Comment: Let’s raise a glass to the pubco model

Scotland’s embattled licensed trade could be set for further change, following the move by the UK government to introduce a statutory pubs code for England and Wales, which will be enforced by an independent pubs code adjudicator. Part of the Small Business, Enterprise and Employment Bill, the legislation comes after four reports over a ten-year period by the business, innovation and skills select committee, into the perceived imbalance in the bargaining power between tied tenants and their pub-owning companies.

The sector has seen significant change in recent years. Picture: Jacky Ghossein

The sector has seen significant change in recent years, with changes in the drink driving laws and the earlier smoking ban posing significant challenges to pubs and other licensed premises.

Once enacted, pubcos owning more than 500 pubs, including managed houses, may be forced to offer its tenants the option of moving to a free-of-tie rent, named market rent only (MRO), if one of a number of trigger points occur. Tenants of companies with more than 500 pubs would be allowed to buy beer/cider anywhere, creating a two-tier market. Such changes will impact many of the UK’s smaller pubs.

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The potential impact on pubs in Scotland has only recently become clear, following amendments to the bill by the House of Lords’ grand committee to make the issue a devolved matter. Holyrood now has the opportunity to act, following the decision by Paul Martin MSP to propose a members’ business motion late last month calling for a statutory code of practice for pub companies to be implemented in Scotland.

Opponents of the current tie-agreements argue they stifle competition and lead to higher prices for customers, less choice and poorer quality beer. Anti-tie campaigners believe that allowing tenants to buy beer on the open market will encourage competition, and help to keep more pubs open. However, this fails to recognise that tied pub company retail beer prices are on average 6 per cent lower than free-of-tie retail prices.

Pub have taken place across the industry, with the rate in the free-of-tie sector more than double the closure rate of closures in the tied, tenanted and leased sector. While there is a range of reasons for the pressures faced by the sector, one factor reinforcing the relative strength of tied premises is the importance to pub companies of safeguarding beer volumes. This is why pub companies invest substantial amounts in capital expenditure, tenant support and rent concessions when good licensees are struggling.

If tenants take up the MRO option they will be free to buy their beers from any supplier but the biggest beneficiaries of this new economic model will be the major brewers. Pubcos will lose a significant revenue stream and, as a result, some investment plans have already been put on hold. While some tenants will be better off under an MRO, the financial risk will no longer be shared with the pubco. Furthermore, beer prices are unlikely to fall, with tenants facing having to balance a modest discount with increased rent.

Pubcos may have been guilty of some poor historic practices, but much had already been done to remedy any imbalances. The surprise introduction of the MRO is unlikely to be the panacea to the problems which affect the tenants of marginal pubs.

The Scottish Government is yet to show its hand on whether Scotland will get its own statutory code of practice for pub companies. Brewers, licensed trade organisations and tenants are eager to see such moves taking place. The pub sector has a long history of evolving in response to regulatory changes, political interference and social patterns. In the wake of changes to the beer tie, alternative operating models are likely to emerge and some significant changes in ownership may also be on the cards.

Paul Shiells is director, licensed & leisure, with Colliers International in Glasgow.