Research on the pub sector in Scotland phase 1: scoping study

4. Main Findings

This section provides a detailed breakdown of the results by the different tenanted pub types (Fully Tied and Partial Tied), IFT (independent free trade), Managed operations and Pub Companies. Findings are stated for each subgroup and cross referenced across all types given as applicable.

Results of the evidence collected formed the basis of the conclusions and recommendations provided within this report (available in Chapter 5).

The main findings of the report covering licensees and Pub Companies are grouped into six main areas:

4.1. Market conditions: long term analysis of the Scottish market and issues that could have an impact upon the performance of individuals, companies, the pub market and the on trade as a whole

4.2. Contract types: including length, type, agreement, cost of entrance, advice availability and advice sought

4.3. Decision making process on contracts: reasons for choosing pub business, agreement options, flexibility to amend, satisfaction with the contractual agreement and dispute resolution procedures

4.4. Products and Services: where/ from whom publicans purchase their beer, current beer charges, and how often these are changed

4.5. Financials: turnover, profitability, rents paid, and how often these are changed, balance sheet data, SCORFA benefits offered and their (real or perceived) value

4.6. Main findings from Managed pubs: managed pub data collection issues, use of supplementary data sources

4.1 Market conditions

It was important to contextualise the main findings to the prevailing market conditions, and show how historical industry and legislative changes helped shape the current environment. (See the main background assessment outlined in detail within Chapter 2 of the report).

The market that the pub, and in particular the tenanted (Fully and Partially) Tied pub, serve in Scotland continues to undergo acute change.

Between 2005 and 2015, the total number of outlets in the Scottish pub market contracted (-23%) more than that in England & Wales (-20%).

Over the same period, the number of tenanted pubs in Scotland declined by -15%, approximately half the rate in England & Wales. Similarly, Independent Free Trade pubs also declined more in Scotland (-29%) than in England & Wales (-10%) ^[30] .

Wet sales ^[31] (i.e. sales revenue coming from drinks sales) dominated the tenanted pub sector in Scotland. This compared with a wider diversification of pub styles and greater food led emphasis in England & Wales.

Overall, the consumption of beverage alcohol is in decline, thus undermining the core sales element and undoubtedly influencing the economic viability of pubs. Between 2005 and 2015 on trade sales of alcohol in Scotland dropped by 30.4%, whilst over the same period off trade sales grew by 16.4% with total alcohol consumption down -1.0% ^[32] . Many people continue to drink alcohol but they have moved away from on trade (in the pub) consumption to drinking at home.

As alcohol forms over 80% of the current sales in all Tied pubs in Scotland, there is a contention that the decline seen in pub numbers is better than expected. However, there is a structural limitation, in that a large proportion of pubs have limited opportunity to change their offer from a sole wet led business. The logical conclusion is that there are too many wet-led pubs currently operating.

Pub Companies that provided additional comment suggested that their view on the current Pub Tie situation in Scotland was that the new Scottish voluntary code of practice is suited to the marketplace and 'promotes partnership between pub companies and their tenants'. The difference between the structure of the Scottish pub market, compared to that in England & Wales (as outlined in the Section 1: Introduction) was a primary factor in this decision, and reflective of what was seen as limited support for further legislation.

4.2 Contract Types

This section evaluates the different types of contracts available to licensees and the elements that are most important in understanding factors that impact significantly on the business. These include the length of agreement, level of (licensee) experience, cost of entrance, and availability of advice (in relation to suitability of agreement type).

Tenanted respondents (i.e. those Fully or Partially Tied) expanded upon the primary rationales behind their decision to agree the current terms of their contract. This helped provide understanding of the drivers and motivations for seeking the terms agreed to and highlight any differentials in between the details of the agreements between tenancy types.

The following headings provide a set of key rationales for why licensees chose their particular contracts and agreements, whether Fully Tied, Partially Tied or IFT. The summary of results suggests that there is a significant level of flexibility to agreement options.

Pub Companies felt, generally speaking, the Pub Tie model worked well in the context of the new voluntary code of practice, the levels of investment provided within the sector, and few formal complaints across their estates being examples of their commitment to the sector.

Length of Agreement

The research asked Tenanted respondents, those with both Partially and Fully Tied, for the length of their current lease agreement and how long they were into that agreement. The questions helped to gauge the level of commitment undertaken, and if any variations existed between agreement types.

Through the case studies conducted, it was evident that Pub Company agreements had variable timespans. They varied between six month trials, through to the longest quoted during this research at 17 years. The most common offer was a five-year agreement and there are some marked differences across the different pub types.

The average length of agreement for Partially Tied respondents was 7.5 years, with only 1 outlet having agreed to a term over 10 years (stated as 12).

Similarly, Fully Tied tenants also, on average, had agreed a 7-year contract. However, it was skewed by two respondents who had signed contracts for over 10 years. Excluding these, the average contract length was 3.6 years, a markedly shorter period than either the commitment apparent in Partially Tied (7.5 years), or the average length of ownership for IFT respondents (13.5 years).

