Punch Taverns� travails highlight growing problems for industry
By John Phelps

The head of Scotland's main hospitality, off-licence and entertainment body has advised Scots not to consider entering the industry as the drinks trade struggles to cope with a hangover caused by the smoking ban and soaring costs.

Paul Waterson, chief executive of the Scottish Licensed Trade Association, issued the stark warning as Punch Taverns, Scotland's biggest pubs landlord, came under pressure to rethink its policy on rental charges for around 450 of its local tenants.

"I would certainly advise people to think long and hard before signing a tenancy agreement with Punch or any of the other big chains as things stand today," said Waterson.

"Conditions are tough enough for the whole trade, with around 400 pubs closing their doors in the past 18 months, but it can be particularly hard on tenants who have signed fixed rental agreements and have no room for flexibility when trading conditions change."

Among unexpected problems he cites are the recent changes brought in by the new Licensing Act, which has hoisted the annual pub licensing fee in Scotland from £175 to an average of between £800 and £1100 depending on pub size.

Other costs, such as architect's and legal fees and training, can mean that new tenants could have to meet total initial costs of up to £5000 as a direct result of the Act, which has come in for fierce criticism from all sectors of the drinks industry.

Trade sources suggest that dozens of small landlords have baulked at the increased cost, and there are fears that the closure rate among Scottish pubs may have accelerated in recent weeks, although reliable figures will not be available for some months.

The tenanted pubs trade is still relatively small in Scotland, which is dominated by independent pubs run by their owners together with managed houses controlled by the breweries.

Punch is the biggest player in the Scottish field, accounting for upwards of 40% of an estimated 1075 tenanted pubs.

The property-based system takes a much larger slice of the drinks market in the south, where Tony Payne of the Federation of Licensed Victuallers said he is now called out on a daily basis to help tenants who have got into trouble.

"It's no good simply asking the landlords to reduce their rent, but you can get a positive response if you can get them round the table with a business plan to show how you will resolve temporary problems," he said.

Punch is advertising for new tenants for some 30 of its pubs across the central belt, which it says is a "normal amount" for the time of year.

Its spokesman said rent was based on a Fair Maintainable Trade Assessment of the business, with the charge increasing annually in line with retail price inflation.

"Lease agreements have long been considered an easy and affordable route into the pub trade whereby licensees do not need the finance to purchase a building at a price of anywhere between £200,000 and £1.5 million," she said. "Instead they can enter into an agreement and rent the premises but have the opportunity to sell the business as well."

Conditions in the pub trade are equally tough in England, where at least four outlets have been closing every week as a result of the combined effects of the smoking ban, the economic downturn and rising costs.

Despite the hard times, analysts believe Punch will be able to demonstrate the resilience of its business model on Thursday with news of a modest lift in interim profits from £116m to £125m, with figures underpinned by its regular rental income from a total of 7581 tenanted pubs.

The group also takes in some 869 managed pubs, including 32 in Scotland, and there are hopes that directors could be poised to announce a sale of these to Mitchells & Butlers for up to £1.2 billion after the two sides failed to agree on terms of a full-scale merger of their businesses last year.

While an agreement could be ann-ounced as early as this week, there are a number of hurdles to be passed before it can be completed, and it is possible that some major shareholders of M&B could veto the proposals.

That is because the buyers would need to issue hefty chunks of shares both to Punch and to venture capital backers to raise the necessary finance, which could result in an effective change in management control at M&B.

One solution would be for the backers of the scheme to buy out the dissident shareholders, who are believed to include property tycoon Robert Tchenguiz, who controls 23.5% of the company.