APPENDIX 16
Memorandum by InnSpired
EXECUTIVE SUMMARY
— InnSpired believes that the current
legislative and regulative climate regarding leased public houses
and tenancy arrangements best serves the interests of the consumer,
the tenants and the Pubcos.
— We believe that the present sectoral
structures create many of the conditions necessary to fulfil the
objectives of HMG and the Select Committee, namely the empowerment
of small business entrepreneurs, increased consumer choice, and
the creation of diversity of competition in the pub and brewing
industries alike.
— We also assert that the relationship
between tenants and pubcos is based upon a shared motivation to
succeed and that both parties are served well by the present arrangements,
with the marginal constraints of the beer tie more than outweighed
by the support which tenants receive to help them to prosper.
Our success is dependent upon the success of our tenants and we
demonstrate below the extensive efforts to which we go in order
to achieve that shared goal.
— As a young and growing company in
a market dominated by two large players, InnSpired would be happy
to provide oral evidence in support of this submission in order
to lend the inquiry team an insight into the future of the market
and how increased competition between pubcos can further diminish
the supposed impacts on tenants from their relationships with
their landlords.
1. About InnSpired
1.1 Formed as a result of the merger between
Ushers of Trowbridge and Alehouse Company in January 2000, InnSpired
has grown to become the third largest player in terms of tenant/leased
pub numbers and the eighth largest in terms of outright pub ownership
numbers, expanding our estate from 800 to 1,070 pubs across England
and Wales. All our pubs are tenanted or leased, run by self-employed
entrepreneurs who retain the profit from the sale of goods in
their pubs.
1.2 Backed by venture capital and based
in Trowbridge, Wiltshire, InnSpired employs 70 staff, nearly half
of whom are field based, including our Business Development Managers
who are the primary contact point for our tenants. We are a significant
employer in the Trowbridge area.
1.3 InnSpired's financial performance has
improved from a position of pre-tax losses of £5.39 million
and £2.88 million in 2001 and 2002 respectively, to a £1.73
million profit in 2003.
1.4 In common with most other Pubcos, InnSpired
derives its income from three different, although clearly related,
streams: rent, sales of drinks products to our pubs and gaming
machines in our pubs. Our income mix is illustrated below; it
is fairly typical for the sector although some Pubcos choose to
balance the mix slightly differently (eg charging higher rents
and lower prices on drinks).
1.5 InnSpired recognises its responsibilities
in supporting our tenants and developing their business. Our 22
Business Development Managers are critical to providing daily
and weekly support to our tenants. The BDM appoints any new tenant
joining the business and thereafter the BDM is the main company
representative who visits each of their pubs (average 48 per BDM)
on a call cycle. When visiting the pubs they provide the tenant
with business guidance and advice on how to grow and improve their
pub whilst ensuring that standards are maintained to an appropriate
level. The support provided includes guidance on promotional activity,
ensuring compliance with government legislation, health and safety
matters, etc.
We also provide:
— incentive schemes to reward succeeding
businesses;
— schemes focusing on tenants in areas
where demand is particularly price-sensitive; and
— advice on stock control and merchandising.
1.6 All of these services are aimed at the
key objective of assisting tenants—many of whom come into
the sector with transferable skills but little or no previous
hands-on experience of pub management—to build and optimise
their businesses and succeed commercially.
1.7 Capital investment
A barrier for growth often experienced by publicans
is the inability to invest in capital improvements or the fear
of the associated risks involved. The present relationship between
pubcos and tenants helps to remove this barrier, allowing the
small business to thrive
1.8 Capital expenditure on the InnSpired
estate for 2003 rose by 13% to £2.6 million through spending
on refurbishments and other improvement schemes put forward by
licensees. It is unlikely that such an amount would have been
spent collectively by the licensees outside of the pubco structure
and illustrates once more the real advantages of the present environment
and yet another benefit for tenants.
2. Becoming a Publican
2.1 The Two Routes
There are two main ways of entering the licensed
trade as a self-employed pub operator—namely the Free-House
or Leasehold/Tenant route.
2.2 The decision to go down the leasehold
route by a potential publican is a trade off between complete
freedom of choice in return for a partnership with a pub company
in which financial risks are shared and the complete range of
business support is available to them.