Half of the Fully Tied respondents (5 out of 10) had relatively short term three year rolling contracts. From the data collected, it would appear that the Fully Tied contract attracted shorter agreement periods. However, it was not clear whether this was down to the tenant or Pub Company. On average, the IFT licensees interviewed had owned and run their current pubs for 13.5 years. Half of the respondents had run their pub for 10 years or more. Of those interviewed, a balanced mix resulted between historically IFT pubs and those that had previously run the same pub on a different form of agreement. All those who stated that they had run the same pub on a different agreement confirmed that it was as either a Fully or Partially Tied contract.

IFT licensees, on average, had owned their current pubs for over 10 years. In comparison, the length of current agreement fell to 7.5 years for Partially Tied; and over half of Fully Tied pubs surveyed were on a three year rolling contract. While the rolling contract offered a more flexible working arrangement, the conclusion was that Fully Tied licensees were in a less committed, shorter term contractual environment.

Level of Experience

Respondents were asked how long they had been directly involved in the industry and how long they had run or owned their current pub. These questions were asked to gain an understanding of the level of experience of licensees and to provide indicators that might suggest disparities between different agreement types.

The average length of time the IFT respondents had spent in the pub industry was 21 years. The highest period recorded being 34 years and the least being 3 years. Only 2 respondents of all 10 interviewed had spent less than 10 years overall.

Partially Tied respondents had a similar average of 20 years' total industry experience, the highest being 29 years, with only one respondent having spent less than 10 years overall in the trade.

Tenants of Fully Tied outlets recorded an average length of experience in the industry of around 16 years. That was somewhat lower than for Partially Tied and IFT pubs.

The trade experience of respondents was a factor in the decision making process of type of pub agreement chosen. It appeared that the overall Tied model in Scotland was being used as a proving ground for licensees. Several responses within the study confirmed purchase of the pub from a Pub Company where the licensee had previously been the tenant.

In the context of the response results, there was a rationale, based on the responses received, that the total Tied model, and the business support offered, was of appeal to those with less experience within the sector. Providing an element of safety to new entrants and offering the opportunity to develop relevant business skills considered as an additional benefit to the 'low risk, low cost' perception of the business type for some licensees.

Cost of Entrance

Tenants and pub owners provided information regarding the cost of purchasing their tenancy/ leasehold agreement, or freehold. This question was crucial in understanding the overall cost of entry to the industry, and the differences between contract types.

The average cost of purchasing a lease for Partially Tied respondents was approximately £38,300 and £21,500 for Fully Tied respondents.

Half the IFT respondents (5 out of 10) specified the cost at which they bought their freehold outright at the time of purchase, which averaged around £399,000. Of the other IFT respondents, four were unwilling to provide their total purchase price (although two stated making initial security deposits of c. £6,000) and one respondent stated that at the time they were paying £22,000 per annum for their freehold.

Of the 7 IFT respondents who specified how they financed their purchase, 3 used business loans or mortgages, one used a personal loan from a friend, and 3 purchased in cash.

The responses within the research showed that cost of entry was ca. 13 times lower for the total Tied model (in particular those with a Fully Tied agreement) compared to a freehold purchase. However, the average entry cost responses for different agreement types suggested that the cost of purchase was interlinked with the level of independence (and purchasing/ business) freedom required, or sought, by tenants/ pub owners.

Advice Sought

Respondents were asked whether they sought independent financial or legal advice prior to purchase. If they sought advice, they were also asked whether it was useful to the licensee. Taking into consideration the potentially complex nature of such agreements, the responses to these questions helped to provide an indication of sector knowledge and experience.

Based on the data collected, the majority of both Fully and Partially Tied respondents were the most likely to seek and take advice. This tallied with the stated requirement of Pub Companies that all potential new publicans must seek legal advice. In comparison, less than a third of IFT respondents provided a positive response to the question.

The majority of those who took relevant advice (6 of the 7 Fully Tied licensees and all Partially Tied) stated the information provided was useful.

IFT licensees appeared less inclined to seek specific advice (only 3 of 10 IFT respondents). However, the few who sought advice stated they found the advice helpful.

The Pub Company responses were unanimous on the requirement that all prospective tenants and lessees must take legal advice of some sort, be that their own, or through the relationships the Pub Companies have with external professionals.

Professional advice was available and actively sought by the licensee. The research indicated this was a standard expectation within the commercial process, but not if the licensee had a complete and thorough understanding of the advice offered.

The inference was that the level of advice requested by licensees had a direct correlation to their level of current knowledge in the sector. In essence, the more experience they had, the less professional advice considered necessary.

4.3 Decision Making Processes

To gain an understanding of the key rationales behind the individual licensee's choice of pub, a number of multiple option questions explored the main factors in their decision making processes. The comparisons between the overall responses to the Tied and IFT models provided a rationale highlighting any differences in motivations and attitude.

Reason for choosing specific pub business

Respondents stated why they chose their particular pub, with a multiple response option based on key criteria, including entry cost, business support, etc... This method of response allowed for a directly comparable dataset of replies between different pub models.

For Fully Tied outlets, the main reasons chosen for seeking that specific arrangement included wanting to run a particular individual pub (referred to by 6 out of 10 licensees) and the low cost of entry (5 out of 10). Lower numbers referred to the location (3 out of 10) and the business support offered (1 out of 10) as their reasons for choosing their Fully Tied arrangement.

All Partially Tied outlets stated that the main reason for seeking that arrangement was running a particular individual pub. 4 out of 5 responses subsequently stated low cost of entry, and a further 2 licensees who could not find any suitable freehold available. No respondents chose their pub for business support. One outlet also stated that they "wanted to become self-employed in the pub trade".

