Adding a new revenue stream to your pub by letting rooms could increase your profits and create a more rounded business, but it requires careful planning. Ben Walker reports.
At a time when every pub operator is analysing their business carefully, creating a new revenue stream such as letting rooms could be the path to greater profits.
"In the current economic climate people are entrenching and looking at getting the most out of what they've got," comments Paul Thompson, partner at Acorn Commercial Finance.
Generally speaking, there are a number of clear benefits to adding bedrooms to your pub. Nicholas Calfe, a director based in the Bristol office of licensed property agent and broker Christie & Co, says that firstly rooms will widen your customer base, attracting leisure and business demand, and people who would otherwise never have set foot in your pub.
Secondly, rooms will increase your food and drink revenue, especially if you are a destination freehouse in the country. Six months after an extension from seven to 14 bedrooms, for example, the Pilgrim Inn near Southampton reported food and drinks sales up by 41% and 102% respectively.
Thirdly, rooms provide much higher profit margins than food. "Obviously the set-up costs can be very high and you may not recoup your initial investment for some years, but you have created a brand new revenue stream from the day you start letting rooms," explains Calfe. "After you have recouped your initial outlay, the profit margin is very high because costs are minimal."
Plus, if you already have a meeting or function room, accommodation is likely to lead to more lucrative group bookings for social and business events.
Lastly, when the time comes to move on, having a more rounded business with three income streams from drink, food and accommodation will make your pub much more attractive to buyers and enable you to command a higher asking price.
THINGS TO CONSIDER
As with any new business venture, adding rooms should not be a decision taken lightly; making sure it is the right move for you will require research and planning.
"I know it sounds obvious but you need to come up with a plan. Stand back and look at the business. Make sure you are addressing a demand that is there," advises Thompson.
An initial SWOT analysis can be carried out by yourself, especially if you have already been operating your pub for a number of years. Find out who and where your competition is. How much are they charging for an overnight stay? Call local businesses and ask if they would book accommodation with you and, if so, how much they would pay. Contact your local planning department to see if any applications have been made for accommodation provision in your area. Look out for budget hotel chains such as Premier Inn and Travelodge. Do they have a hotel due to open near you? If so, how would you plan to compete against them?
A thoroughly-prepared business plan will be essential if you need to borrow money to finance the rooms. Your lender will also want your business valued and the valuation will contain a fair amount of feasibility work.
HOW MANY ROOMS?
The choice of how many rooms you open will largely be dictated by the space and money you have available, but you also need to consider their impact on your workload and staffing costs.
"If you have rooms above the pub which are already there - and clearly many pubs do have them - then you can create anything from four to seven letting rooms. It can be economic to do that," says Fuller's operations director Jonathan Swaine.
"But you can also look at the land around your pub. If we are building a new block we would not build fewer than 14 rooms in order to get a decent return."
Fuller's is a pub company that recognises the benefits of accommodation and now has some 500 bedrooms across its managed estate.
A publican's day is long enough already, but having overnight guests means someone has to be up in the morning to serve them breakfast, and then clean and prepare the rooms for the night ahead. Paul Rowlands, co-owner of the Duke of York, Shepton, Somerset (see case study) found himself going to bed at 2am and then getting up to serve breakfast at 6am after adding rooms at the Duke of York.
There are some who consider four rooms to be manageable for a husband and wife team with some extra part-time help. Anything above four rooms will involve employing extra staff and have a knock-on effect on the pub operation, perhaps requiring an extra cook in the kitchen. You will need to weigh up the extra staffing costs incurred against the increase in revenue when making your cashflow forecast.
FIXTURES & FITTINGS
Investing in creating new rooms can be costly, and that's even before you've started buying the furnishings, bed linen and accessories. But do not be tempted to do it on the cheap. In the long run it will be more cost-effective to create fewer rooms at a higher spec than more rooms with cheap fixtures and fittings, which will quickly look tired and worn; you will only end up having to spend money on a refurbishment.