2.3 We firmly believe that this business
model offers opportunities that would be denied many aspiring
licensees who might be unable, or unwilling, to raise the significant
capital required to become a freehold publican. We see our business
model as an important mechanism for supporting 1,070 small businesses
to thrive in the UK.
2.4 In this we also believe that our business
supports Government aspirations to sustain community businesses,
as Minister of State for Trade and Industry Stephen Timms MP asserted
in November 2003:
". . . we want to help businesses succeed
and prosper, and to reduce the barriers that prevent enterprising
individuals who want to start in business take those first important
steps."
2.5 Weighing Up the Options
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| Free house | Leasehold
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| Requirements for entry | Need to fund and service the full capital costs of the business (finance to purchase the pub plus working capital).
| Capital to buy loose fixtures and fittings from the previous tenant.
Deposit (up to £3,000) against the goods account.
A month's rent in advance and a damage deposit.
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| Advantages | Buy all your requirements from whichever source you choose—including all alcohol at the lowest cost available.
You own the asset.
No obligations other than legal and financial to repay mortgage payments and provide working capital.
Ability to capitalise on reduced costs of products, and special offers from wholesale outlets.
| Low cost of entry to the market.
InnSpired retains responsibility for the structure of the building, the electrics and underground drains—the largest areas of structural expense.
You own the lease and any growth that you can realise on transfer.
InnSpired offers tenants one-stop-shop for easy, regular and reliable delivery of full range of products.
Regular six weekly support from Business Development Manager on stock control, merchandising, legislative requirements, training and staff management to deliver an efficient and effective business.
Regular discounted and promotional opportunities for tied and un-tied products which benefit the tenant and consumer.
Pubco will try to support tenants during lean times, acting as a safety net.
Low capital investment allows a tenant to leave the pub trade more easily than a freeholder.
Pubcos are often able to secure advantageous deals from other suppliers of goods and services eg catering companies, insurance, accountancy and banking services.
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| Disadvantages | Sole exposure to all the risks for maintaining a profitable business yourself.
Resource intensive sourcing of suppliers to ensure best value for money.
No support for business development.
Responsible for maintaining the asset.
| Have to buy a proportion of your goods from InnSpired specifically beer, lager, cider and soft drinks at a price which may be more expensive than alternative suppliers.
Five year rent reviews assessed against turnover and profitability.
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3. Becoming a Tenant
3.1 Terms of an InnSpired Lease
As we have already identified, leases are an advantageous
springboard for would-be publicans to break into the market and
the agreements represent a fair deal given the commercial constraints
within which we operate.
3.2 Our pubs provide a self-employed business opportunity
with a low entry value and almost always include living accommodation.
3.3 InnSpired offers a choice of flexible arrangements,
from a short-term 12 month contract to more secure 10 and 20 year
agreements that give tenants the opportunity to develop their
businesses. The long leases are assignable, allowing tenants to
realise the goodwill of the business they build in partnership
with InnSpired. The lease on the French Horn in Alton, for example,
recently changed hands for £190,000 and the sale of a lease
on a pub in the Isle of Wight is currently being negotiated for
around the same sum.
3.4 It is vitally important that our tenants fully understand
the requirements of the lease before they enter into an agreement
with us. We operate transparent procedures to ensure that all
prospective applicants are at liberty to review and question us
before choosing to become our tenants. Testimonials illustrating
the genuine appreciation of the systems that we use to support
our tenants are provided in Appendix II.
3.5 How InnSpired calculates Pub Rents
Rents are below market rates precisely in order to take into
account the "beer tie" and gaming machine income share
arrangements. Although there is a provision to appeal on rent
review, as yet we have never had to go to independent arbitration
about any of our rents.
3.6 Rents are calculated and reviewed on a case by case
basis. Our Business Development Managers and Operations Directors
make their assessments using the following criteria:
— What a "good average tenant" could achieve
in terms of turnover, based on all income streams.
— What margins could be achieved taking into account
regional and location variations.
— The outgoings of the business, using information
provided by the tenants.
— Finally, we would then take into account the turnover
and profitability to set the rent.
3.7 InnSpired rents are generally between 10 and 15%
of turnover, dependent upon style of venue and location, or 50%
of profit before rent.
3.8 Our tenants are made fully aware of the costs of
the rent before they sign an agreement with us, and that these
rents are subject to five yearly reviews.
