When is a franchise not a franchise? when it's a pub

Strat. Change 11: 291–305 (2002)Published online 13 August 2002 in Wiley InterScience(www.interscience.wiley.com). DOI: 10.1002/jsc.595

When is a franchise not a franchise?When it’s a pubConrad Lashley∗ and Bill RowsonSchool of Tourism and Hospitality Management, Leeds Metropolitan University, Leeds, UK

• Recent changes in ownership and consumption patterns have brought manypub operators to follow strategies that are more concerned with a retailingorientation.

• Many of the companies operating pubs are aiming to grow sales and respond quicklyto changes in consumer tastes and fashions. They no longer own brewing facilities andfrequently control whole estates of pubs that are marginal and where the actions, skillsand motivations of local unit managers are crucial for the success or failure of theproperty.

• The exploration of different forms of indirect control via lease arrangementsis recognition of the need to provide more entrepreneurial incentives for thosemanaging these more marginal properties. In many ways, it is possible to viewpubs owned by chains operated through both tenancies and leasing as a form offranchising.

• The literature and research on franchising hospitality services can help inform a studyof leasehold and tenanted relationships in licensed retailing. Franchising in licensedretailing is almost wholly based on the tenanted/leased agreements.

• This paper argues that in this more retailing and service quality competitiveenvironment, pub operating companies will need to use more traditional franchisingapproaches than have been practised in the past.

Copyright 2002 John Wiley & Sons, Ltd.

IntroductionPub ownership and control has long beenan unusual feature of the English ‘bar trade’when compared with other countries. Licens-ing laws and the increasing concentrationof the brewing industry have in the pastresulted in large numbers of pubs beingin the control of a small numbers of firms(Price et al., 1999). Given restrictions on the

* Correspondence to: Prof. Conrad Lashley, Schoolof Tourism and Hospitality Management, LeedsMetropolitan University, Calverley Street, Leeds LS13HE, UK.E-mail: [email protected]

numbers of licensed premises, the brewerswere keen to maximize the numbers of out-lets available to sell their output and restrictthe sales of competitors’ products (Lashleyand Lincoln, 2000). In these circumstances,the more marginal properties were let out totenants as a way of securing outlets for theproducts while at the same time tapping intothe entrepreneurial, managerial and financialresources of the small firm.

Recent changes in the industry haveresulted in a shift in control of these tenantedproperties from the large brewer retailers to anew breed of ‘independent’ retail operators

Copyright 2002 John Wiley & Sons, Ltd. Strategic Change, Sept–Oct 2002

292 Conrad Lashley and Bill Rowson

who, though no longer tied to a brewer,tie the publican through either tenant orleasehold agreements (Martin and Coulson,1998). These licensed retail organizationsare motivated by a concern to benefitfrom the added resources that the tenantbrings, particularly the need to exploit theentrepreneurial drives and skills of tenantsand lessees. In some ways they resemble‘adhocracies’ (Goffee and Scase, 1995) inthat these organizations attempt to be largeand small, centralized in a strategic direction,yet decentralized in tactical operations,global and local.

From the tenant/lessee’s perspective, thenominally independent business potentiallybenefits from the expertise and know-how ofthe larger firm. Even in contexts where thebrand might be fairly loosely defined rounda beer brand and a ‘blueprint’ (Lashley andLincoln, 2000) the potential support of thelarger company can overcome some of theresource poverty of the small firm (Morrisonand Lashley, 2000).

This paper is the first of two that appear inStrategic Change, exploring these arrange-ments in the licensed retail sector. Bothare informed by a research project commis-sioned by the British Institute of Innkeeping.The project aimed to develop an understand-ing of these indirect forms of managing pubs,given recent changes in the ownership ofpub estates and developing trends in pubgoing. This paper explores the relationshipbetween the large and small firms in the sec-tor. It is particularly concerned to explorethe support provided by the retail operatorsto these nominally independent small firms.In addition it explores the motives of thetwo parties involved. Research on franchisearrangements (NatWest, 1998) suggests thatthere are some important differences in aimsand goals between the two parties.

The changing face of licensedretailing

One of the consequences of the changesto pubs and bars resulting from theMonopolies and Mergers Commission is that

the ownership and control of properties hasundergone dramatic restructuring. Prior tothe ‘Beer Orders’ a small number of brewer-retailers controlled large numbers of pubs asoutlets for their product and as a means ofrestricting the outlets available for compet-ing brewers. As a result of the Orders, firmswere restricted to 2000 tied pubs, thoughthey could control more properties that werenot to be tied to a single source of supply.Subsequently, a large number of propertieshave changed hands with the major retailersdirectly managing the businesses with high-est sales, and the less profitable propertieswere let as tenancies, or more recently underlease arrangements.

Table 1 highlights the changes in owner-ship as a result of MMC report and con-firms that in less than a decade the form

In less than a decadethe form of control ofpubs had undergone

dramatic change

of control of pubs had undergone dramaticchange. In 1998 the big national brew-ers had relinquished a large part of theirindirectly managed estate in the form of

Table 1. The structure of public house owner-ship 1989–1998

Pre-MMC1989

1998

NationalsTenanted 22 000 4000Managed 10 000 8500

RegionalsTenanted 9000 3000Managed 3000 7000

IndependentsSingle outlets 16 000 16 000Multiples —

Tenanted 15 000Managed 3500

Source: Williams and Lincoln (1996); Martin andCoulson (1998).


