Pubcos in trouble
According to the British Beer and Pub Association (BBPA) there are still over 57,000 pubs in the UK, but only a comparatively small number of them are freehouses, both owned and managed by the licensee. Most pubs in the UK are owned by a few groups, the so-called “pubcos” (pub companies).
The two biggest pubcos – Enterprise Inns and Punch Taverns - own 16,000 pubs alone.
At the moment, the biggest problem for the pubcos is their high debt burden. Most groups seem to have been pushing exactly that kind of investment model no one in their right mind would invest in anymore these days. Pubcos’ highly leveraged business model is based on “securitization” (or the pawning of the family silver).
There is around GBP 20 billion of debt in the sector and both Enterprise and Punch are struggling to service their debt of about GBP 8.5 billion, reports say.
Market observers have worked out that together Punch and Enterprise need GBP 730 million a year to meet their debt obligations. Consequently, pubcos have to maintain current levels of short term income to meet their obligations and to stop their business model from collapsing. Despite the current recession, pubcos are continuing to raise beer prices and rents forcing many of their tenants out of business. As more of their pubs close and fewer people want to take a tied lease, the pubcos are trying to get more income out of fewer and fewer pubs.
What adds to the pubcos’ and publicans’ woes is that pub beer sales declined by 6.3 percent in the first quarter of 2009 compared to the same period in 2008. This has led to pubs closing at a rate of 30+ each week. Market observers speak of approximately 1,600 pub closures since spring 2008.
To cope with their debt issues, some pubcos have cut their dividends, while others have decided to sell off some of their pubs to strengthen their books.
Sometimes even brewers have to come to a pubco’s rescue. Although brewing beer in Britain is a cut-throat business – thanks in part to the pubcos’ bargaining power – Heineken decided to grin and bear it when the Globe Pub Company fell into trouble in April 2009 and Heineken had to purchase as much as GBP 60.2 million of the Globe’s debt, thus protecting its supply contract from being passed on to a competitor.
Despite the precarious situation for UK’s pubcos and publicans at least Guy Ritchie’s pub continues to do well. According to the British tabloids he is already planning to open another typical British pub – in New York City.
