As a specialist in the leisure sector with a large proportion of Intrinsic’s work in the pub, bar and restaurant market, I have frequently been asked by friends, colleagues, people in the industry and even ‘the chap in the pub’ to “how will the smoking ban affect the pub market?”

The most popular question centred around how values will be affected and will there be any more pubs on the market as a result? I have no simple answer to their questions although, of course, I was expected to have an opinion.

The fact is that the licensed pub sector has probably seen, over the past 20 years, the biggest ever evolution it has faced in centuries starting with the Beer Orders through to more modern challenges such as the minimum wage, supermarket and booze cruises, Sky TV charges, Foot and Mouth and, of course, the Licensing Act 2003 which came into force in November 2005.

The industry has survived all of these challenges and many more although there have been casualties along the way. There were over 78,000 pubs in the UK in 1986. Today that number is close to 57,000. That does not mean that every pub missing from this list has closed, some of them have changed to restaurants or other similar uses, but the fact is there has been a substantial loss in numbers. Price Waterhouse Coopers estimated in a recent survey earlier this year that a further 5,000 pubs may close by 2001 which is around 25 per week.

Whilst figures like this may seem dramatic, this is not any different from the pattern of the last 20 years and the Price Waterhouse Coopers’ report was looking at the effect of the smoking ban specifically but obviously taking other wider issues into account.

10% fall in trade in Scotland, Wales and Ireland

With evidence and research carried out on the earlier smoking bans in Scotland, Wales and Ireland by trade associations that represent independent licensees and tenants have reported an average fall in trade of around 10% which is a fairly significant reduction in turnover and clearly will tip a number of pubs over the edge in terms of decimating any profits they make. To be fair, those pubs maybe struggling businesses in any case and if it was not the smoking ban there would have been some other factor that hit turnover and profits.

In addition, hidden in that overall figure trade downturn will be quite a wide variance, but those pub and bar operations with the right market position and adaptability will probably be the winners and those business that have no alternative market offer will be the losers. As a consequence it is unlikely that the market will have a sudden increase in numbers of pubs available and even if that were the case the likelihood is that the businesses affected will largely be at the bottom end of the market where the values are relatively low in any case.

Those businesses that survive, adapt and prove to have a strong level of turnover that is resilient to the ban may even see a rise in values over the coming months, should they become more sought after once the effects of the smoking ban become clear. It is unlikely that we will see a clearer picture of the impact on trade that the smoking ban may have had for a while yet. It was introduced in England at the beginning of the summer when holidays, good weather and other factors mask the practicalities of dealing with the smoking ban. On a cold wet Monday night in November the effects of the smoking ban will become more apparent.

Ultimately, the smoking ban has overwhelming public and consumer support and we cannot avoid the fact that as a result, staff who work in the hospitality industry will no longer have to suffer the potential effects of passive smoking. The evolution of the pub will continue albeit that there will be fewer of them in the future and there maybe a larger difference in values.

Other issues affecting the industry

Related to the smoking ban issue and other challenges that have faced the pub industry is a longstanding friction between landlords and tenants regarding “upwards only” rent review clauses with which most readers will be familiar as this has been the convention in commercial leases for many years. With the biggest eight pub companies owning almost 29,000 pubs between them (just over half of the UK’s pubs) it is easy to see how, through such market domination, the pubcos have systematically increased the number of costs involved to tenants and rents seem to have increased at an ever spiralling rate.

A few years ago hardly any pub tenants challenged these rent increases by appointing a surveyor to act on their behalf or indeed taking the rent dispute to third party. Perhaps this was because pub tenants felt they could negotiate with their local business development manager and the fees and costs involved in taking professional advice may not have been something they felt they could justify by a potential saving in rent.

However over the past few months a trend has emerged and it looks as though this may be about to change. Perhaps tenants have simply just got fed up with the ever increasing costs, it would not be too surprising after all and with the Smoking Ban being the ‘last straw’ and many of these tenanted pubs facing a downturn in trade, even if this downturn is short lived, the big pubcos are going to have to adopt a more pragmatic and fair approach. After all rents on tenanted pubs are a direct proportion of “fair maintainable trade”. If your turnover (and other pubs in the area as well) is 10% down for example it is going to be difficult to understand how your landlord can justify proposing a 20% rent increase.

As a result, over recent months, at Intrinsic we have had quite a large number of enquiries from pub tenants interested taking professional advice and even contemplating the costs involved in taking their rent review to third party. Like the smoking ban, this issue is likely to be here to stay!

No smoking in the valleys

The ban on smoking in enclosed public spaces came into effect in Wales in April 2007 ahead of the date of introduction in England. Initial reports from publicans indicate that urban, wet sales only public houses have suffered a downturn in trade. The profile of their customers is believed to include a large proportion of smokers. Food led businesses appear to be less affected with some owners even reporting an increase in trade as a result.

Most publicans have provided outside covered smoking areas however the weather lately has not encouraged their use. Most publicans agree that it is too early to draw any conclusions as other factors can affect the level of trade over the short term. In Ireland where the ban has been in place for a number of years pubs are reporting a downturn of approximately 8% per annum to date. However this does not take account of the proportion of smokers in the population which may be higher in Ireland.

Agents report that there are a large number of leasehold urban pubs on the market with few buyers. This may be attributed to a downturn in business following the smoking ban however there are many other factors which affect their viability. These include high rents and rates, supply ties which limit gross profits and lack of experience amongst operators. Again food led businesses in rural areas are in demand whether leasehold or freehold.

The smoking ban has caused one pub company to only consider buying pubs which already have outside covered areas. However it is too early to see any marked trends in the underlying trade.

One man’s pleasure is another man’s pain

Here’s one they didn’t think about: A correspondent to The Times complains that he and he wife have always enjoyed a drink and a meal in a pub garden on a pleasant summer evening. Since July their pleasure has been ruined by ‘noisy hordes of smokers crowding the gardens and generally wrecking the atmosphere.’

Mine poor host. You cannot please all of the people all of the time.