IFT respondents stated that the 'financial/ investment opportunity' was the primary rationale for choosing their pub with 8 out of 10 positive responses. Half of the respondents (5 out of 10) wanted to run/ own that specific pub, and 4 respondents considered the independence and lower drinks prices important. Other reasons provided included "always wanted to run own business" and "Tied pub options charged too much for products".

IFT outlet respondents clearly saw the business opportunity as a key priority. This was based upon the fact that the financial commitment to purchase a pub freehold was a far more significant and longer term investment.

Pub Companies certainly viewed the overall Tied model as a 'low risk' form of entry for the potential tenant/ lessee. There was a general view that the business support on offer was of primary importance to both Partially Tied and Fully Tied pubs. However, this did not compare favourably with the values assigned to this by respondents from both Tied pub types.

Differences between the individual pub models above highlighted different considerations in the decision making process. The data suggested that low cost entry was a primary motivator for both Tied models and was a major factor in the type of pub selected. Conversely, based on previous assumptions that most Tied licensees were generally more inexperienced within the trade, the fact that a number found business support generally unimportant was surprising.

Agreement options

The research asked Tenanted respondents, both those Fully Tied and Partially Tied, what options they had to choose from different contract types. This included if they had any flexibility regarding amendments and, if so, what elements they were able to amend. These questions were asked in order to understand the negotiation process, and the flexibility offered around each contractual arrangement.

Around half of Fully Tied respondents (4 out of 10) stated that alternative agreement options were made available to them at the point of signing initial contracts, all described as in the form of longer term leases. None of the Partially Tied respondents interviewed had alternatives offered as part of the negotiations between them and their Pub Company.

All Partially Tied respondents, and 6 out of 10 of Fully Tied licensees, stated they were unhappy with their current agreement. Partially Tied respondents broadly defined the issue as being directly connected to a general problem in the Pub Company/ licensee relationship, primarily ongoing maintenance issues, and perceived lack of investment in that area (based on available responses). There were more Fully Tied licensees dissatisfied with their agreement than satisfied. A broad range of reasons was given, but no consensus provided.

Pub Companies did affirm that there were flexible options available for agreements. In fact, they believed they were flexible in agreement options on a case by case basis as need warranted. The Pub Company response did emphasise that they preferred good relationships and based this on the low level of dispute and complaints stated as received by them.

For Fully Tied outlets, 3 respondents said they had the opportunity to amend current ongoing contracts. Although the only options stated were exit strategy and machine income ^[33] . This compared with all of the Partially Tied respondents who were able to amend their agreements, although these were primarily limited to agreement extension options, and shorter term release clauses.

Overall, there appeared to be a limited level of flexibility to amend contracts within the current system. It was clear that some Fully Tied outlets had the opportunity to choose longer term lease options at the start of their agreement, compared to Partially Tied outlets that did not have that option. However, all the Partially Tied respondents showed greater flexibility to amend within the context of their on-going agreement, even if it was limited to contract extension and release options. Partially Tied outlets, overall, appeared to enjoy less restrictive on-going contractual arrangements.

Nevertheless, the degree of flexibility in their contractual arrangements did not appear to improve their satisfaction levels. Overall, these satisfaction levels were low. The primary factor appeared based on individual Pub Company/ Licensee relationship as opposed to issues of inflexibility in available agreement options. IFT respondents were not directly asked about contracts in this context, as they are a completely separate type of pub business model.

For all Tied pubs, the key commentaries suggested a general dissatisfaction with the Tie itself, limitation/ restriction of choice first, price second. Followed by a feeling that there was an overall lack of support, and SCORFA benefits were either not properly recognised, or received.

The bias of IFT pub comments was towards broad legislative issues perceived to have a potential negative effect on their business. The primary focus was VAT rates, minimum wage cost increases, and the drink driving law changes, especially for those pubs in more rural, isolated locations.

It was clear that for all Tied pubs, the perceived restrictions of the tie itself remained a focus of issue. However, there was also a broader recognition of wider legislative and regulatory issues, which they shared in their responses with a large number of IFT outlets.

For Partially Tied pubs, it was clear from licensee responses that they felt the benefits and freedoms of their current agreement did not go far enough. They thought that the free of tie option would be more broadly beneficial to their businesses based on freedom of choice to their customers, more than implications of cost.

The Pub Companies interviewed also had an opportunity to provide additional commentary regarding their position and perspectives of the Tied model.

The key areas of the Pub Company position focused on their summation of the current Scottish Pub Tie regulatory situation; capital investment, and the limited number of formal complaint/ arbitration issues within the estates.

Contract disputes/ resolutions

Contract disputes played a key role and drove the development of pub legislation in England & Wales. Licensees considered the level of disputes flagged a key element, and within the current agreements with their Pub Companies and how this affected their business relationships. Respondents were asked if they had any disputes (ongoing or otherwise) and how the dispute was being resolved.

Some Fully Tied outlets (6 out of 10) stated that they had been involved in landlord disputes. The majority of these disputes remained unresolved. Those who experienced a dispute (6 fully tied outlets), were also asked about the nature of the dispute. Most respondents (4 out of 6) based their reply on pub maintenance, repair and general upkeep issues. The two remaining stated financial issues for their disputes. None of the Fully Tied respondents stated that overall beer pricing was a specific issue of dispute within the contract itself.

