Letter to Martin O'Neil MP, Chairman,
Select Committee on Trade & Industry from Punch Taverns
PUBCOS INQUIRY: POINTS ARISING FROM PUNCH
TAVERNS ORAL EVIDENCE SESSION
Following our oral evidence to the Committee
on 20 July, there were a number of points on which you andlor
other Members of the Committee asked for clarification, or where
we felt it might be useful to provide clarification, as listed
below.
1. Information on the number of people visiting
pubs, beer consumption and customer spend in pubs before and after
the Beer Orders—Questions 511-515 (Chairman)
2. Upward only rent reviews within Punch
estate—Questions 523-527 (Lindsay Hoyle)
3. Relationship with Business Relationship
Managers—Questions 528-530 (Roger Berry)
4. Premises insurance and price increases—Question
536 (Judy Mallaber)
5. Machine rents/royalties—Questions
553-554 (Sir Robert Smith)
Many of these issues were also addressed in
our original submission to the Committee on 2 June 2004 and we
have cross-referenced to this, where applicable, in our answers
below. However, we have also aimed to address the specific points
raised, as follows.
1. INFORMATION
ON THE
NUMBER OF
PEOPLE VISITING
PUBS, BEER
CONSUMPTION AND
CUSTOMER SPEND
IN PUBS
BEFORE AND
AFTER THE
BEER ORDERS
This subject is covered to some degree in sections
65 to 73 of Punch's original submission, which highlights the
increasing dominance of the multiple grocers and shows the decline
in on-trade beer volume from 1985 to 2003 (point 69, figure 5).
As indicated in our oral evidence to the Committee, the highest
point in beer sales in the UK was reached in 1982. The rate of
decline increased from around the time of the miners' strike in
1984-85 (ie before the Beer Orders were implemented in the early
90s) and has continued since.
We believe the cause of this trend has been
mainly to do with significant changes in the social fabric of
the country and the way that pubs are used. Over the period 1980-2000,
there has been a trend towards people visiting the pub less frequently,
with weekly visits falling from 44% of the population to 39%,
but with an increase in the number of people making less frequent
monthly visits, rising from 59% to 63% of the population [source:
TNS]. Overall, therefore, a significantly higher percentage of
the total population now visits the pub at least occasionally—rather
than a smaller number more frequently.
At the same time the UK population has risen
from 56.4 million in 1981 to 59 million in 2001. In terms of those
aged 16 or over (which is the closest we can get to the adult
drinking population), there has been an increase in population
of some 2.8 million people. If this is combined with the rise
in percentage of people visiting pubs, the pub industry therefore
now has some 4 million more people visiting on a more or less
regular basis compared to 1980. This is a very significant increase
in terms of the number of individuals sufficiently attracted by
the pub experience to visit on a reasonably frequent basis.
There has also been a change in the split of
spend in pubs, with the rapid rise of provision of food and snacks.
We do not have data available from as far back as 1980, but since
1997 pub catering sales have grown by 27%. The strongest growth
has been in pubs not tied to a specific brewery: ie the pubcos,
whose pubs are run by tenants and leaseholders. Around one third
of pub visitors eat in pubs at least once a month and meals now
make up some 21% of pub turnover. I attach a pie chart which summarises
the full split at Appendix One [source: Market & Development
Report "The UK Public Houses Market Development", February
2003].
Equally, whilst on-trade volumes have fallen
per capita, alcohol consumption is increasing slightly: that is
to say, people are drinking less in liquid quantity but the same,
if not slightly more, in terms of alcoholic content. This reflects
a more general consumer trend away from beer and lager towards
wine, spirits and spirit-based drinks (coolers)—but does
not therefore indicate a trend away from alcohol-based drink consumption
in pubs. Again, I attach a statistical graph in support of this
at Appendix Two [source: British Beer and Pub Association—statistical
handbook, 2003].
In summary, therefore whilst beer volumes and
frequent (weekly) visits to pubs have fallen, at the same time
more of the population are going to pubs than ever before and
enjoying a far wider experience, including dining out and a wider
range of alcoholic beverages. This has not only improved their
experience but has also meant a growth in pub turnover over the
period as a whole. It would be simplistic to attribute this change
solely, or even principally, to the Beer Orders—but we do
believe that the Beer Orders (as was intended by the 1989 Monopolies
& Mergers Commission report which led to their introduction)
played a part in enabling landlords to sell a much wider range
of both beers and other drinks and thereby improving the level
of service to customers.
I should also mention, in this context, the
issue of pricing between the on- and off-trade. As explained in
our evidence, we believe the removal of the tie would lead to
a detrimental effect on pricing to the end consumer, the customer.
The ability of pubcos to negotiate on behalf of our pub estates
means we are able to get discounts from the brewers which then
benefit the retailer by means of lower than commercial rents and
discounts. In countries where this system does not occur and the
brewers deal directly with individual owners, the differential
between on- and off-trade (take home) pricing is worse, not better.