3.9 Rents across the market are subject to variations
according to the pubco. These differentials take into consideration
the full terms of the agreement ie the appropriation of machine
income, the allocation of incentive/discount schemes and the property
repair liabilities on the pubco. InnSpired, by way of example
in a lease arrangement, allocate 75% of the net machine income
to the lessee and do not impose full repairing liability on the
lessee. The variations in rents may also be related to the types
of property that different pubcos operate and the geographical
nature of the areas in which a company's estate is concentrated.
4. The "beer tie" and tenant support/benefits
4.1 The inquiry lists "the exclusive purchasing
obligations (beer tie) enforced by pubcos on their tenants"
as a point of focus.
4.2 There is a perception that our tenants are forced
to purchase all their products from us at premium rates from a
limited choice of ranges allowing us to benefit from discounted
rates that we have been able to negotiate.
4.3 This is not the case:
— InnSpired tenants are tied to only buying beer,
lager, cider and soft drinks from us. They are free to buy wine,
spirits, alco-pops, cigarettes, food and snacks from their supplier
of choice.
— We offer a very wide range of beer, lager, cider
and soft drinks including between 90-100 ales.
— The price at which we offer beer, lager and cider
is at the brewers' own recommended wholesale price. Soft drinks
are sold at a discount.
— In areas where price is an issue (for example
where they compete directly with a high street pub chain offering
heavily discounted beer), we offer our tenants a "price fighter"
scheme to enable them to compete in these areas. Through this
the selected "price fighter" product is discounted to
the tenant.
— We offer all our tenants regular promotional
offers.
— In the past decade there has been a marked market
decline in beer sales which has been replaced by wine, alco-pops
and food. According to the British Beer and Pub Association alcohol
sales now account for only 58% of turnover and within this beer
accounts for around two-thirds of alcohol sales. This diversity
provides our tenants with a variety of income streams from non-tied
products.
4.4 We believe that it is imperative that the limited
tie-in is assessed within a wider view of the other benefits that
we provide, including incentives, rewards and an entrepreneurial
climate in which our tenants can operate, profit and grow.
4.5 The Purchase of Non-tied Products
An example which challenges the assertion that pubcos use
their position to wield power over tenants is InnSpired's wine
initiative which offers tenants the opportunity—without
obligation—to buy a comprehensive range of wines at competitive
prices.
4.6 More than half of our tenants have purchased non-tied
wine from us within the course of the year. This demonstrates
that the combination of price, convenience, support and promotional
offers are recognised by our tenants.
4.7 Ordered through our telesales department and delivered
with the pub's normal weekly order, the offer provides a simple
and cost effective alternative to third party suppliers, and saves
licensees time by integrating each pub's beer and wine stock ordering
process into one. There is no tie-in and the licensees' choice
of a wide range of wines is assisted by a taste guide with explanatory
notes and a wine profit margin calculator.
4.8 The initiative benefits licensees and provides them
with a reliable and competitively priced wine supply making the
service even more lucrative for licensees. In addition, product
provided on a free of tie basis also counts towards the tenants
incentive scheme.
4.9 The costs of Tied Products—why do we charge the
price that we do?
Our critics claim that on our tied products (beer, lager,
cider and soft drinks) we charge a premium price, and prevent
out tenants from purchasing these goods at a lower cost thereby
prohibiting them from making a greater profit.
4.10 In reality we charge the national recommended price
that breweries set, though it is true that we are able to negotiate
a discount on these products as we buy in bulk.
4.11 It is also the case that it is the licensee who
reaps the most significant share of the rewards on the sale for
example of a £2.50 pint.
4.12 Why do we charge the national recommended price on our
tied goods?
The answer is simple: to raise the revenue required providing
the mutual services that we and our tenants enjoy, and as a business
which needs to grow and employ people, we need to raise income.
4.13 We raise income by providing tied products at a
recommended (or in the case of soft drinks a reduced price) whilst
benefiting from the discounts we can raise.
4.14 It is true that we could pass a percentage of this
discount on to our tenants. Indeed some of our competitors do
just that. But the consequence is higher rents in order to provide
the revenue stream we need to run the pubs in our estate and support
our tenants.
4.15 As you can see from section 1, InnSpired is running
an efficient SME, creating a return for our investors, providing
employment and maintaining a number of pubs in areas which might
not themselves encourage investment.