When is a franchise not a franchise? 293

tenancies and new group of non-brewery-linked organizations had emerged. Theselatter firms were no longer directly linkedto a specific brewer and controlled most ofthe estate in the form of tenancies or leases.In fact by the millennium (Publican, 2001)national, and regional retailers together withthe independent multiples controlled 27,000properties in the form of tenancies or lease-holds. This is approximately 47% of the totalpub estate or 66% of the estate when singlefreehouses (independently owned pubs) areexcluded.

Over the 1990s five types of pub operatorsor retailers emerged as a result of the ‘BeerOrders’:

1. National retailer with brewing interests2. National retailer with no brewing interests

(either de-merged or fully independent)3. Regional or local retailer with brewing

interests4. Regional or local multiple retailer with no

brewing interests5. Totally independent operator or free-

houses

There are significant differences betweenthese types of organization in the way theyoperate their retail outlets and in the type ofoutlets they own. In particular, there is a ten-dency for brewers and nationals to concen-trate on high-volume houses that are directlymanaged. Some other companies concen-trate on tenancies/leases as an indirect formof control of pub activities. In other cases,companies continue to have a ‘mixed’ estatewith some properties directly managed andothers tenanted or leasehold, or ‘franchised’as indirect arrangements. These changeshave been important in shaping the relation-ships between publican and pub operator.In particular, the large number of companieswho operate significant pub estates in theform of tenancy or lease arrangements rep-resent a business relationship between ‘big’and ‘small’ firms that contains some inherenttensions and contradictions that this paperexplores.

The tenancy as a franchisearrangement

In the past the major brewer/retailers oper-ated pubs, in either a directly managed formor via tenancies. Tenancies were linked to the‘brand’ in the form of named brewery but hadlimited impact on operating systems or busi-ness format (Williams and Lincoln, 1996). Inthis case, the brewers name could generatecustomer loyalty through the brewery prod-uct. Tetley’s in Yorkshire, for example, has asolid loyal customer base because of loyaltyto the beer brand, similar to other brands inother regions.

The relationship between the brewer/pro-perty owner and the tenant was generallyloose. The tenant had to stock the beerproducts and purchase all supplies from thebigger company. The tenancy was a nomi-nally independent organization but tied tothe bigger firm through property rental andsource of supply. The brewer/retailer gener-ally managed the more profitable units andlet the more marginal properties out to ten-ants (Williams and Lincoln, 1996). Frequentlyproperties were ‘churned’ through periodsof being let to tenants and being taken backinto the directly managed estate when thetenant had built up the business. The ten-ant had little security of tenure, because thetenancy agreement was short-term and thetenancy could not be sold or accrue addedvalue as the business developed.

In many ways, firms operating in the sectorfollowed what Johnston (1989) called ‘costleadership’ strategies. In other words theyconducted business in a way that minimizedcosts as a key means of generating profitand competing with other companies. Fewcompanies seemed to be concerned withstrategies that gave priority to service qualityor service uniqueness, for example. Thehigh levels of staff turnover (Lashley andRowson, 2000) and generally low levels oftraining (HtF, 1996) are consistent with firmsminimizing labour costs by taking advantageof a large labour market. The ‘churning’of the pub estate was also consistent withcost-minimization strategies, as the operating



costs for the more marginal properties wereshifted to the tenant and when the pubwas profitable, it was brought back into thedirectly managed estate.

In recent years, and particularly as a resultof the changes in ownership patterns, thetenancy arrangement has been criticizedby pub companies because they believedthat tenants had little incentive to growthe business. They were not able to assignthe tenancy and thereby gain from capitalinvestment or improved business value(Whitbread Inns, 1995). They could takeprofits from increased sales and highervolume business activity but this was nottranslated into business value. With minimalrisk to the brewer and minimal support to thetenant, many tenancies failed to meet theirfull potential because tenants were perceivedto have limited capital, managerial resourcesand incentives to grow the business. They toosuffered from resource scarcity. Increasinglyover the last decade, the licensed retailoperators have explored lease arrangementsas a way of overcoming the perceivedweaknesses of the tenancy (KeyNote, 1997).

The new arrangement is chiefly focusedat changing the financial arrangementsbetween the lessee and the licensedretail organisation (Guild, 1996). The aimis to encourage a more entrepreneurial

relationship in which the lessee is said to havea financial incentive to invest in the develop-ment of the pub as a business opportunity.Typically the lessee pays a more commer-cial rent, for the property that has some trackrecord as a business (Lincoln, 1996). Table 2lists some of the key differences between ten-ancy and leasing arrangements. In essencethe lease arrangement is said to give thelessee a greater financial incentive to buildthe business, because the lease has value thatcan be sold.