Disputes amongst Partially Tied respondents was minimal (only one stated they had experienced a dispute, namely around maintenance issues).

Pub Company responses recognised that disputes occurred and referred to protocols in place that would escalate them systematically. The Pubs Independent Conciliation and Arbitration Service ( PICAS) and Pubs Independent Rent Review Scheme ( PIRRS) are the ultimate means for resolution. PICAS and PIRR are independent, and the industry widely accepts that, based on this, they are both impartial and fair.

At the time that the research took place, none of the licensees stated that they had referred their dispute to PIRRS or PICAS. This suggested that either they had not considered the option, felt it was unnecessary at that time, or the dispute had not escalated to a point where it was a key option going forward. This tended to support the view shared by the Pub Companies that the overall level of serious dispute across the tenanted trade in Scotland was low.

Outside of the tie itself, the key areas of comment were broad legislative issues. Primarily VAT, the minimum wage, and the drink driving law changes - mainly based on the direct affect they had on their individual businesses.

In the context of the responses, the tone of the negative comments received suggested a certain level of 'us and them' mentality.

4.4 Products & Services

This section covers data collected around the products and services available for pubs. It specifically looks at beer purchasing behaviour, beer pricing and how these prices fluctuate over time. This section also covers special commercial or financial advantages (more commonly known as SCORFA) agreed as part of the contractual package between tenants and their Pub Companies.

Beer purchasing behaviour

Tied respondents, those Fully or Partially Tied, were asked which products (drinks or other product categories) they were tied to, and from whom they purchased these products. The key to this question was to understand how licensees used the freedom and flexibility to purchase where it was available.

Tied trade are by definition tied to the designated supplier set by the Pub Company. The product ranges presented were mostly market leader brands. Those pubs that are Partially Tied have, by definition, a greater degree of purchase flexibility than the Fully Tied option.

Generally, Fully Tied pubs were restricted in their beer purchasing behaviour by the terms of the contractual agreement with their Pub Company. Historically there was inherently no flexibility in their ability to purchase from alternative suppliers. However, case study responses indicated flexibility is more available. There was some evidence of purchasing 'local cask' beers from both Fully Tied (in a small number of cases) and Partially Tied respondents. This bears out information provided by Pub Companies in questions on supply relating to local/ regional purchasing flexibility. As expected, Partially Tied outlets were likely to have multiple suppliers. In fact, only one Partially Tied tenant used their Pub Company as their sole supplier. The others used different leading wholesale businesses operating in the Scottish market. One respondent, in particular, claimed to use five different beer suppliers.

Overall, Partially Tied pubs were actively 'shopping around' to obtain the best/ most competitive pricing available for the products for which they were not tied. This would not always result in them using a wide range of sources if not considered beneficial to their business. The ability to 'shop around' suggested a clear advantage financially compared to Fully Tied licensees. There was also some evidence of 'local' flexibility from Pub Companies to Fully Tied respondents to purchase regional beers and Scottish spirits.

When comparing Partially Tied with IFT outlets there remained a slightly lower level of varied purchasing behaviour from Partially Tied, primarily due to the fact that most respondents remained tied for several drinks categories. However, some interesting variation existed between a respondent who still used their pub company as 'sole supplier' and one who used a high number of different independent beer suppliers.

Independent purchasing behaviour exhibited a modest proliferation of drinks suppliers. In relation to beer and cider, the average number of suppliers used was two. The overall drinks supplier average was three. Overall, this level of variation suggests that IFT licensees do not purchase their drinks from a large number of different suppliers.

Additional commentary received from Partially Tied respondents focused on restriction of choice in relation to products (including in some instances local ones), something seen as detrimental to their business opportunity. However, cost of products was not a specific area of focus within the responses polled.

Beer charges

Through the face to face interviews, data on beer prices was also collected. This took the form of direct questions, but also through the collation of invoices. The rationale for this was to provide a direct comparison of the overall costs of beer between the different Tied pub models and IFT outlets. CGA brand segmentation and package types provided standardised product classification. The prices were then standardised to a purchase price per litre of product.

For beer data, the analysis below did not take into account brands but concentrated upon the overall product and the container, based on a broad range common to all pub outlets/ types.

The analysis showed that IFT pub owners paid less for their beer than pubs within a tenanted agreement (either Fully or Partially Tied). This was the case for bottled, cask and keg beers. For bottled beers, the disparity is 45 pence per litre, rising to 78 pence for cask, and 71 pence for keg per litre.

A similar pattern is evident when comparing tenants who are Fully Tied and those Partially Tied. Fully Tied outlets recorded that their average purchase price was higher than for the Partially Tied. In relative terms the Fully Tied set were paying 6 pence more per litre for bottled, and 5 pence more per litre for keg than Partially Tied. Cask beer costs were the same for both.

The table below provides further detail on the average cost of beer paid across different pub types.

Table 5: Average Purchase Price per Beer Litre

	Bottle	Cask	Keg
Independent Free Trade	£2.74	£1.59	£1.89
Partially Tied Pubs	£3.19	£2.37	£2.60
Fully Tied Pubs	£3.25	£2.37	£2.65

The following table shows retail selling prices (by beer container type) at a common volume of one litre. All prices include VAT at 20%. Consistently IFT are cheaper. Partially Tied pubs are more expensive for bottle and cask, but cheaper for keg beer. The former, however, are lower volume sales categories. Overall, the average beer price per litre will be similar.