5. The InnSpired Tenant Support Programme
5.1 At InnSpired, we are particularly proud of the support
programme we provide to allow our tenants to thrive. InnSpired
allows entrepreneurs who might otherwise lack the financial capital
or business resources to fulfil their ambitions as publicans to
flourish commercially. Far from this being a case of the pubco
"ripping off" the tenant, it demonstrates the tangible
support necessary to engender success for our tenants.
5.2 Business Development Support
In addition to providing commercial opportunities, the current
environment allows InnSpired to provide extensive and comprehensive
business support to tenants. We play an important role in developing
a climate for success for small businesses such as tenanted pub
managers. A network of 22 Business Development Managers provide
tenants with support, from advising on business plans to stock
control and merchandising, all with the key objective of helping
tenants build their businesses. This service is invaluable to
people who are coming into the trade for the first time.
5.3 Training provision
Many tenants enter the pub market with little or no direct
business experience of the sector, whilst others have experience
but may be in a weak position to keep up with advancements in
trading practices in the sector. As InnSpired tenants, they have
access to an out-sourced training provider: Inn-Dispensable, the
largest independent organisation offering compliance training
and support to the leisure sector. It is also gives publicans
and their staff access to comprehensive, high calibre training
with national coverage at over 20 training centres across the
country, meaning that busy landlords do not have to travel far
to attend courses.
5.4 All training takes place in working pubs, enabling
those new to the trade to gain hands-on experience of practical
skills such as beer dispense and cellar management. In addition,
a series of "business building" courses are available
through an associated company. Training is tailored to the needs
of experienced publicans as well as those new to the trade, and
courses are run at regular intervals. A pack of support materials
is also provided to all delegates.
5.5 Incentivising success, promoting entrepreneurship
In line with the ethos of assisting our tenants to succeed
and engendering the growth of the small business, InnSpired also
sets reward-inspired incentives for publicans. Target-based incentives
can considerably bolster income whilst not impacting negatively
upon any tenants who do not hit targets.
5.6 InnSpired's licensee incentive scheme last year paid
out £1 million to tenants. The scheme, which gives discounts
to high-performing pubs, encourages licensees to exceed barrelage
targets: the greater volume of products sold, the greater the
incentive payout.
5.7 InnSpired also run a major competition to recognise
excellence in the pub trade and to add value to licensees' businesses.
The InnSpired Pub of the Year competition judged by Business Development
Managers nationally and regionally, will score pubs on key criteria
in the provision of the best possible service to its customer
base.
6. Social Responsibility
6.1 Offering Consumer Choice
InnSpired is committed to providing a wider choice of product
to our consumers. In 2000 the outlets of Ushers, which were merged
with the Alehouse Company to create InnSpired, offered around
six ales. Now our outlets offer between 90 and 100 ales to customers
including guest ales that are rotated each month; additional product
choice was also added to lagers, ciders, etc.
6.2 Our Business Development Managers work closely with
tenants to ensure that they meet the demands of their customers,
identifying the markets that they should target and what to offer.
Our commitment to product diversity is reflected by the 270 different
brands offered, from local micro-beers to drinks brand leaders
such as Fosters and Carling.
6.3 Historically, tenanted pubs were simply an outlet
for a single brand. Ten years ago, pubs would have offered the
products of only one major brand whereas today it is not uncommon
for our premises to offer products of up to eight major brand
owners.
6.4 It is quite commonplace for an individual pub to
retail on average eight different brand owners products all delivered
via one telesales call and on one delivery vehicle. Through this,
the tenant can satisfy the demands of his customers through fulfilling
their requirements for leading national brands supported by regional
brands as required.
6.5 Supporting Local Community Pubs
The majority of our pubs are local pubs for local people,
many of which are located in areas where they are the central
focus for the community, for example, village locations.
6.6 They provide an important social gathering point
in communities which have often been abandoned by other main stream
service providers, particularly larger supermarkets.
6.7 Socially Responsible Drinking
We have zero tolerance policies on under-age drinking and
illegal drugs. We expect our tenants to abide by the law and advise
them accordingly. In serious cases we take the necessary steps
to remove tenants if they are not upholding the law, and always
co-operate fully with the authorities to ensure that licensees
comply.
6.8 We do not encourage excessive drinking in our pubs,
and our Business Development Managers regularly talk to tenants
about the importance of managing their customers' behaviour. We
do not offer incentives to our tenants to hold happy hours which
encourage anti-social behaviour, and we actively discourage incentives
to stimulate customers to binge drink.