There are variations in both the levelsof restriction placed on the lessee and thelevels of support given by licensed retailorganizations. The branded operations aremore likely to require the lessee to con-form to brand standards and provide struc-tured management development and train-ing programmes. Innpartnership for exam-ple, charge all ‘franchisees’ an annual feebased on 2% of turnover and this financesa programme of courses to improve themanagement skills of ‘franchisees’ (Lashleyand Lincoln, 2000). The Punch Pub Com-pany now requires all new lessees, andlessees applying for an investment loan,to undertake a 10-day training programme.This compulsory approach has increased theparticipation rate on the programme fromapproximately 100 per year to over 450 in

Table 2. Tenancy and lease arrangements in licensed retailing

Tenancy Lease

Term 5 yearsmaximum—typically muchless

Up to 20 years—typically10 years

Cost Smaller in-going rent lessthan market rate

Full leasehold purchase‘Realistic’ rent

Capital investment shared Capital investment lesseeresponsible

Conditions Non-assignable AssignableNo minimum barrelage Minimum barrelage penaltiesUsually tied for majority ofproducts

Less wideranging tie

A number of companyimposed constraints

Fewer constraints

Propertymaintenance

Joint responsibility Lessee responsibility

Source: Lashley and Lincoln (2000).



the first twelve months, and the companyreports increased sales, and reduced lesseeturnover as a direct result of the approach.

Though some would disagree (Wormaldand Hartley, 1999), ‘One can view pubsowned by chains as well as those operatedunder long-term leasing as a form of fran-chising with no up-front fees’ (Slade, 1998:578). Certainly the literature and researchon franchising hospitality services (Lashleyand Morrison, 2000) can help inform a studyof leasehold and tenanted relationships inlicensed retailing. Franchising in licensedretailing is almost wholly based on thetenanted/leased agreements that stem fromthe ‘tie’.

The tenant/lessee is, in part, buying accessto a business organization that has expertiseand a business profile for the venture. AsMorrison (2000) argues in relation to fran-chising, the owner–manager is minimizingrisk by taking on the franchise arrangement.She describes a typical franchisee as beingan ‘intrapreneur’ (Lessem, 1987) rather thanan entrepreneur because of the restrictionsplaced on them by the operating systemand the various other requirements to pur-chase supplies through the franchisor. Insome ways, similar restrictions exist for thetenant/lessee in the licensed retail sector.Tenants and lessees have to purchase prod-uct through the licensed retail organisation,the range of services and activities mightbe defined in the brand or ‘blueprint’. Thatsaid, the operating standards and systems aregenerally much less restrictive than in somerestaurant and hotel retail brands (Ball, 2000;Taylor, 2000; Lashley, 2000).

Whilst there are many similarities betweenpub tenancy/lease arrangements and fran-chising there are, however, some importantdifferences when compared with the moretraditional business format franchise. Chiefly,the brand standard applied to the brewer’sproduct but did not include service stan-dards. Unlike the current typical licensedretail brand, issues like service times, thecleanliness factors, ambience or the range ofnon-beer services offered are rarely specified(Lashley and Lincoln, 2000).

Without the structure of a rigid businessformat the monitoring of unit performancetends to be limited to monitoring beer qual-ity and the solidity of the tie are the keyconcerns during visits by Business Develop-ment Managers (BDMs) — the local operat-ing company manager. Sales volumes, theability to pay rents and other bills and con-duct an orderly house within the limits ofthe law are also concerns, but are gen-erally handled only when problems arise(Wormald and Hartley, 1999). Service qualitymonitoring is minimal, if not non-existent,and support for tenant and lessees man-agement development is equally minimal inmany companies. Typically the relationshipbetween the landlord/lessor and the ten-ant/lessee is much looser than it would bein a ‘hard’ brand such as McDonald’s (Priceet al., 1999).

In particular, the barriers to entry are usu-ally lower than in a typical franchise arrange-ment. Pub operators tended to be concerned

Barriers to entry areusually lower than in

a typical franchisearrangement

with the applicant’s ability to pay the up-frontfee (the in-going), and secure a license fromthe Licensing Magistrates. Franchisors likeMcDonald’s require a more substantial up-front fee and require the applicant to workin a restaurant for approximately one year,without a salary, before they are allowed totake on the franchise (Lashley, 2000).

The relationship between tenants andthe pub operator’s local manager is alsomuch looser than it would be in a ‘hard’brand like McDonald’s. In the latter case,the Operations Consultant would workwith approximately six to eight franchisedrestaurants. Whilst there is an auditingdimension to the relationship because theConsultant needs to check that the franchisee



is working in the ‘one best way’; there is aconsiderable consultancy support dimensionto the role in the fast food company (Lashley,2000). The relationship between tenantsand BDMs involves a much greater span ofcontrol — typically 50 pubs. The relationshipand support available to the average pubtenant is therefore much lower, and suggesta potential ‘firefighting’ dimension to theBDM’s priorities. In other words, mosttenants experience irregular and infrequentvisits from the BDM because he or she islikely to be concentrating on the problemoutlets.

