021, things were looking up for the trade generally and demand for pubs, both in the free trade and tenanted arenas, was reported to be healthy. However, a couple of years later, the outlook is gloomier. The cost of living crisis is affecting pub businesses very badly through a combination of rising costs, especially for energy, and reduced customer disposable income. Many pubs have also faced great problems in recruiting staff. The impact on pub companies, as businesses, remains to be seen but there are certainly difficult times ahead.