This week, a catch up on the world of beer. Lets start with the good news that the Small Business, Enterprise and Employment (New Clause 2) Bill, otherwise known as the law which will allow large pub company tenants the right to move to a Market Rent Only (MRO) agreement, where they can buy beer from a supplier of their choice (but still be mandated to stock a selection of PubCo agreed brands) has got royal assent meaning it is now enshrined in law. The government has said that the new pub code will be amended to include the MRO legislation and the new pub code adjudicator will be up and running by May 2016.
However there is still secondary legislation to follow to deal with short term leases, franchise managers and deferral of MRO in exchange for investment by the pub company. We have to be careful that this is not used by the PubCo’s to sneak in watering down measures which will make the act favour them more. I would expect to see some transfer of pub assets ahead of the implementation date from those brewery linked pub operators who are just over the 500 pub limit to “new companies” who just happen to have supply deals with the same brewery, the aim being to cut their size to 499 pubs or less as to avoid being covered by the act of law.
Whilst on the topic of big brewers, Marstons is buying out the beer operations of Thwaites, the Blackburn based brewer and pub operator. This deal is the final step of integration between the two companies as Marstons has been brewing the mainstream Thwaites brands for just over a year now. The opening of a £10m brewery in the area producing the mainstream beers for some of its own pubs and hotels (which it will be retaining) and its craft brands is still going ahead as planned. Marstons already owns the regional brewers Jennings, Ringwood, Wychwood, Banks’s.
The risk of course is that the range of beers from Thwaites will be reduced to a handful of core products. Wainwright and Lancaster Bomber will of course be pushed out into the Marston estate as these are national brands. Their Dark and Smooth keg brands should continue to be offered as well. The Craft Dan beers which are released each month should be safe as these will stay in the Blackburn craft operation, but I’d expect a marked reduction in their quarterly beer releases, as well as more Marstons brands beers moving into the Thwaites pubs chain, a consequence of the accompanying supply deal for most wet products between the new owner and the acquired company’s pubs.
There is a link between these two stories. When Marston bought our Jennings, Ringwood and Wychwood, they also took on their pub estates at the same time, with subsequent sell off of premises where they were not profitable enough or did not suit the needs of Marston regarding building or location. This time they were never part of the the equation. They were only interested in the brewing arm they already had the contracted out production for. The classical thought is that a bigger pub estate will mean economies of scale regarding head office costs, regional administration and reduced purchasing costs due to increasing volume. Marston are already over the 500 pub limit by a factor of three with 1500 pubs, so it would make no difference re the legislation. Thwaites has 300 pubs so would add significantly to the size of the Marstons estate, but more importantly their pubs would be subject to the new legislation as part of the bigger group. This way they escape the MRO / Free of Tie options which will be granted to pubs in the parent company.
Companies such as Enterprise and Punch are too big to split up into 499 pub units without significant costs. However for those who have a similar number to Marstons, creating “North”, “Central” and “South” pub divisions would incur not unreasonable costs if it means they can avoid the legislation and safeguard their tied house revenue streams. Industry experts predict a significant number of pubs will fall into the “managed pub” or “franchise” category when tenancies expire, something I’d not disagree with. Pub company rent reviews are typically every five years, so we will have to wait until 2020 until the first full cycle across all of their estates takes place. This gives PubCo’s above the limit time to manage their tied tenancy pub numbers downwards, via various methods, with the target of hitting 499 pubs.
When the Beer Orders 1989 came in the Big 6 brewers got around it with PubCo’s, the same companies will probably avoid this again, hopefully I am wrong, but I fear not.