Table 6: Average Retail Selling Price per Beer Litre

	Bottle	Cask	Keg
Independent Free Trade	£8.61	£4.84	£5.23
Partially Tied Pubs	£9.06	£6.95	£5.86
Fully Tied Pubs	£8.70	£6.30	£6.36

Using the retail selling prices provided by the case study respondents' analysis an average RSP per litre was calculated (as per the table above). In conjunction with the estimated purchase cost per litre the analysis produced the gross profit for each combination. Gross profit percentage was used to provide a standard comparison. The formula to calculate this is as follows:

( ( (retail selling price less VAT) - (purchase price) ) / (purchase price) ) * 100= % Gross Profit.

There were differences in unit profitability across the different types of pubs. Details are shown in table 7 below.

Table 7: Average Gross Profit % (excluding VAT)

	Bottle	Cask	Keg
Independent Free Trade	65%	61%	57%
Partially Tied Pubs	58%	59%	47%
Fully Tied Pubs	55%	55%	50%

Both Tied types had consistently lower gross profit percentages because their overall beer purchase costs were higher. IFT outlets had a high gross profit across all standard beer container types due to their ability to shop around for the cheapest purchase options. Whereas Fully and Partially Tied pubs had higher costs and higher retail selling prices. To achieve the same gross profit percentages in IFT, the Fully and Partially Tied pubs would need to increase their retail selling price further.

Percentage gross profit, cost price and retail selling price are data and analysis that produce regular business statistics. All data is converted into monetary values, in £'s per litre, as shown below. The unit cash profits are similar across all 3 cohorts. Viewing Table 8, one can see that each cohort has a highest, median and lowest gross profit in each beer container type. This strongly indicates that each cohort approaches pricing in an individual way.

Table 8: Average Gross Profit £/litre (excluding VAT)

	Bottle	Cask	Keg
Independent Free Trade	£4.43	£2.44	£2.47
Partially Tied Pubs	£4.36	£3.43	£2.29
Fully Tied Pubs	£4.00	£2.88	£2.65

CGA have recorded 1,631 different beers over the last 3 years (in pub) in Scotland. The average number of beers available to customers in individual pubs is c.40 (with a minimum recorded of 6 and maximum of 206 beers recorded). It is thereby self-evident that the individual product mix masks the potential complexity of the product range on offer to customers. Additionally, the impact of brewery tied agreements for supply remained an unknown. Pub Companies referenced these as a potential factor but the research did not specify it for inclusion. Due to the inherent variety of beers available, it is potentially possible to substantially change financial outcomes based on the beers chosen.

Changes in beer prices

Tied respondents were asked about the level of changes to beer prices over a 3-year period. The rationale for this was to provide a direct comparison of the overall changes in beer prices, and any differences, between the pub tie models and IFT outlets. Pub Companies were also asked to provide information relating to beer price changes; however, this was provided at an annual level over a two-year period. Therefore, it is not possible to make direct comparisons between both sets of responses. However, the average annual trends for each set of responses show similar annual percentage increases for the most part. The beer price changes shown in this part of the analysis are based on an average of the percentage change details recorded from the surveys undertaken.

Pub Companies indicated that beer price changes were made on an annual basis, and have increased in the last year (2014 to 2015) by around 2-3% for all Tied pub types. The increase recorded by the Pub Companies for the previous year (2013 to 2014) was slightly higher at around 3-4%.

Overall, Tied and IFT pubs corroborated the increase in prices stated by the Pub Companies. However, the level of increase varied across the different pub types. Fully Tied respondents indicated that over the past three year's beer prices had risen by about 8% to 10%. The increase recorded by Partially Tied pubs was similar, at 6% to 8%. IFT respondents provided the widest range of responses, indicating that beer price increases ranged from 4% to 20% overall.

These results suggested that overall changes in beer prices, based on responses from Pub Companies and case study respondents, are very similar. The increase stated by the Pub Companies aligns with the responses of the overall Tied pub sample. It does indicate that Partially Tied and IFT experienced differing levels of beer price increases. There is a caveat to this statement. Brands have different pricing strategies and this may have acutely influenced the results.

Special Commercial or Financial Advantages ( SCORFA) benefits

Special commercial or financial advantages or (as more commonly known) SCORFA benefits, were considered to be an important part of the Pub Company and Tied licensee relationship by the Pub Companies and industry associations. They show a clear statement of the benefits available to the tenant. These benefits include, amongst others, business help, marketing & PR, training and legal & compliance assistance. Annex 7 of this report outlines the full BBPA list of definitions for the SCORFA benefits.

Some respondents, across all pub types, acknowledged that certain specific SCORFA benefits had a value, but some had no value to them as individual licensees. Some respondents did not value SCORFA benefits at all.