As was argued above, pubs were turnedover to indirect forms of control whenthe pub was deemed to be marginal as asource or revenue and profits (Slade, 1998).Often the higher-volume properties withsales over £10 000 per week are directlymanaged properties. Those with sales ofover £5000 but under £10 000 per weekare let out as leases, and pubs with salesunder £5000 per week are let as tenancies(Lashley and Lincoln, 2000). According toconventional ‘agency theory’ (Mathewsonand Winter, 1985; Brinckley and Dark, 1987),the small firm owner has more incentive togrow the business than do salaried managers(Eisenhart, 1989). It is noteworthy thatresearch in other fields has also definedthis approach as ‘resource scarcity theory’(Oxenfeldt and Kelly, 1969; Norton, 1988;Minkler, 1990). The general growth ofthe property-owning firm is enhanced byhaving access to the financial capital, labourand managerial talent supplied by the‘franchisee’.

The small firm operating a pub as a tenancyor lease can also be said to be attempting toovercome ‘resource scarcity’. As a businessventure, the tenant/lessee requires limitedcapital to take on a pub. The business mayalso be able to call on the resources and skillsof the bigger firm and in more branded oper-ations is able to benefit from the market posi-tion and consumer knowledge of the brandin a way that would not be possible for a truly‘independent’ small firm. In the past, the ten-ant has had less access to the resources of the

bigger firm though was able to benefit fromlower rentals and the brand position of thebeer product. Clearly, this dimension is moreimportant for ‘franchisees’ in organizationslike Innpartnership and Pubmaster becausethey are closer to the franchise format in theMcDonald’s manner than many other com-panies (Wormald and Hartley, 1999). In allcases, there is much in common with fran-chising as a business format. The tenant isoperating the pub as a unit of the parentcompany and pays rent for the right to oper-ate the business, and they are bound to somekind of tied supplier arrangement. It is ourview that whatever the nomenclature, ten-ancies and lease arrangements are variationson franchising. Taking this further, many ofthe operating companies would do well toexplore more full-blown franchise arrange-ments as a means of building the businessbecause this could apply the big company’sbusiness skills and operating format in a waythat overcomes the smaller firm’s resourcescarcity.

Research approach

This paper is based on a project commis-sioned by the British Institute of Innkeep-ing. The Institute was concerned to explorerelationships between tenant and lessee,landlords and lessors as recognition of itson-going commitment to developing the pro-fessional skills of management in the sector.The research explored business relation-ships in the licensed retail sector involvingtenanted, leasehold and franchise businessformats.

The sample was constructed round anumber of representative types of oper-ator, that is, organizations that managetheir ‘non-directly managed’ estate in dif-ferent ways with a variety of motives andin a variety of contexts. The list belowhighlights the four categories of firm thatwere used.

1. Family brewer retailer with a mixed estateof managed and non-directly managedproperties.



2. Licensed retailer whose estate is wholly/orsubstantially tenanted.

3. Licensed retailer whose estate is wholly/orsubstantially leased.

4. National licensed retailer with a mixedestate of managed and non-directly man-aged properties.

Issues to be explored

Interviews with senior managers establishedthe details associated with the key issuesindicated earlier specifically:

• The motives and intentions of firmswho operate pub units as tenancies andleases and following from this, companies,perceptions of ‘successful’ tenants.

• To consider the approach of indirectlymanaging pubs as a form of fran-chise arrangement and to explore theconsistencies and inconsistencies in theapproach.

Research methods

Lucas (1999: 77) states that the surveymethod of research ‘is about searching andlooking in order to ask a question, or a seriesof questions’, in this case gaining an impres-sion from those who represent firms operat-ing pub properties in an ‘indirectly managed’

format. The Publican (2001) survey lists 100firms operating licensed retail properties inthis manner. Researchers conducted tele-phone surveys of five firms within each offour categories attempting to establish thepicture of the approach being operated.Telephone interviews were targeted at thesenior operational manager responsible forthe non-directly managed estate. Researchersused the telephone survey method as it isrelatively low cost, quick, allows for a largesample, can cover a wide geographical area,is interactive and can gain sensitive informa-tion more readily than some other surveymethods (Lucas, 1999).

Table 3 highlights the sampling frameused in the study. Researchers recognizedthat telephone surveys can be limited in theamount of data gathered, and that is possi-ble to gain only a partial picture of the issueunder investigation. In this case researcherswere keen to explore dimensions relatingto the stated policies of the operating com-panies and the experiences of the tenantsand lessees. Semi-structured interviews werecarried out with senior managers in one com-pany from each category. Interviews werealso conducted with tenants and lessees fromthe same companies to gain insights abouthow the declared policies impacted on thepractical experiences of the licensees on theground.

Table 3. The sample frame

Type of firm Phone interviews Semi-structured interviews

Seniormanagers HO

Case Seniorman.

BDM/Consult

Tenants Lessees

Family brewerretailers

4 1 2 1 2 1

Licensedretailer:tenanted

4 1 1 1 3

Licensedretailer: leased

4 1 1 1 3

Nationallicensedretailer: mixedestate

4 1 1 1 1 2

Total 16 4 5 4 6 6



The managers included the senior oper-ational manager and one regional man-ager (BDM) together with an average ofthree tenants or lessees in four companiesthat represented different operating compa-nies as shown in Table 3. Where tenantsand lessees were interviewed, the relevantcompany identified potential interviewees.Whilst this presents a problem when oneconsiders the potential for ‘hand-picking’the respondents, researchers were keen toexplore relationships that were supposed tobe working well. A follow-up project mightpick up on more typical experiences of ten-ants and lessees.