Rowlands, whose pub the Duke of York added bedrooms three years ago, says: "We didn't want to do it cheaply. I remember visiting a nearby pub that was struggling and they'd opened rooms that had cheap furniture. That pub has now gone."
Today's guests expect an en suite bathroom as standard and it's probably a good bet to provide Wi-Fi too, especially if you anticipate attracting business customers.
It is worth thinking about the marketing potential of your rooms before you go ahead. Is your pub near a major tourist attraction? If so try and get a link on their website so tourists can book accommodation with you. Are you near a trading estate or a business park? A lot of pubs have a corporate rate or an account with local businesses.
Adding accommodation will lift the profile of your pub and enable you to be included in accommodation guides and perhaps have a brown sign with a B&B symbol directing visitors to your pub from the main road.
Depending on your location and the number of rooms you plan to build, there may be grants available from your local council to help with your building costs. Grants are sometimes available in areas where there is a need to create more local jobs and provide more accommodation. Check with your local authority and/or your local BusinessLink advisor. You also may be able to get further grants once you are open. The Duke of York pub received a £500 marketing grant from BusinessLink.
Do you have the money to add rooms in the first place? It's worth having the finance lined up at an early stage and your regular high street bank may not be the best place to borrow, according to Thompson.
"A broker can identify hundreds of specialist banks and lenders that most people have never heard of. We are talking to these lenders all the time and we know what sort of deals are being financed. Lenders are becoming keener to do business," he says.
If you already borrowed at a high loan-to-value ratio and the value of your pub has now decreased, then you will not have any equity for further borrowing. However, Thompson says that some banks will fund you based on the future value of your business (if still within normal lending limits) after the rooms are completed, rather than its current value.
FIRE RISK ASSESSMENT
By law, all accommodation providers, no matter how small, must carry out a fire risk assessment, which is a time-consuming but essential audit. Full details of what is required can be found in the Government document, Fire Safety Risk Assessment - Sleeping Accommodation, which can be downloaded as a PDF file at www.communities.gov.uk/documents/fire/pdf/151339.pdf
If you are creating more than just a couple of rooms, it is important that your initial business plan takes into consideration the fire risk assessment and the potential cost of fire alarms, lighting, fire doors, building material and separation and even a fire escape.
Find your local authority's unitary development plan on their website. It should contain a section on tourism, which will give you an idea of your council's policy on existing and new accommodation. Get an outline planning application in early. The planning department is required to respond to you within six weeks. Hopefully the answer will be "yes", at which point you can proceed.
CASE STUDY: THE DUKE OF YORK, SHEPTON, SOMERSET
Husband and wife Paul and Hayley Rowlands have run the http://thedukeshepton.co.uk" target="_blank" rel="noreferrer">Duke of Yorkfreehouse in the village of Shepton, near Illminster, Somerset, for eight years.
About three years ago, with the smoking ban about to come into force, they realised they needed to do something extra. They spoke to an architect who recommended they could build a block of four bedrooms in their back garden. Their nearest competition was a Best Western hotel at £140 a night and another pub charging £100 per night. Although Somerset Council has a stated aim of increasing tourism, a planning application was rejected.
Fortunately Rowland's luck changed when he eâ'mailed short-lived chief secretary to the Treasury and local MP David Laws. "He was brilliant," says Rowland. "He replied within 20 minutes, and I met him the next day. Within nine days, the planning application was approved. He also came and opened the new bedrooms for us."
The Rowlands borrowed from their bank, Lloyds TSB. All in all, the investment came to around £250,000. "We did overspend and had to go back to the bank for a little more. They were very supportive, but we were lucky. The pub had a lot of equity; it had probably doubled in value since we took it on," Paul says.
The rooms opened about seven months before the recession started. Business was slow for the first year, with occupancy at 35%.
"We did everything ourselves because we were nervous about taking on staff. We would be getting to bed at 2am and I was up at 6am to serve breakfast. Hayley was doing all the washing and bed-changing. It put a lot of strain on us."
Since then trade has picked up, with a good number of business contracts and bookings through online portal Eviivo, plus associated growth in food and drink revenue, and the Rowlands have more staff to help.