In terms of comparing the data, the table below ( Table 9) shows the average valuation, and perceived value, for all three pub respondent groups and the consolidated Pub Company position:

Table 9 Estimated value of SCORFA benefits by Pub types and Pub Companies

	Pub Company	Weighted average across all pubs	Total Tied	Partial Tied	Independent Free Trade
Business Help	£3,443	£2,160	£0	£0	£2,160
Legal & Compliance	£888	£1,570	£373	£500	£2,347
Property	£5,676	£3,995	£1,875	£1,000	£7,821
Memberships & Subscriptions	£300	£1,002	£70	£0	£1,188
Marketing & PR	£3,197	£1,878	£1,600	£2,000	£1,950
Products and Product Support	£557	£428	£213	£0	£750
Consultancy/ Business Services	£746	£750	£0	£0	£750
Training	£830	£635	£438	£150	£890
Other	£3,000
Total	£18,636	£12,418	£4,569	£3,650	£17,855

Pub Company estimations and IFT expenditures were very close at item, and overall levels. The Pub Companies estimated the overall expenditure of SCORFA at around £18,600. IFT pubs, who do not have access to SCORFA through a Pub Company and would have to purchase/ pay for these, estimated the value of the benefits at a similar range (around £17,800).

Partially and Fully Tied respondents estimated the value of the SCORFA benefits received at a significantly lower level. Fully Tied outlets, rated the total value at around £4,600. This was marginally higher than the value perceived by those Partially Tied (at £3,650).

Considering specific individual benefits, the key areas of issue were 'Business Help' and 'Consultancy/ Business Services'. For both Fully and Partially Tied respondents, the value assigned to these benefits was negligible, compared to the Pub Company estimates of over £4,000.

The 'Property' benefit, which included maintenance costs, demonstrated that Fully Tied and Partially Tied licensees viewed it at a value considerably less than half of that assigned by the Pub Companies.

'Products and Product Support', which include benefits such as discounts on a designated range of products, and access to local products (via initiatives like the Society of Independent Brewers ( SIBA) direct delivery service) also saw little value from the Tied licensee point of view.

There were also a number of more unquantifiable 'other' benefits valued by Pub Companies (at an average of £3,000). These other benefits include ease of surrender ^[34] or rent amendments to reflect material change of circumstances. It is likely that some licensees saw many of the other benefits provided by SCORFA in a similarly intangible way.

The results suggested that Fully Tied and Partially Tied respondents either undervalued SCORFA, or did not feel that their Pub Company provided that level of value to each individual benefit in their case. However, it also seemed likely that there was a lack of understanding regarding all the potential benefits available. For example, when there were a number of maintenance issue complaints from licensees, property capital-expenditure (which includes maintenance of the property) was stated as a key benefit, but it would appear that Pub Companies were either not communicating, or providing, all the benefits available clearly enough.

From the additional commentary provided from all Tied surveys lack of investment and dilapidation costs, both in relation to overall maintenance agreements and SCORFA benefit issues was also a key comment.

4.5 Financials

A range of questions were asked in order to provide a clear evidence base from which to directly compare the financial performance of different Tied pub models and IFT outlets against each other. The aim of the financial analysis was to uncover whether any pub type had a positive advantage against any other.

A broad range of financial information was collected, which included: information on standard prices paid for key drinks product categories, frequency and size of drinks/ rental price changes, rental payments, operational costs, capital expenditure, annual sales (as proportion of turnover), gross margins and profit and loss accounts.

Respondents were to provide accounting data (for the past two years) for cross referencing with Companies House entries (where available).

Internal data supplied by CGA Strategy (as part of its On Premise Measurement Service, OPMS) ^[35] was used to provide corroboration and triangulation of the financial data provided by licensees.

Levels of capital investment were a positive example of the current situation. One Pub Company respondent stated that during the coming year they " will invest over £3 million in joint developments with our Scottish leased and tenanted estate". This willingness to invest inferred their belief in the potential of the current tied pub model, and the potential benefits available to the tenant/ lessee. There was also the suggestion that legislative changes could have a negative effect on this position.

Turnover

Respondents were to provide their annual turnover. Turnover represents the comprehensive sales of all products and services the pub provides. Turnover is just a measure of business scale. Within the case study, all three pub types, with the exception of Managed, were within a similar range.

The latest data for a 12-month period across the different pub types (i.e. Fully Tied, Partially Tied and IFT), showed relatively similar results. Turnover for Fully Tied pubs averaged £325k; Partially Tied was £321k and IFT was £333k. Managed pubs sales by contrast where on average over £1m per annum (based upon CGA internal source data).

This was a small sample, but the indications showed that all the Tied outlets were of a similar stature. IFT by scale were comparable on a turnover basis, and Managed pubs again of a different, higher financial level.

Profitability

Gross profit is a calculation of turnover less cost of sales. This is a common metric used in retail trade. Licensees commonly differentiate between revenue streams. The most common differentiation of the revenue streams is between products classified as wet and dry. Wet refers to sales of drinks products (i.e. beer, cider, wine, spirits, soft drinks and snacks equates to total wet). Dry refers to food sales. A critical measure in this research was a comparison of the wet gross profit percentages across the different pub types.

Respondents were asked to report their percentage gross profit from their wet and dry sales. Table 10 summarises averages across the different pub types.

Based on the percentage total gross profit Fully Tied pubs appear to be the most profitable. Partially Tied and IFT appear less profitable and are below the overall combined average for all pub models.

