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DTZ Assists Proactive Publicans

17 August 2005

DTZ Assists Proactive Publicans Meet Challenging Business Climate

The recent changes to legislation concerning gaming and smoking in licensed premises could potentially have negative repercussions for the industry as a whole. Amendments to the gaming site rental scheme provide for lower rentals to be paid to operators and, in addition, licensed premises are now required to become smoke free environments.

David Bower of DTZ's Hotel, Hospitality & Tourism Division believes that the impact of these two significant changes is still to be felt by most bars and taverns. "Either of these amendments on their own could potentially affect a publican's bottom line. Taken together it is likely that many owners of licensed premises will feel the pinch. This is the time for owners and operators of licensed premises to be proactive and not reactive. Many will need to re-direct and re-focus their businesses in order to avoid potential fall-out from the changes."

Major effects may still be to come

"The DIA has recommended a maximum site rental of $150 per machine per week which translates to a significant reduction in rental income in many locations. The former rental regime was upwardly progressing and based largely on gaming site turnover from the machines, with some sites being paid as high as $600 per machine per week.

"With regards the change in smoking legislation, its possible that the extended summer season led many patrons to enjoy the outdoors rather then the 'pub' for entertainment. This view is supported by sales patterns that confirmed lower levels of on-premise sales and a correspondingly higher level of off-premises sales. As winter strikes, the real effect on on-premises sales may be fully realised," says Bower.

Bower notes that the legislation may have varying effects depending on the nature of the business and how it has run its operation in the past. "For example, some publicans became so focused on gaming activity that they lost their way in the management of the traditional elements of the business, namely the provision of liquor and food, and failed to attract on-premise patrons - a factor that is self evident in many businesses."

It is also possible that further regulation to minimise harm from gambling activities could be forthcoming. "There have been cases where the DIA has closed businesses where the predominant activity was gaming," adds Bower.

Over the past 10 years there has been an enormous expansion in the type and style of licensed premises permitted. To some extent this has resulted in an over-supply since the size of the consumer market has not really increased by similar proportions. Finding or creating an adaptive use for some existing licensed premises will be inevitable. Those that remain may then be in a position to trade profitably.

Bower believes that, in the current market, many landlords are investors rather than going concern owners who (perhaps in retirement) have sold out their interests. Many landlords, therefore, do not possess the hands on understanding of the business that is so necessary in a tougher climate.

"It is speculation, but based on a number of business profit and loss accounts sighted by us within the last 12 months we know that a major reduction in site rental income coupled with a slump in on-premises revenues will test the solvency of some outlets. In addition, current rentals were set using figures that have now fundamentally changed. As a result rent may become an issue, for some businesses at least, and those landlords will face a dilemma particularly if there is a sizable mortgage to service.

Proactive owners and operators must fully understand the dynamics of their business

The most important thing, according to David Bower, is for owners (and their bankers and mortgagors) to fully understand the internal and external dynamics impacting on the individual business. "It is important that challenges be properly analysed to determine the extent to which they are management or market driven. Common sense dictates that some problems can be resolved with a change of direction or focus and some cannot. Often, it takes an in depth understanding of the market to be able to tell the difference."

"The earlier you take advice the better since this provides the best chance of finding proactive solutions rather than reactive ones."

"In any challenging business environment, you first identify the root causes of the problem and this demands specialist expertise. With a solid understanding of the property and business of licensed premises behind us, we are able to provide objective advice to enable clients best manage potential risk. We can provide SWOT assessments and provide answers to the hard questions involving retention, management, selling and/or other exit strategies," says Bower.

Through its valuation and agency functions, DTZ is able to offer the total package of property advisory services from the development of a broad strategy for marketing and selling property and businesses through to securing premises, chattels and stock, providing detailed itemised cost inventories, recording the state of a property and highlighting any areas of deferred maintenance.


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