Heartbeak hotels?

If the news of this week is anything to go by, you wouldn’t be a pub owner or operator for all the beer in Melbourne.

Yesterday we brought you the story of the collapse of another NSW pub operator, Alchemy Hotels. Down in Melbourne this week, the closure of an iconic pub and music venue called The Tote has led to protests, farewell concerts and front-page newspaper stories.

These two closures come after a seemingly endless string of pub group collapses during 2009. So what exactly is wrong with the sector?

The main problem is the eternal entrepreneur’s curse – debt. With Australia’s economy booming in 2006, 2007 and even 2008 and cheap credit around every corner, budding pub owners were willing to borrow heavily to pay incredible prices for hotels.

While the economy motored along, these entrepreneurs could meet their interest payments. But when the GFC struck and the patrons dropped off, the interest payments became harder and harder to meet. Eventually, the banks stepped in and installed administrators, receivers and liquidators.

The other problem, which appears to have affected Alchemy and the operator of The Tote, is government crackdowns on alcohol-fuelled violence in hotels and clubs.

Tighter liquor licensing laws, increased security and safety obligations and variations to operating hours all put pressure on costs and profitability.

But for all these negatives, the pub sector might not be dead quite yet.

Indeed, one hotel manager I spoke to over the holidays was telling me about how his pub – ironically located just a few kilometres from The Tote – had doubled its average takings on a Saturday from $20,000 to over $40,000 in the last year.

That pub is very different from The Tote in that it is located in a relatively quiet residential street, runs a well-regarded restaurant and has built a steady function room business.

It’s also different from many of the collapses pub groups in that the owners have been in the property for some time, so are not carrying the debts that brought many undone.

But the size of the property’s turnover increase says to me there is a bit of an opportunity here for a canny entrepreneur.

The secret appears to be finding well-located pub with a strong, regular clientele, diverse income streams (such as a food, gaming machines, functions or a bottle shop) and a reputation as a low-risk venue from a security point of view.

Then the owner must be careful not to overpay (and it appears there are bargains around) and most importantly, not to over-borrow.

But remember, this is not an easy business. Pubs with very strong, hands-on management appear to do best; one pub expert I spoke to yesterday said pubs where a syndicate of investors simply install a management team and hope for the cash to roll in have struggled in recent years.

It’s hard work, long hours and relentless in that many venues are open for up to 20 hours a day. But with the sector in turmoil, opportunities just might present themselves.