August 8, 1999
Britain's Old-Fashioned Pubs Are Undergoing a Makeover
Related Article
Regulators to Investigate Bid for British Pubs (July 15)
By ALAN COWELL
ONDON -- Four years
ago, when Amanda Rimmer took
over as landlady at the Bull and Last
in north London, it was, she said, "a
really run-down pub with a bit of a
reputation" as a rough sort of spot.
The décor was dowdy. Brawls were
not unknown. People came to drink
and, well, drink. So she set about
making it over.
Upstairs, she turned a landlord's
bedroom into a dining room. Downstairs, she changed the barroom to
include more dining tables, a sofa, a
fireplace and a new kitchen with a
menu offering bruschetta and homemade pasta. She stripped out the
polystyrene ceiling, the banquette
seating, the jukebox. What she
sought, she said, was an atmosphere
where people could "relax and chill
out."
Her reasoning was simple. "It's
getting to the stage where you really
have to offer something different or
distinctive to attract people, to break
the mold," she said. Ms. Rimmer had
reached the same conclusion that
corporate marketing gurus had --
inspiring a revolution in the $35 billion British pub industry.
The pub as downmarket watering
hole, a neighborly spot serving pints
of warm beer, pickles and starchy
pies, a spot where the ghosts of Dickens and Dr. Johnson hover in the air,
is rapidly being displaced by the pub
as trendy cash cow. It is all part of a
booming leisure industry, financed in
large part by money from America
and Japan, that has freckled the British landscape with all the trappings
of a mass-market society: themed
bars, brand-name taverns, chain restaurants and leisure centers offering
everything from water parks to 10-pin bowling and, of course, beer.
The business of Britain's 70,000
pubs has "changed beyond recognition," said Lindsay Campbell, who
leases four of them, including the
Bull and Last, from Punch Taverns
Group Ltd. As just one sign of this
change, when 3,500 pubs were put up
for sale en masse earlier this year, a
bruising battle ensued over who
would win this prize.
But what turned the British pub
from a barren shrine to single-minded drinking into a battleground for
takeovers? The answer lies primarily in a set of government rules,
known as the Beer Orders, that came
into force a decade ago.
"Historically, pubs were tied to
beer consumption and to brewing
companies," said Linda Bain, a
spokeswoman for Scottish & Newcastle P.L.C. "So a company such as
ourselves brewing a lot of beer would
own a lot of pubs." Scottish & Newcastle, an Edinburgh-based brewer
that had sales of about $5.3 billion
last year, owns a slew of branded
pubs and produces beer.
The Beer Orders, issued in the
Thatcherite spirit of deregulation,
sought to sever this umbilical link
between brewers and drinkers because it gave the big breweries a
stranglehold on the supply chain, virtually from hops to gullet. The orders
instructed brewers that owned more
than 2,000 pubs to sell either their
breweries or some of their pubs.
That meant, Ms. Bain said, that "a
large number of pubs came onto the
market," offering new opportunities
for a mini-generation of pushy young
entrepreneurs like Hugh Osmond, 37,
who made his name by establishing
the Pizza Express brand and now
runs Punch Taverns, and Guy
Hands, 38, a former investment
banker with Goldman, Sachs & Company. Both have substantial backing
from outside Britain -- Hands
from the Nomura Securities Company of Japan and Osmond from
Texas Pacific, an American private
equity company.
"At the same time," Ms. Bain said,
"you have changes in consumer patterns. People want to go to the pub at
least three or four times a week for a
meal, or to have coffee in the morning." Indeed, in many pubs and
themed bars, the old-fashioned pint
of warm, low-margin English beer
has been displaced by smarter and
more profitable beverages, from
chilled lager to elaborate cocktails.
Nomura's involvement in the British pub business, which might seem
unlikely, is ascribed by analysts to
Hands's ability to persuade the
Japanese company to invest in his
vision of pubs as business -- an investment that has so far led to some
$3.2 billion in acquisitions.
If there was any doubt about the
passions fueling this sea change, consider the struggle for control of those
3,500 pubs, put on the market by
Allied Domecq P.L.C., the world's
second-largest drinks maker, which
shed its pubs to focus on liquor
brands. From May to July, Punch
Taverns dueled with the blue-chip
brewer Whitbread P.L.C. for control
of the Allied Domecq estate. Offer
followed counteroffer. Only when
antitrust regulators threatened to
scrutinize its offer did Whitbread
withdraw from the fray. That left
Osmond of Punch Taverns to
clinch the deal on July 20 with $4.4
billion in cash and shares in Bass
P.L.C., which will buy 650 of the
Allied Domecq pubs.
The deal turned Punch Taverns --
which already owned 1,500 pubs and
recently acquired 688 more from Inn
Business Group P.L.C. for $107 million -- into one of Britain's biggest
pub operators. Nomura, with some
5,000 pubs, is the leader. And the
matter may not end there. Nomura
was rumored last month to be preparing a counterbid, but has withheld
comment on the reports.
Like Ms. Rimmer at the Bull and
Last, pub owners have recognized
that a new generation of customers
-- Scottish & Newcastle is aiming at
18- to 30-year-olds, Ms. Bain said --
wants a new style, much to the consternation of older customers who
cleave to the old notion of the pub as
a no-frills retreat. But as the industry consolidates around a number of
big players like Nomura and Punch
Taverns, it's questionable whether
the Beer Orders have really had the
effect they were supposed to have.
Individual pub operators can pay
up to $80,000 a year in rent on a 10-year lease costing up to $250,000,
Campbell said. But, crucially, the
deals restrict people like him to selling only the beers specified by the
big companies that own them. That
means leased pubs are just as immunized from competing brands as so-called tenanted pubs were before the
Beer Orders.
"The intention was to break the
stranglehold" of the big breweries,
said Campbell, whose four
leased pubs are dotted around London, "but now you have leases that
make us vulnerable to nonbrewers'
whims." At the Bull and Last, for
instance, Ms. Rimmer may sell only
beers from Bass P.L.C., the brewing,
hotel and leisure company that sold
1,500 pubs to Osmond in 1997 as
Punch Taverns was getting started.
That translates into tight margins on
beer sales, leaving leaseholders to
look for profit in food and wine,
which are controlled by the pub owners.
Of course, Campbell acknowledged, the owners invest in improvements to the leased pubs, like those
undertaken by Ms. Rimmer. And by
buying in bulk from the breweries,
the owners can command favorable
wholesale prices.
Some breweries exercise more direct control. Managed pubs, like
Scottish & Newcastle's 1,900 Rat &
Parrot and T & J Bernards outlets,
are designed to offer what Ms. Bain,
the Scottish & Newcastle spokeswoman, called "common standards."
"It's the McDonald's thing, where
you walk in and you know what to
expect," said Ms. Rimmer at the Bull
and Last.
Despite all the drama surrounding
the Punch Taverns purchase of Allied Domecq's pubs, though, the market is not universally chirpy. One big
regional leisure group, the Greenalls
Group P.L.C., which makes half its
$640 million sales from pubs and
restaurants, mainly in northwestern
England, has underperformed the
market so greatly that it may be
forced to sell its 760 managed pubs.
In any event, many analysts regard the beer market itself as being
as flat as English beer is held to be
by its critics, leaving people like
Campbell and Ms. Rimmer to look
for profits in wines and food.
Yet small operators are being
squeezed. "What's tended to happen
in the last five years is that the
bigger brands are getting bigger and
smaller brands are becoming less
popular," Ms. Bain said. Or, as
Campbell put it, "I think the old
notion of the corner boozer has fallen
away forever."
