There will be “serious unintended consequences,” warned Simon Townsend, chief executive of pub owner Enterprise Inns. The effect on his shareholders was certainly severe – 17% went off the share price in the first gulp as MPs voted, in effect, to abolish the “beer tie” that forces tenants to buy their beer from their landlord.
Townsend was talking about “widespread pub closures, significant job losses and reduced investment in the sector”. The trade body, the British Beer and Pub Association, cited the government’s own research to claim that 1,400 more pubs will close and 7,000 jobs will be lost.
Actually, the report in question (from London Economics) spoke about “700-1,400” pub closures and “3,700-7,000” job losses, which more fairly reflects the fact that nobody really knows what reform will produce, assuming the measure is actually passed into law.
Tied tenants will get the option to negotiate a contract where they pay “market rent” on the pub. What is a market rent? Is it rent for the use of the property only as a pub? Or can Enterprise, Punch Taverns and other big landlords first tout their property to Tesco or Sainsbury’s as a convenience store? As Deutsche Bank’s Geoff Collyer pointed out, Enterprise has “the nuclear option” of turning itself into a pure property company, or real estate investment trust.
It is easier to explain how the pub companies made themselves so unpopular with so many tenants and now MPs, including those rebel Tories who spy a bad case of crony capitalism. In short, the law of unintended consequences was also at work when Enterprise and Punch Taverns loaded themselves up with towering levels of debt more than a decade ago.
When disasters struck the industry (the smoking ban, cheap supermarket booze, recession), tenants were too often left exposed. Many found themselves earning a pittance as the pubcos concentrated on serving their bondholders and salvaging something for their shareholders. Too much money went out the top of this industry; too little was invested at the bottom; and too many pubs struggled to compete with other attractions.
That’s the last decade’s story, the industry would argue. It is true that the pubcos have been bludgeoned into offering more support for tenants and various codes of good practice have been introduced. And it is also the case that tenants sign these “beer tie” contracts freely, knowing they will be paying above the odds for beer in exchange for a sub-market rent.
Even so, the death of the tie – if it happens – seems an intelligent way to proceed, whatever the uncertainties. Allowing purer market forces to decide rental levels and the price of beer-supply contracts will shake things up. It’s a more transparent way to live. The pubco era produced a dispiriting experiment in financial engineering. Let’s see what more freedom for pub tenants brings.
Challenging mail
At headline level, life looks a grind for Royal Mail. Revenues advanced by only 2% in the first half of this year. Now here goes Amazon, building its own delivery network.
That development has jolted the idea that Royal Mail would get an easy ride on the back of the rise of online shopping. Amazon is so big that its move in-house means the “addressable market” in parcels, as Royal Mail chief executive Moya Greene phrases it, will increase by only 1%-2% for the next couple of years. That probably also means stiffer price competition.
Meanwhile, on the letters side, Greene continues to grumble about “cherry-picking” by TNT’s Whistl operation, whose grasp of geography is better than its command of spelling. You’ll find its postmen only in densely populated cities.
Should Royal Mail shareholders be depressed, then? And should the business secretary, Vince Cable, congratulate himself on a well-executed privatisation now that Royal Mail’s share price is “only” 30% above the sale price?
Cable can certainly claim the pricing was fairer than it looked, but let’s see what the independent report says about the process of privatisation. It is yet to be explained properly why pricing power was surrendered to long-term “cornerstone” investors who banked their winnings at the first opportunity.
But those Royal Mail investors still on the register should not despair. Aside from Amazon, the script is as previously advertised: productivity is improving, a lid is being kept on costs, the company’s dominance in parcels is essentially unaltered and there is cash to spend on technology.
On a five-year view, Greene should succeed in achieving higher profit margins. The half-year advance was small – from 6% to 6.2% at the “underlying” level. But when your turnover is £9bn a year, fractions count.
And, on letters, the regulator Ofcom is duty-bound to blow the whistl before Royal Mail’s obligation to deliver to every UK address at a uniform price comes under threat.
True long-term investors, one suspects, won’t be alarmed by yesterday’s 8% fall in the share price.