Table 10: Calculated GP % from survey responses

	Fully Tied	Partially Tied	Independent Free Trade	Overall Average
Wet	67%	54%	57%	59%
Food (Dry)	66%	20%	65%	65%
Total Wet & Dry	67%	53%	58%	60%

Analysis of the financial data supplied enabled a comparable analysis to the face to face survey response data. Comparing the two there were disparities in results for the Fully Tied cohort. With regard to Partially Tied and IFT, the results were very similar. The implication drawn is that the Fully Tied cohort has a different perception of their financial status compared to that reported. This particularly focused upon the gross profit percentage statistic in Table 11 below.

Table 11: Calculated GP % from analysis of financial data provided

	Fully Tied	Partially Tied	Independent Free Trade	Overall Average
Gross Profit %	47%	50%	57%	52%

Balance Sheet and Profit & Loss Analysis

The balance sheet has the capability to measure liquidity. The liquidity ratio, which can be calculated from this data, is a particularly useful metric. It is the ratio between current assets and net current liabilities and commonly used by external analysts as a measure of the ability to pay short-term debt. The measure is based on reported financial performance. A caveat is that it is still possible such measures can be distorted.

Profit & Loss accounts are a standard measurement for performance over a set period, usually one year. Besides calculating gross profit and percentages, other relevant metrics can be calculated. These include measures of how the business is run.

This was an aggregation of the account information collected from the face to face sample respondents. The purpose of this consolidated balance sheet analysis was to show a summary of the three cohort's financial performance in a succinct manner. There are three critical areas of divergence in performance that illustrate the differences between Fully Tied, Partially Tied and IFT pubs.

Firstly, the liquidity ratio showed a significantly weaker status of both Tied cohorts compared to IFT. The Partially Tied liquidity ratio whilst slightly stronger than the Fully Tied was also significantly weaker than the IFT. Overall, this would indicate that the IFT pubs, based on the respondents in the sample, are stronger and more robust businesses.

Secondly, as stated earlier, the comparison of gross profit percentage indicated that IFT pubs operate with greater margins than either Tied cohort.

Lastly, stock coverage in days shows the number of day's stock held. The Fully Tied cohort hold comparably excessive stock levels compared to the Partially Tied and the IFT pubs. By holding more days' stock, the outlet is tying up working capital, which is used to run day to day operations of the business.

Broadly, the analysis of the balance sheet and the liquidity ratio in particular, indicates that IFT outlets are most solvent. Fully Tied and Partially Tied are similar and markedly less solvent. On the surface, this indicates the IFT have stronger liquidity using reported financial data.

The analysis above suggested that overall IFT outlets are in a stronger financial position than both the Tied cohorts.

Table 12: Consolidated research respondents key P&L and Balance Sheet data

	Fully Tied	Partially Tied	Independent Free Trade
Profit and Loss Account
Turnover	£325,365	£320,975	£333,155
Cost of sales	£145,680	£159,574	£141,651
Gross Profit	£151,956	£161,402	£191,504
Balance Sheet
Current Assets	£51,525	£71,345	£41,294
Stock inventory	£9,214	£5,833	£3,029
Debtors	£9,988	£243	£5,339
Prepayments	£0	£0	£53
Cash	£32,323	£65,269	£32,873
Creditors: amount falling due within one year (Current Liabilities)	£61,353	£115,937	£41,653
Net current assets (liabilities)	-£9,828	-£44,593	-£359
Current asset ratio	0.84	0.62	0.99
GP %	47%	50%	57%
Mark-up %	123%	101%	135%
Stock Coverage in days = (Cost of Sales/ Stock Inventory)	23.02	13.31	7.78

Rents paid

Respondents were asked how much they paid (per month) in wet rent. 'Wet rent' being defined as the overall price the Pub Company charges for beer/ wine and spirits for which the pub is tied.

For clarity, tenants pay rent in their tied premises to the property landlord. This rent, is for the most part, based upon the estimated likely, or historical performance associated to the individual premise. The rent can vary dependent upon the type of agreement (Fully, Partially or free of Tie) between the tenant/ licensee and the property landlord around a large number of variable, negotiable aspects of the business, or its potential. The Tied pub market has great variation of the size and scale of each outlet. It is therefore highly likely that the levels of rents paid will vary equally.

The data collected revealed that a substantial number of renting options were on offer. Bearing this in mind, a comparison of rents purely on a financial value basis might not be robust, as rents would vary by location, size of business, agreement negotiated, etc…

The best way available to compare rents paid therefore was by comparing rent as a percentage of turnover. It would not be unreasonable to assume that there is a linear relationship between those two variables. The most robust comparison would be within the main Tied cohort as these outlets were confirmed to be Fully tied for beer and cider, although spirits in Scotland are a significantly more important product group.

To enable us to look at rents as a percentage of turnover we calculated average rent paid by cohort. The rents paid comparison between Fully and Partially Tied showed that the collective average respondent position was quite close with Fully Tied reading £3,000 per month, compared to the Partially Tied at £3,200 per month. Expressing this as a % of turnover Fully Tied rent was 12% whereas Partially Tied was 13%. This does bear out a slight premium for the Partially Tied outlets over Fully Tied. However, within each cohort the range of rent paid varied substantially. Across the combined cohort rent as a percentage of turnover ranged from 6% to 19%.