Table 4 lists the organizations that tookpart in the survey and in order to preserveanonymity the actual company names havebeen substituted with a case number. Inpractice the research revealed a great dealof dynamism and change in the sector.Most importantly, the categories that werecreated as representing different types oforganization were not always as clear-cut aswas at first thought. Several of the companiesdo not cleanly fit into one category ratherthan the other. In some cases organizationswere in the midst of a change process that

meant they were converting properties fromone type of control to another. With thatqualification in mind the Table 4 lists thecompanies that took part in the survey.

• National Licensed Retailers with a mixedestate were Cases 001, 015, 002, 009, 011.Case 001 was the case study organizationand involved interviews with a seniorexecutive, a BDM and tenants/lessees.

• Licensed retailers with mainly tenantedproperties are Cases 006, 014, 019, 003,005. Case 006 was the case study organiza-tion and involved interviews with a seniorexecutive, a BDM and tenants.

• Licensed retailers with mainly leased prop-erties were Cases 007, 008, 010, 012, 013.Case 007 was the case study organizationand involved interviews with a senior exec-utive, a BDM and lessees.

• Family brewer retailers are Cases 016, 020,018, 017, 004. Case 016 was the case studyorganization and involved interviews witha senior executive, a BDM and tenants.

A second problem faced by researchersrelated to the terminology used by inter-viewees. Although some organizations were

Table 4. Telephone survey of company-owned properties

Case no. Managed Tenant/lease/franchise

Tenanted Leased Franchised Other Total

001 104 2516 1670 846 0 0 2620002 1000 4200 1000 3200 0 0 5200009 260 460 460 0 0 0 720011 44 210 210 0 0 0 254015 67 320 317 3 0 0 387003 35 115 115 0 0 0 150005 42 71 71 0 0 0 113006 0 1000 1000 0 0 0 1000014 0 2000 2000 0 0 0 2000019 0 75 75 0 0 0 75007 0 1170 200 60 910 0 1170008 0 2810 765 2011 0 34 2810010 0 700 500 200 0 0 700012 18 392 392 0 0 0 410013 22 73 73 0 0 0 95004 1 40 40 0 0 0 41016 0 96 96 0 0 0 96017 35 32 32 0 0 0 67018 0 89 89 0 0 0 89020 0 43 43 0 0 0 43



managing pubs in the form of lease arrange-ments, they continue to refer to the lesseesas ‘tenants’. In the following we refer totenants and tenancies as referring to arrange-

A problem faced byresearchers related tothe terminology used

by interviewees

ments where the tenant has short-termtenure, with a non-assignable agreement.The pub-operating company continues tohave responsibility for major repairs andbuilding insurance. The lease arrangementrefers to a situation where the lessee has along tenure in which the lease is assignableand the lessee is responsible for propertymaintenance, repairs and insurance. Thecore distinction is in the ability to assignownership to another party. The lease has avalue that may increase as the business buildssales and profits. The lease will therefore gainfrom any increased business value. The basictenancy involves a relationship between twonamed parties and ceases to have value out-side of that specific relationship. The tenancyis closer to a rental arrangement whereby thetenant has no return on increased businessvalue.

Findings

The research explored the motives and inten-tions of firms who operate pub units as ten-ancy and lease arrangements. In particular,it examined these companies’ perceptions of‘successful’ tenants/lessees and unsuccessfultenants/lessees and considered the linkagesbetween the operating company and thesmall firm within the context of franchisearrangements.

Variations in ownership and control

The results from these telephone and face-to-face interviews is of changing and diverse sets

of provisions. There are clearly increasingnumbers of firms who are managing theirestate in an indirect manner. Organizationsin all categories reported that they run theirestate as ‘tenancies’ and convert any acquiredmanaged pubs to tenancies as quickly aspossible. Case 006 said in the telephoneinterview: ‘There are no key issues, wedon’t have any managed pubs and if wedid we’d convert them to tenancies. Wehave taken over some other mixed estatesand we have converted the managed intotenancies’. Case 008 with an estate largelylet to leases said ‘We do not have theinfrastructure or brands to run managedpubs’. In some cases they offer the propertyto the existing manager, or continue tooperate the managed estate ‘until a suitabletenant can be found’. Case 009 is typical ofthis comment: ‘We are converting all of ourestate to tenancies the reason we still havemanaged houses is the problem of gettingenough good quality tenants.’ One of thebrewer retailers reported (Case 004), ‘Wespecialize in tenanted pubs, we’ve got onemanaged pub as a bit of an experimentto see how it works out and that’s acrossthe road from the brewery’. It is worthremembering that the respondent’s use oftenants and tenancies is likely to be a term toinclude lease arrangements as well. Case 005was typical of several commentators: ‘I saytenanted properties, in reality our tenanciesare really five-year leaseholds but we stillcall them tenancies’.

