Comment: Landlords miss out in Greene King expansion

1st Dec 2009 14:21

There has been much talk of the demise of the proper British pub in recent years, but latest results from Greene King show that, even if the landscape in the pub sector is changing rapidly, the right kind of business model can still prosper.After posting a rise in revenues and profits, Greene King, which brews its own ales and sells them in its Olde England style pubs, is set to expand further, starting with the acquisition of seven pubs in Scotland today from its rival Mitchell and Butlers, the owner of O' Neills and All Bar One.It was pubs that are managed by Greene King itself, as opposed to those it leases to tenants, that delivered the goods for the group, so it is no surprise that the new acquisitions will be incorporated into its managed division. Greene King Retail, which covers the group's managed pubs, most of which are based in southern England, saw sales climb to £278.2m in the 24 weeks to 18 October, 4.5% above last year. Belhaven, the Scottish division that encompasses both managed and tenanted pubs, saw sales growth of 14.6% to £72.2m.In Greene King's tenanted arm, sales were down by 8% to £68.8m. While the acquisitions announced today were from another managed pub group, Greene King has also been buying from Punch Taverns, a landlord, which has been offloading pubs to ease its debt pile. This appears to be part of a pattern of pub groups shifting from tenants into the hands of central management.Greene King pubs may hark back to a bygone era of warm beer and church bells, but the firm's business model is one of clinical capitalist efficiency. 'The downturn has exposed distinct weaknesses in the tenanted/leased pub model, particularly the inability to offer a value proposition,' the broker Killik, which thinks the managed pubs model gives Greene King more flexibility to adapt to changing economic conditions, says.Managing pubs centrally gives companies the ability to keep a lid on costs by implementing synergies. With eating out at pubs becoming increasingly popular, it is easier to maintain margins when these operations are managed across a chain, rather than by tenants individually.Punch Taverns and Enterprise Inns, the two big landlords operating in the UK, have been accused of squeezing their tenants dry through the beer-tie system, which obliges leasees to buy beer from the landlords. But it may simply be that the tenanted model cannot deliver the value needed to pull in the punters in these tough times.Greene King raised money to buy new pubs with a £207m rights issue in April and has spent £62m, so we can expect to see more buying over the next year - and more pubs switching from the tenanted to the managed model.