A time to buy?

25 September 2008
A time to buy?

Economic indicators make grim reading at the moment, so you should be very sure about your prospects before going into any new pub venture

As they are chart-topping musicians, Arctic Monkeys drummer Matt Helders and former bassist Andy Nicholson should still have money in the bank whether or not the property they bought together in Sheffield earlier this month, to turn into a pub called the Bowery, succeeds or fails.

But for everyone else in the hospitality industry, the credit crunch and the economic downturn have put a huge question mark over when might be a good time to take the plunge and buy a pub or bar - and, for that matter, whether it is a good idea to do so in the first place.

Certainly, the economic indicators are grim. According to the British Beer & Pub Association, five pubs closed every day in the first half of the year, and Punch Taverns and JD Wetherspoon both reported sliding sales this month, with the latter describing this year so far as "traumatic".

To add to the misery, in August, market research firm Nielsen suggested that English and Welsh pubs, already reeling from last year's imposition of a smoking ban (which Scotland had brought in a year earlier), were suffering a worse summer than in 2007 as consumers cut back on spending by drinking more at home.

Do your research

The other side of the coin is that, with the downturn shaking out poor performers and property prices falling, for the canny investor, now may actually be quite a good time to invest - as Neil Morgan, head of pubs at property agency Christie & Co, points out.

"Good operators will ride out the storm, but the market at the moment does flush out the poor operators," Morgan says. "So you need to do your research."

While the lending environment has become much tougher since last summer and the bite of the credit crunch, there is still money available to be shoe-horned out of the banks, though you need to ensure you have a robust, realistically costed and well-thought-through business plan in place.

"Banks are lending but often on a smaller percentage," Morgan says, "so you may need to put in more equity yourself."

Kate Hempsall, recruitment, marketing and PR manager for the 240-strong Charles Wells Pub Company, agrees but adds: "Even when entrepreneurial retailers bring solid experience and ideas to an opportunity, produce a sound business plan and have all the right training and retailing skills behind them, many are still finding it hard to get the financial backing to invest in their pub."

Working on the assumption that you want to do more than just run a managed pub as an employee, the first question you must consider is whether to go into the market as an independent "free trader", as a tenant under a lease or, more rarely (given that relatively few operators offer the option), as a franchisee.

Self-analysis

Whatever route you choose, you need to recognise that, while you may superficially be buying a new lifestyle and a new home, you are also buying a business in a hugely competitive industry with long and unsociable hours. So a bit of self-analysis about whether it's really the life for you is no bad idea.

There are advantages and disadvantages to all the options noted above.

Under the leasehold option, a common choice among new entrants, the freehold of the property remains in the possession of the pub company, brewer or property company, and the premises are then let on a commercial lease, normally for a period between 10 to 25 years, though it can be shorter. As the lessee, you pay rent or a share of the margin on some of the goods and services you sell. There may also be a "tie" that restricts you to selling only certain products.

As a free trader, however, you buy and therefore own the property, and so you are solely responsible for all the decisions concerning the business, and are also free to negotiate with whoever you like in terms of the products, beers and services you sell. But this is by far the more expensive option, given that you are buying the property yourself.

Common scenario

The franchise model is essentially a halfway house between running a leased and a managed pub, with the franchisee still owning the business and leasing the property from the brewer or pub company, but also getting some of the training and support you might expect to get if you were running a managed pub.

David Hunter, a consultant at hospitality consultancy The Bowden Group, explains that a common scenario is that a manager working a managed pub will get the opportunity to make the transition to running a tenanted or leased pub, or even to strike out as a free trader.

If you take the tenanted route, however, it is important to nail down, and work into your calculations, exactly what sort of discounts you will be getting from the brewer and what this is likely to mean for your gross margin.

"Taking a lease with a brewer is clearly a much cheaper way to buy in, and it gives people an opportunity to become their own boss," Hunter says. "But what you have to look at is whether you can make a living doing it this way."

His advice is: "If you have the money to be independent, buy a freehold if you can."

It is also worth considering what add-on benefits you might get with a big brewer or pub company behind you.

Sustainable business

For example, Hempsall says, at Charles Wells, you get access to a retail development manager as well as a "business support manager" who can advise on current profitability in comparison with shadow profit-and-loss accounts based on pubs of a similar style and size.

She adds: "This helps identify where cost savings can be made or profit margins improved, and has become an invaluable tool in developing sustainable businesses."

Nevertheless, it is vital that licensees also carry out regular SWOT (strengths, weaknesses, opportunities and threats) analyses, and review their business plan with their retail development manager. Hempsall urges: "Licensees have to stay on top of their game and ensure that they claim what proportion of the leisure-pound spend is available."

It is imperative that you look long and hard at the location and potential demographics of your chosen area, says London pub entrepreneur Mark van der Goot, owner of gastropub the Greyhound in Battersea.

Van der Goot also runs the Rosendale pub in West Dulwich, the Wheatsheaf in West Wickham, and the Crown in Sundridge Park, Bromley, all through long leases with Punch Taverns.

"You need to be realistic," he says. "At the moment, you are probably unlikely to be making a massive profit, but there are still opportunities out there."

But he adds: "I would say you need to be very wary about your cash-flow. Whatever you think your perceived costs are going to be, double them. You just need to give yourself a buffer."

Demographic profile

With higher-margin food sales being an important part of his financial mix, the sort of customer van der Goot is aiming to attract, and their potential spending power, is key.

He explains: "You need to look closely at your demographic profile - who are your customers going to be? For instance, if anything, I am now targeting the grey pound. It is the younger professionals who are more likely to be hitting the wall, and so having less disposable income. Older people don't tend to be as exposed financially, but what they are looking for is quality."

Hunter warns against forgetting that securing a property and successfully opening it is only half the battle. You need to be on top of your finances and accounts from day one - and to stay on top.

He says: "One of the biggest mistakes people make is not doing regular book-keeping, or only doing quarterly, or even just annual, accounts. If you want to stand any chance of surviving in this industry, you have to be doing monthly profit-and-loss accounts."

Ultimately, the message to would-be buyers is that it may be tough out there at the moment but, if you plan, work and bargain hard, then buying a pub or bar, even in the current climate, is still a viable idea.

As van der Goot puts it: "One person's mistake is another's opportunity."

Checklist

Advice on buying a pub or bar during the credit crunch

  • Make sure that this is really the business for you - it's a life-changing move that will involve long, antisocial hours and harsh competition.
  • There is still money available to borrow from banks, but make sure that you have a robust, realistically costed and carefully crafted business plan in place - you may still have to put in more equity.
  • You need to consider whether to go into the market as a free trader, tenant or franchisee - weigh up the pros and cons of all these options.
  • It's imperative that you look long and hard at the location and demographics of your chosen area - will it be profitable?
  • Be very wary about cash-flow. Whatever you think your costs are going to be, double them. Give yourself a contingency.
  • Securing your property and successfully opening it is only half the battle. You need to be on top of your finances and accounts from day one - and stay on top of them.
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