Other firms found that across all the cate-gories reported that they continue to manageproperties in a mixed estate. Typically thecity-centre or high-volume properties aredirectly managed whilst the more marginalproperties are indirectly managed. Case 011with a mixed national estate told the tele-phone interviewer, ‘The bigger houses havea big enough profit usually much biggerturnover so there is little point in puttingthese out to tenancy. The tenanted housestend to be smaller and suit an owner oper-ator.’ Case 005 with a more tenanted profilesaid, ‘When the properties are no longer mak-ing enough money to maintain as managed



houses. Some are too small to warrant biginvestment and these get put out to ten-ants.’ The local brewer retailer also used asimilar reasoning Case 017 reported ‘Loca-tion and revenue. Most of our tenanted pubsare smaller community pubs better suited totenancy.’ Case 012 with a largely leaseholdset of contracts stated ‘We are all tenantedexcept for a few managed houses. Our man-aged estate is all city-centre pubs and theyare profitable for us to operate that’s whywe keep them under direct management.’

The volume of sales, location and prof-itability are clearly issues that influence theforms of ownership and control. Where aretailer has a managed estate these tend to bethe larger pubs in the estate, and are typicallyin prime locations. A similar set of considera-tions is obvious when an operating companyis deciding between various lease and ten-ancy arrangements. Case 002 reported to thetelephone interviewer, ‘It’s a combination ofthings really. Profit levels, houses generatinglow incomes are offered as tenancies, poten-tial poor site location. The lower incomehouses are normally put out to tenant costabout £5000–7000. The better performingand higher value sites are put out to leasebecause of the higher cost £40 000–50 000.’Case 007 operate most properties as ‘fran-chises’, though a senior executive confirmedthat potential business size is an importantconsideration. ‘Just as I’ve said if the pubsdon’t fit the franchise model they stay ina tenancy agreement or we sell them on.The point of franchise houses is that theyare potential growth pubs and if the pub inquestion is a low-turnover pub with littleopportunity to develop then we usually sellit on.’

The forms of arrangement suggested ear-lier are confirmed in the telephone inter-views and interviews with senior executives.The tenancy tends to apply to short-termperiods of tenure and is non-assignable. Thebrewer retailer reported that they favour theexisting tenants family though the tenancycannot be transferred, ‘Non-assignable, butthe tenant’s family gets first choice say in thecase of ill health. We’ve a tenant who was

ill with cancer and because of the treatmentand hospitalization was forced to retire buthis daughter has taken on the tenancy andwe know she will run the business the sameas he did.’ The senior executive in Case 007said ‘Our 10-year franchises are assignableafter 3 years, with the old 3 + 3-franchisearrangement in theory they could sell thesecond three years when they sign on the dot-ted line.’ The senior executive in the mixedestate confirmed the general pattern: ‘Our3-year tenancies are more traditional tenan-cies but we are trying to move these towardsthe longer agreements. Our 10-year tenancyagreement is in fact nearer to a lease and isassignable after 2 years. Our 21-year lease isalso assignable after 2 years. Our tenanciesare unique in that they have a cooling-offperiod if before the first 28 days are up theydecide that this is not for them they can give6 months notice to quit.’

This notion of the cooling-off period is auseful one in that several tenants complainedof finding the reality of the tenancy orlease different from the message from thecompany’s promotional literature. In somecases tenancies were six months to one year,but three years seemed to be the most typicalas the length of tenure for the tenancy.Leaseholds were usually for 10 years thoughsome agreements are for 21 years. Somecompanies make these assignable from dayone whilst in other cases, they are assignableafter some minimal period — typically twoto three years.

The amount of capital required by thepotential tenant, lessee or franchisee canvary considerably. Most initial charges wouldinclude some up-front fee, plus money forfixtures and fittings, stock and workingcapital. The precise amount depends on theproperty and the state of the business in theunit. Some interviewees suggested that thiscould be as low as £4000–£5000, thoughmost suggested that a typical tenancy wouldrequire around £15 000. Leaseholds wouldtypically attract higher charges than this,though again increased size and complexityof the business will add to the cost.A property with a substantial dining or



accommodation business will increase thevalue of fixtures and fittings. A seniorexecutive with Case 001, the national retailerwith a mixture of properties, gave a sense ofthe flexibility of the arrangements: ‘Between£15 000 and £20 000 is about average, thelonger the agreement the higher the legalfees. This also very much depends on thelevel of the inventory. We have a low entrytenancy called an ‘‘E+’’ which is basedaround the three-year tenancy agreementwith a barrelage discount and an abilityto rent the majority of fixtures and fittingswithin the pub rather than purchasing themoutright. This is because fixtures and fittingscan cost up to £40 000 in some properties.This arrangement lowers the entry barriersto potential tenants with limited capitalavailable.’

