One of the things I continually get asked is “How much does it cost to run a pub?” My usual answer is “How long is a piece of string?” as all pub businesses are unique and in consequence each pub has its own unique running costs. So how do you work out what a given pub is going to cost in terms of overheads such as wages, utilities, repairs etc?
Luckily for the pub industry the British Beer and Pub Association (BBPA) and UKHospitality (the new name for the Association of Licensed Multiple Retailers or ALMR) gather information from thousands of pubs throughout the country and collate that information into a series of “benchmarks”, which one can compare against.
The BBPA, who represent brewers and pub owning/operating companies in the UK publish the results of their research on a regular basis, however the results can be difficult to interpret. The BBPA uses some broad segments from within the tenanted and leased pub sectors to categorise the types of pub one might encounter and thus the typical running costs one might experience running that type of pub:
- Rural Character Pub with a 52/48 split between drink and food trading at £5,000 per week or 54/46 in an £8,000 per week
- Small Community Local Pub with a 98/2 split between drink and food trading at £4,000 per week
- Community Wet Led Local Pub with a 89/11 split between drink and food trading at £5,000; 88/12 in an £8,000 per week, and introduced in 2017 a £12,000 per week model with a 88/12 split
- Town/Country Food Led Pub with a 42/58 split between drink and food trading at £10,000 per week
- Town Centre Pub with a 71/29 split between drink and food trading at £10,000 per week
The BBPA specifically excludes the following sales and costs from their modelling: Managers’ Salaries (as many pubs are owner operated and do not employ a manager or management couple); Amusement Machine (AWP) income as some pubs have fruit machines/pool tables etc installed and some don’t and different arrangements by pubcos and brewers such as offering free of tie arrangements for AWP make their inclusion problematic; and finally Entertainment costs such as the provision of Sky TV and/or BT Sports or live music etc are unique to each pub business.
I believe many costs are bundled together into the heading “other costs” and may or may not include provision for spending on things like Trade Insurance, licensing costs (Premises, Personal, PRS for Music or PPL for recorded music) and provision should be made for these in a detailed Profit & Loss Account.
There is no longer provision within the BBPA analysis for depreciation and interest is on capital (not working capital), one would normally expect these costs to be taken out of net profit and not included in operating costs so one ends up with a true EBITDA (Earnings Before Interest, Tax, Deprecation and Amortisation), which I believe is a better way to assess profit/loss. EBITDA allows a more meaningful comparison of business models as depreciation and interest costs are not only peculiar to specific pubs but are also dependent on other factors such as accounting methods (for depreciation) and finance costs (interest).
Accordingly one can extrapolate an approximation of average operating costs for pubs as a percentage of their turnover from the BBPA benchmarks (UKHospitality benchmark is bracketed where appropriate):
- Wages and Salaries – 20.2% (24%)
- Rates – 3.3%
- Utilities – 3.7% (4.4%)
- Repairs, Maintenance & Renewals – 1.3%
- Building Insurance – 0.6%
- Marketing/Promotion/Telephone – 1.3%
- Consumables – 0.6%
- Waste/Cleaning/Hygiene – 0.7%
- Professional Fees – 1.0%
- Bank & Card Charges – 0.6%
- Equipment Hire etc – 0.3%
- Interest on capital – 0.4% (This category added in 2016)
- PayTV (Sky/BT etc.) – 2.3% (This category added in 2017, does not apply to all models)
- Other Costs – 1.6% (2.0%)
Which means, one can expect to spend 36.8% of turnover on operating costs and generate a Trading Profit of 19.5%, from which a rent or mortgage costs would need to be deducted. (The historic figure BBPA used for Depreciation /Interest Charges was 0.8%). The BBPA analysis shows an average rental cost of 9.8%, whilst UKHospitality puts this at 10.6%.
The BBPA quite rightly points out their figures are only an approximation and every pub is different and experiences differing costs depending on the size, location, style of trading etc and that benchmarks are only meant as a guide, whereas a comprehensive Business Plan will take account of the exact figures for an individual pub. Benchmarks are useful in trying to determine whether ones business is operating within “industry norms”, however, that is as far as their use goes. A good publican will always seek to minimise all costs and maximise all sales to extract the greatest profit from their business.
To commission a bespoke Rent Estimate Report from How To Run A Pub click here.
Click here to download a copy of my analysis of the BBPA figures, which include a rental bid figure one might expect to submit for a tenanted/leased pub business using the Business, Industry and Skills Department’s formula for a rent assessment as detailed in their consultation documents in 2013 into the relationship between tenants and pubcos. The formula attempts to create a fair rent whereby “no tied tenant is worse off than a free of tie tenant” by taking into account SCORFA (the supposed financial value attributed to the benefit of being a tenant of a landlord company through the provision of services, discounts etc the landlord may offer). Using this formula the average “net rent” would be nearer 7.8%, so negotiating this point is definitely worth a punt.
You should also note UKHospitality has differing criteria and results when assessing costs and are from information gathered from tentanted/leased/freehold businesses and from businesses who operate more than one pub (or other hospitality businesses such as nightclubs). The BBPA benchmarks are, I believe, more relevant to the majority of owner operated pubs than those of the UKHospitality, hence my focus on the former.