With regards to IFT, the comparison was slightly more tenuous. The nearest comparison was mortgage repayments, although some limitations to this approach need consideration. Respondents varied from those who inherited outlets debt free a number of years ago, to outlets recently acquired. A further distorting effect was that of property prices over the long term. Expressing the mortgage repayments as a percentage of total turnover the resulting mortgage repayment would be 14% of the total turnover. Fully Tied outlets appeared to be the lowest cost option available.

In addition, the research asked respondents if their pub came with personal accommodation and if so, what the licensee saw as the perceived value of that. This was provided to ascertain if it was a tangible benefit (or not) to the respondent. This was an area where some differential between Scotland and England & Wales occurred with only a small proportion of Scottish premises historically providing licensee accommodation.

This was borne out by the survey results with no Partially Tied outlets having accommodation, and only 1 out of 10 within the Fully Tied results. The single Fully Tied respondent valued the accommodation at c. £300-400 per month.

Overall, this suggested that there was only a small disparity between the rental costs between the two Tied models. It also confirmed that, in Scotland at least, living accommodation was not a major contributory factor, or seen as a particular benefit, to the licensee agreement.

Changes to rent

Respondents answered a number of questions regarding any changes to their rent made over the course of their agreement. These included whether they had a Retail Price Index ( RPI) rent review clause, if not how often they had a rent review, and how much their rent had risen/ changed overall in the last 3 years. The information collected allowed direct correlation between key financial measures to the licensees of all Tied pub models.

In the Fully Tied group, rental changes are found to be extremely varied and most respondents have a Retail Price Index ( RPI) review clause within their rental agreement. In terms of changes to rent, there was one large % increase from £10k per annum in 2010, to £18k in 2015. The current rent in this outlet was 5.7% of their quoted turnover (this was in the lower quartile of the rental percentage in the Fully Tied group). Additionally, one rent had fallen by 15%, and the rental as a % of turnover was 11.7%, which is in line with the Fully Tied sample average.

In the Partially Tied, it was a similar situation with most respondents claiming they had RPI clauses in their rents. Reviews were varied, two respondents informed the research that their rents had gone up in recent years and quoted substantial amounts. No specific information was provided by the respondents as to why this was the case.

The inclusion of an RPI rent review clause, in a large number of cases, suggested a level of clarity provided to the rent review process. Most responses to the % rental increase question were broadly 2-4%. There were exceptions to this, however, the detail for the exceptional change in rent were unclear. This indicates that rent increased in line with the general RPI.

4.6 Main findings from Managed pubs

Managed Pubs are a segment that includes pubs operated by focused companies, regional brewers and mixed Pub Companies. They are by broad industry definition, run by a company who operates the pub, specifies what it sells, and hires a salaried manager to run it.

In order to obtain a full representation of the pub market in Scotland, Managed pubs were also included in the data collection process.

CGA made requests for managed outlet case study data from the relevant operators in Scotland and with support from the relevant trade associations.

Nine Managed Pub businesses received an initial contact over a four-week period between May and June 2016. CGA requested that they complete a template survey to provide detailed financial information and supplemental comments.

No managed businesses agreed to take part in the self-completion survey. In total four businesses responded. The responses indicated that none of them would participate in the study. Among the reasons given for non-participation were:

• That a single/ few outlets would not be influential
• That enough information was already published in other Governmental reports and that the facts reported were still relevant
• In current circumstances day to day work had to take priority and that participation would deflect from these efforts

Therefore, other data sources were included. CGA obtained data from three primary, and additional secondary sources that enabled meaningful headline comparison between Managed Pubs, IFT and Tied models.

In order to provide a detailed analysis of some key metrics in the operation of Managed pubs in GB and Scotland, a thorough review of multiple data sources was undertaken by CGA. This data included: Trading Index ^[36] , ALMR Benchmarking Survey ^[37] , Companies House data, OPMS, various tertiary data and supplementary information collected through this Scoping Study.

The analysis undertaken on data did show the Managed pub to be different to the Fully & Partially Tied and IFT outlets that were the focus in the case study. Managed pubs compared to most Fully & Partially Tied and IFT pubs were at quite a different level (on both a financial and operational level) and thereby have less direct relevance. These differences related to the following areas. The study analysed company accounts and premises numbers quoted. Outlet Index and other market research data corroborated the former. The result produced average outlet turnover and sales mix. The sales mix showed Managed pubs had significantly higher food mix and turnover than the case study outlets. The turnover was 3.5 times that of Tenanted (both Fully and Partially Tied) and IFT outlets.

The operational style of Managed pubs was also different to all other pub types. Many of the Managed pubs in Scotland are brands. These are primarily one segment, branded food pubs, containing outlets operating under the same fascia, offering the same menu and product range in all premises. Furthermore, many have substantial accommodation. This would have excluded them from the study based on the definition applied to the Hotel segment. Finally, an analysis of the location on Managed pubs classified many as rural "travel to destination" venues. The case study pubs were mainly suburban, community located pubs.

Historically, the discrepancies between managed and IFT/ Tied are clear. Outlet Index, over the last 10 years, showed that Managed pubs grew through new build. They located on prime and previously unlicensed sites. Tied and IFT outlets are on a more stable base with a high proportion of existing premises that have a long standing history. Almost 1 in 4 Managed pubs today are new builds or conversions of other premises since 2006. A substantial number of the other sites have been in receipt of significant investment during this time.