In fact most of the companies madesome arrangements to adjust the financialpackage if the ‘right’ tenant or lessee didn’tquite have enough money up-front. In thecase of the local retailer brewer, they wereprepared to spread the purchase of the in-going fees if the person matched the needsof the local community. One national leaseorganization used the Royal Bank of Scotlandto help their ‘franchisees’ with loans. Theother companies had a variety of formal andinformal methods for overcoming potentialcash shortages for the ‘right person’. Thetelephone survey suggested that nineteenof the twenty firms in the survey requiredapplicants for a tenancy or lease to produce abusiness plan. In some cases, the productionof a business plan was a requirement ofbeing accepted, though in other cases thiswas more optional or a ‘broad-brushstroke’rather than a detailed working plan.

Cases 007 and 014 both claimed to berunning a part of their estate in the formof ‘franchises’. Without the rigidities oftight operating systems and hard brands,these are different from the McDonald’stype franchise that sells a highly prescribedbusiness format and uniformity-dependentbrand. In the main, these companies tendto be based round ‘blueprinting’ where thebrand represents less of an up-front aspect

of the business. However, the properties arebased on a loosely defined format directedat specified market segments and customeroccasions. Interviews with senior executivessuggest that this approach to franchisingallows more scope for individual flair andservices innovation. This may be the case, butthere are opportunities to use franchisingas a tight hard brand along the lines ofMcDonald’s, and we see this as a potentialfuture development.

When asked about the benefits of theseless direct forms of control respondentsacross the range of units alluded to reasonsthat reflected ‘resource poverty’ benefits toboth firms and the ‘agency theory’ for thepub operator. The interviewee in Case 003summoned up the benefits identified bymany respondents: ‘I suppose the biggestadvantage is that it allows the companyto reduce its operating costs, while stillretaining outlets for its beer. It definitelysaves on the cost of managers and staff forevery property and the company retains thebeer tie and in general makes more profit.To the tenant for about £5000 they can get achance to run their own business on a shorttenancy.’ The telephone interview with Case020 also reflected the benefits of tappingthe skills of the tenant or lessee: ‘Tenancieslet people who are ‘‘self employed’’ runtheir own businesses and develop their ownideas about the types of activities and foodthey offer. The more the tenants make thebetter off we are because of the beer tie.So it’s in our interest to guide and helpour tenants to succeed.’ Several intervieweesreflected this point, and Case 008 drewthe two sets of benefits together. ‘Havinga committed businessperson in each pub,working at building their own businessemploying their individuality and makingunique pubs. Response to local changesand customer demand. Reduced overheads,especially in finance and brands. Secure andstable income streams so long as tenantchanges are actively managed.’

When asked to comment on the limitationsof this indirect form of pub management,answers reflected those that would also be



given by companies running more traditionalfranchises. Almost every respondent in thetelephone interviews commented on the lackof control of the unit as being a major lim-itation. The tenant or lessee are said tohave a powerful impact on the success orfailure of the unit. Several respondents com-mented on the difficulties of recruiting theright kind of tenants/lessees and particularlyin the more marginal properties where scopefor business development was limited. Onelocal brewer retailer summed up these con-cerns (Case 017): ‘Not as much control onyour beer products, as you would have ina managed pub. Sometimes the tenants buyoutside the tie. If a pub goes ‘‘belly up’’considerable damage can be done to yourproduct range. If the tenant doesn’t keep thebeer well the word in a community soongoes around — ‘‘don’t go there the beer’scrap.’’ That not only damages our wet prod-uct range in the eyes of the punters, but italso means more support and beer promo-tions for the new tenants to help them buildthe trade.’

Several tenants and lessees pointed to theoperating companies as having some respon-sibilities for failures: ‘Probably because thecompanies ‘‘rip them off’’ by putting them inpubs with no growth potential and then justleave them to it. All some of these companiesare interested in is the money, has the per-son applying for the job got the money anda clean record for the licence? They won’ttell you that but that’s the reality in a lot ofbreweries and pub companies’ (Lessee 002in Case 006). ‘Probably because of the highrent this place is £460 a week, the ‘‘rip-off’’on the beer tie, and the lack of support’(Tenant 002 in Case 007).

The operating companies that participatedin this survey were clearly sampling differentapproaches to operating these businesses. Inthe main they are attempting to limit riskand gain the benefits from operating on alarger scale, using the resources providedby the small firm as their tenant, lesseeor franchisee. At the same time they wereattempting to limit their own risk by exposingthe tenants to the marginal properties in the

hope that the local ‘owner–manager’ wouldbe able to apply a more entrepreneurial setof skills to the pub than those exercised bya manager. At each stage and each type ofoperation the less marginal properties wereretained in a more secure form either asa directly managed units or leases. In allcases, the key benefits for the operators were

The key benefits for theoperators were cost

and risk minimization

cost and risk minimization, though this wasat the cost of a reduced level of control.Much in common with arrangements in othersectors might be called franchising, though inthe McDonald’s type business the franchiseewould be much more tightly tied in brandoperating standards.

Discussion

Relationships between the operating com-panies and tenants were in the past largelybased on brewery-owned properties wherethe operation of the most marginal proper-ties allowed access for beer product at mini-mal risk to the brewer. Support structures fortenants were basic and costs were kept low.Where tenants were able to grow the busi-ness, the brewers frequently repositioned theproperty within its directly managed estate.Risk reduction, cost minimization and profitmaximization was the driving considerationsfor the companies that owned the pubs.

