If you’ve read our guide to the MRO process, or already have an understanding of the Pubs Code Legislation – you’ll no doubt agree that the process is far from straightforward, and MRO completion can be costly.
Therefore when dealing with our clients, we will take account of individual circumstances to achieve the best possible outcome for the business. This may include considering a part-tied deal, or renegotiating an improved tied offer.
You may be surprised to hear me say this, but a tied deal is not necessarily a bad deal.
The Pubs Code is specifically drafted to allow for a “parallel rental assessment” which means you have the right to consider all options, whether tied or free of tie by a MRO agreement.
I tend to ask my clients the following question:
“If you were Free of Tie tomorrow, would you change your product offering?”
In other words, what is your main motivation in wishing to go free of tie?
If the answer is yes – then clearly product choice is hindering the business, and as such the freedom afforded by a MRO agreement will be very attractive.
If the answer is no – then the tie is not really the problem. The problem is more likely that the tied deal is a bad deal in terms of profitability.
If a MRO agreement at a ‘fair’ market rental would allow a saving to the business of say £40,000 per annum – then a rental reduction of £40,000 on existing terms would allow an equivalent level of overall profitability.
Given that in most cases if a Tied Pub Tenant (‘TPT’) completes a MRO agreement the Pub Owning Business (‘POB’) will lose revenue – the MRO option can act as a powerful lever to also negotiate outside the process of the MRO, whilst still allowing it to run it’s course.
To best demonstrate this point, please see the below real world examples. At the time of writing all of these deals have been negotiated in the last 6 months, but I have avoided revealing the pub names for client confidentiality.
To discuss the best way forward for your business, please call Michael Erridge on 0800 634 8388.
Description: Entirely wet-led site, seafront location
Location: Hastings (East Sussex)
Trade - 250 composite draught barrels
Tie - Beer, Cider, FABs
Existing supply terms* - £92.25 discount per barrel
Passing rent - £38,000
Proposed tied rental - £44,000
Proposed MRO rental - £78,000
Independently Assessed MRO Rental - £57,900
Outcome – MRO rental accepted and lease completed
Result – The net saving was around £35,000 per annum. This site was entirely wet led, and the operator had another FOT site in the town. It therefore made sense to complete the MRO lease, and the tenant gained further from breaking the tie on machine income.
Description – Busy gay bar, entirely wet led
Location – Central Manchester
Trade – c.500 composite draught barrels
Tie – Beer, cider, FABs
Existing supply terms* – no discount
Passing rent - £130,000
Proposed tied rental - £130,000
Proposed MRO rental - £171,500
Outcome – Tied rental reduction
Result – In this instance I determined that the correct MRO rental would be roughly in line with the passing rent. On that basis the saving to the tenant would be in the region of £75,000 per annum – very significant indeed. Eventually we negotiated a tied rental reduction of £75,000 with the POB. So the bottom line saving was the same, but the POB retained the trade. There was minimal cost to the TPT, and the saving has transformed the business. This is a perfect example of using a MRO offer as a lever to achieve a great profit improvement, equivalent to MRO, without the associated drawbacks.
Description: Busy town centre pub, predominantly wet-led with some food, strong cask trade
Trade – c.300 composite draught barrels
Tie – Beer, cider, FABs
Existing supply terms* - £80.00 discount per barrel
Passing rent - £36,000
Proposed tied rental - £45,000
Proposed MRO rental - £100,000
Outcome – Negotiation of a part-tied deal
Result – In this instance the passing rental was reasonable, but there was considerable margin to be gained from the tied beer trade. In the end we agreed a compromise deal, whereby 6 out of 8 cask lines would become free of tie, the rent would remain at the current level, and some investment would be made into the site. This was a great result because the FOT lines added instant profitability with no risk. Profit improvement over £50,000 per annum.
Description: Pub site, 60% wet / 40% dry
Location: Basingstoke outskirts, rural
Trade – c.180 composite draught barrels
Tie - Beer, Cider, FABs
Existing supply terms* – nil discount
Passing rent - £46,000
Proposed tied rental - £49,500
Proposed MRO rental - £67,500
Independently Assessed MRO Rental - £45,000
Outcome – MRO rental accepted following appeal
Result – This is a great example of a site where the tied passing rent was too high. As such the MRO rental was actually determined to be less by an independent assessor. This was appealed by the POB, but ultimately resulted in completion of a MRO lease saving £45,000 per annum.
*Existing supply terms – please note that each POB has different pricing structures in relation to tied products. The discount referred to is an average discount per composite barrel from a typical full tied price list. These ‘discounts’ are usually shown as on-invoice discount determined by a ‘price banding’. All prices are net of VAT.
Information accurate as of 7th October 2017