6.9 Compliance with Legislation
We produce "Inn Touch" (see Appendix III), a quarterly
newsletter to inform our tenants about legislative changes, health
and safety issues, compliance with the Disability Discrimination
Act, topical issues like drink spiking, smoking in public places
and drugs in pubs, and door supervisors. This is supplemented
by on line information, and is reinforced by the Business Development
Managers' regular face-to-face contact with tenants. Examples
of the advice and financial support we are giving our tenants
include:
— Licensing Reform—The changes to the licensing
laws will have a significant impact on licensees. InnSpired is
committed to helping our tenants navigate their way through the
new system, providing them with advice and assistance to make
applications, and sharing the legal costs of applications.
— Asbestos Surveys—Under new legislation,
all commercial premises are required to be surveyed for asbestos
and, where it exists, to have annual inspections. Although the
obligation is on the licensee, InnSpired is arranging and paying
for the initial surveys at a cost of £250 per venue.
6.10 Supporting small brewers/suppliers
From the supply end of the "beer tie" there are
other advantages which InnSpired has witnessed regarding an environment
for success of small brewers. Our centralised distribution network
via Carlsberg UK provides regional brewers with a route to their
market which they previously did not enjoy. For example through
this network InnSpired can provide the distribution network and
access to outlets that many regional or micro brewers would not
be able to achieve without the pubco network.
6.11 As testament to the advantage this has brought,
letters stating the direct link between the network and the success
of regional brewers are included in Appendix I of this document.
6.12 InnSpired pubs offer between 90-100 different ale
brands, some of which come from breweries that enjoy a subsidised
duty as a consequence of their size.
7. Legal Precedent
7.1 Given the above testimony, our experience leads us
to firmly believe that the position of our tenants, and those
of our competitors, has improved in recent years. This raises
the question of legal precedent since points of question in this
inquiry have previously been dismissed as not having sufficient
supporting evidence.
7.2 The well documented case by Bass and Scottish and
Newcastle was cleared by the EC in July 1999, concluding that
tied lessees can compete on a level playing field with "free
trading" competitors and exempts them from EC competition
rules.
7.3 The Commission found that leases are in line with
UK property law and that whilst lessees may pay more for beer
than individual operators, they are still on a level playing field
due to other advantages such as lower rent. The Commission also
found that the breweries also aided their lessees with repairs,
business planning, free development initiatives, administration
and printing costs, and exclusive marketing promotions:
". . . the price differential the lessee face is compensated
by a rent subsidy; bulk buying and procurement services ("value
added services"); benefit of co-investment by Bass ("investment");
the benefit of non-rentalised repairs ("repairs"); the
benefit of certain business planning, performance review and development
initiatives offered free of charge to lessees ("support franchise");
valuable direct operational support offered to each lessee ("direct
operational support"); support provided by Bass in the form
of literature and assessment schedules, administration and printing
costs ("set up and development costs"); and, finally,
Bass has made certain promotions and marketing offers exclusive
to lessees ("promotions").
7.4 An earlier case in the European Court, Roberts
v Greene King in May 1997 saw Roberts' application, referring
to the laws already imposed on breweries in 1989, fail.
7.5 The tenants voiced concerns of a cartel which attempts
to exclude access to the market and control prices. The inquiry
found evidence to be insufficient. In regard to price fixing,
it was concluded that tenants are able to set their retail prices,
and that Greene King did not control the prices consumers paid.
7.6 Furthermore, in December 1996, European Commission
Member Karel van Miert, commented on a procedure in the Manchester
County Court between the tenants and the brewer:
"It is up to the tenant to decide the price at which
he wants to sell the products, and, therefore, the margin he will
be able to achieve . . . [the supplier] does not control prices
which consumers pay."
8. Conclusions
As illustrated in the evidence above, InnSpired believes
that both pubco and tenant enjoy reasonable terms for the operation
of public houses in the UK market at present, which also serve
the consumer in the best way possible with regard to pricing and
choice. We also believe that the spirit of entrepreneurship is
well served, as are the opportunities for small brewers.
InnSpired would also like to reiterate its willingness to
play a part in the inquiry process hereafter and would gladly
provide oral evidence if deemed of use by the Committee.
2 June 2004
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