Recent changes in ownership and con-sumption patterns within the market havebrought many operators to follow strategiesthat are concerned with a more retailingorientation. Many of the companies oper-ating pubs are aiming to grow sales andrespond quickly to changes in consumertastes and fashions. They no longer ownbrewing facilities and some companies con-trol whole estates of pubs that are marginal.The actions, skills and motivations of local



unit managers are crucial for the successof the property, and its contribution tocompany goals. The exploration of differentforms of indirect control via lease and ‘fran-chise’ arrangements is a recognition of theneed to provide more entrepreneurial incen-tives for tenants and lessees (franchisees),though we believe that the operators havenot gone far enough and need to explorefranchising more thoroughly.

Given a more ‘retail’- and growth-orientated agenda, the essentially ‘laissez-faire’ approach to managing these pubswill, in our view, need to give way a morefocused branded, or at least ‘blueprinted’strategy where customer segments, customeroccasions and critical success factors areclosely defined and delivered. There maybe a place for pub tenants and lessees‘doing their own thing’ in the future,but a serious retail strategy cannot leavethis to the happenstance of individualmotives and skills. It will need traditionalforms of franchise arrangements to beintroduced. The key concerns will becomeconsistency and brand values, and as aconsequence managerial systems that willrequire both closer monitoring and, moredetailed support for the lessees and tenants.

Conclusions

This paper has explored the use of indi-rect business controls exercised within thelicensed retail sector. Though many prac-titioners openly declare that they are notinvolved in a franchise relationship, manygeneral features of franchising apply to therelationship between nominally indepen-dent businesses. For their part, the largercompanies are aiming to operate on a largerscale than their level of resources wouldpermit if the businesses were directly man-aged. By controlling the units in an indirectmanner, they are able to take advantage ofthe resources of the smaller firm and canthereby benefit from lower operational costs.At the same time they hope to gain from theimmediate skills and incentive of the local‘entrepreneur’. The smaller firm is aiming to

gain from the expertise and increased marketpower of the larger organization.

This paper has shown that whilst theseobservations reflect the general aspirationsof the two parties, in practice they are flawedby misunderstandings that are present in therealities of the relationship. For the largerfirm, the need to develop the retail aspectof the business through sales growth issomewhat tempered by the need to haveproperties let to tenants. Hence they operatelow barriers to entry and although manydeclare intent to match the tenant to theproperty, filters and selection processes areminimal. In some cases, the companieswere accused of overselling the potentialof a property to the more na ı̈ve tenants.In other cases, the companies have anunrealistic expectation of small firms withwhom they work. There is a general tendencyto overestimate the entrepreneurial drives oftenants and to underestimate the numberof ‘life-style’ entrepreneurs among tenantsand lessees. These issues will be explored ina follow-up paper in Strategic Change, ‘Bigfirms waiting to grow?’

The relationship between the big compa-nies and their small firm partners is complex.

The relationshipbetween the big

companies and theirsmall firm partners is

complex

The operating company recruits tenants andlessees, they charge them rents, tie them intoa source of supply and undertake some basicmonitoring of the business — particularly in‘policing the tie’. The small firm looks tothe larger firm as both a source of exper-tise and support and as a restraint on theirbusiness. Several tenants and lessees com-plained about the levels of rents, the pricescharged for supplies, and the rigidity of thetie. The larger firm aspires to grow the retail



dimension of the business, and could pro-vide more direct support to tenants in theform of training programmes, and BDMs whowork closely with a small number of tenantsand lessees. However, strategies based oncost minimization mean that training pro-grammes are mostly optional and the spanof control of most BDMs is too large to doanything other than ‘firefight’ the problemproperties.

Biographical notes

Conrad Lashley is Professor of HospitalityRetail in the School of Tourism and Hospital-ity Management at Leeds Metropolitan Uni-versity. Conrad has undertaken research andconsultancy for several major organizationswithin the sector including the Hospital-ity Training Foundation; J.D.Wetherspoons;Scottish and Newcastle Retail; the YatesGroup; the British Institute of Innkeep-ing and McDonald’s Restaurants Limited.He edits the Hospitality, Leisure andTourism series of books for Butterworth-Heinemann. Conrad has authored or co-authored 15 books and published reportincluding Empowerment: HR strategies forservice excellence; Hospitality Retail Man-agement: a manager’s guide, as well as over40 articles in refereed journals.

Bill Rowson is Research Assistant in theSchool of Tourism and Hospitality Manage-ment, at Leeds Metropolitan University. Heis co-author with Conrad Lashley of severalpublished reports based on commissionedresearch. These include the following reportsWasted Millions: the costs of staff turnoverin licensed retailing (BII, 2000); Is ThereBreath on the Mirror? Tenant relationshipsin pub companies (BII, 2001); The Bene-fits of Training for Business Performance: aresearch report for the Punch pub company(Punch: 2001). His other research interestsinclude the impact of minimum wage legisla-tion of small hospitality firms.

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When is a franchise not a franchise? when it's a pub