Why Australia’s pub owners are in trouble

More pub groups are expected to collapse as falls in property values and discretionary spending and a lack of credit combine to push pub owners over the edge.

Last Friday SmartCompany reported that Melbourne pub owner Cornerstone was placed into the hands of receivers. Receivers John Lindholm and Peter McCluskey of Ferrier Hodgson will restructure the group of 15 high profile Melbourne hotels, including music venue The Tote in the suburb of Collingwood and The Botanical in South Yarra.

Cornerstone’s managing director Ben Niall said on Friday that the group had reached a close on the sale of three pubs: Richmond Public House, Q Lounge in Melton and The Local in Port Melbourne.

The problems that have affected Cornerstone have been repeated at – and threaten – other pub groups.

One banker told SmartCompany this morning there are a number of pub groups in “intensive care”. Some of them will trade through, but he expects others not to make it.

There are the key errors if the pub groups in trouble:

1. Paid too much

Many pubs were bought in the boom and the new owners paid inflated prices for both land and leases.

2. Wallets are closing

Pubs and gaming are at the front edge of discretionary spend. As consumers have less money in their pockets, these industries get hit hard.

3. Red tape 

New anti-smoking legislation and changes to gaming regulation has hit pub revenue.

4. Property values fall 

On average, a pub owner might have borrowed 70% of the price of the pub and had a commercial property buffer of 30%. However property values have fallen by 20% and the buffer has gone.

5. No credit

Bankers are refusing to refinance the businesses because revenue and property prices have fallen and the outlook is risky.

So is it a good time to buy pubs? Only if you have the cash, don’t need to borrow, and can sit out any further fall in discretionary income. Otherwise, you might be better off waiting.

Related story:

• Melbourne hotel group collapses