The attached extract from the Interbrew Market Report 2003 [Appendix
Three] clearly shows this, with the differential in pricing on
premium lager between on- and off-trade rising from 2.11 times
in Great Britain (with the tied system in place) to 6 times in
France and 5.5 times in the Netherlands—where individual
bar owners dealing directly with brewers lack the negotiating
power to get large discounts.
2. UPWARD ONLY
RENT REVIEWS
WITHIN PUNCH
This is covered in sections 139 to 168 of our
original submission and to some degree by Mr McDonald's answer
at the oral evidence session on 20 July. However, for complete
clarification, some 31% of our agreements are legacy agreements,
inherited through the acquisition of pubs from other companies,
which still contain an upward only rent review clause. As Mr McDonald
said, however, we always look at each review on its own merits
and in the 12 months to August 2003, of those pubs with an upward
only clause in their agreement which received a review, 19% saw
their rent either stay the same or reduce. As stated in our original
submission and in our oral evidence to the Committee, our preferred
lease agreement does not have an upward only clause within it
and we are working with our tenants and retailers to move to that
agreement.
3. RELATIONSHIP
WITH BUSINESS
RELATIONSHIP MANAGERS
(BRMS)
Details of both the role of BRMs and the retailer
satisfaction survey are provided in sections 234 to 313 of our
original submission. At our oral evidence session, we sought to
explain the role of BRMs and discussed their relationship with
retailers. To clarify further how BRMs within Punch are incentivised,
their bonus is made up of five elements, two of which relate to
Punch's overall profitability, with the remaining three elements
being behavioural, relating to how they work as a team internally
within the company, how they develop their relationship with their
retailers as measured through a survey of all of our retailers,
and how competent they are to perform their role as measured through
a structured competency appraisal. Any bonus paid to BRMs is split
55% for the profitability measures and 45% for the behavioural
measures. Our BRMs are to a large extent the face of the company
to our retailer and are extensively trained for their role. As
discussed at our oral evidence session, we are under considerable
competitive pressure to ensure we are fair to our retailers and
that they are able to operate successfully. It is in our own interest
as well as that of our retailers to put our house in order if
problems occur.
In terms of the retailer satisfaction survey
and direct feedback from retailers on their views of their particular
BRM, we surveyed the Punch estate in October 2003 with a response
rate of 80% (over 3,300 licensees responded). The three principal
questions relating to their relationship with BRMs, while indicating
room for improvement, produced generally positive results as follows:
first, are you satisfied with the support your BRM gives you (to
which 58% responded they were satisfied, with a further 20% neutral);
second, does your BRM understand your Business Objectives (to
which 59% agreed, with 20% neutral); and finally, do you respect
the abilities of your BRM (to which 63% agreed, with 22% neutral).
4. INSURANCE
AND PRICE
INCREASES
Some specific instances of insurance increases
and beer price increases were raised in the course of the oral
evidence session on 20 July, without attribution. As stated at
the time, without knowing the specific circumstances it is hard
to respond; however, our practice is that any inquiry from our
retailers that is not fully dealt with is passed to our Chief
Executive, and then acted upon as quickly as possible. Giles Thorley
indicated he would be happy to respond to any specific concerns
if individual retailers wished to write to him, or alternatively
were happy for a Member of the Committee to do so on their behalf.
In response to the general point raised with
regard to premises insurance, the cost of this has risen throughout
the industry over the last 12 months in response to higher premium
charged by insurers. Within the Punch estate, on a like for like
basis this rise averaged 10%. This increase was communicated to
our retailers in advance and a copy of this letter is attached
[Appendix Four]. As our letter states, our buying power enabled
us to keep the premium increases below the average market rates.
Our block policy approach also ensures all pubs are covered, including
those in flood areas and other high risk areas. Any above average
premium increases experienced by individual retailers are likely
to have been due to individual increases in building costs and
reinstatement values.
In terms of price increases, our policy is to
only increase prices either when the national wholesale price
increases or there is a Government price increase via duty. As
the brewers do not all increase their prices at the same time,
this can lead to a number of increases throughout the year and
with the extremely wide range of products we offer, this can lead
to individual licensees seeing a series of changes— particularly
if they stock a wide range of products. Despite this, we do attempt
to manage the process and no single retailer should receive more
than 12 separate letters in total during each year—and for
the major items sold, no more than five during the year, including
an annual letter on any duty increases.
5. MACHINE RENTS/ROYALTIES
AWP (Amusement with Prizes) machines are rented
from external suppliers. Where we share machine income with a
retailer, we source the machine for the retailer and are able
to share the benefits of our buying power in reduced machine rent
This was stated in our oral evidence but for further clarification,
the facts are as follows:
— The average AWP rent for one of the
national AWP suppliers in the free market (on a like-for-like
basis) is £45.93 per week [source: major trade suppliers].
— The Punch Taverns average rent is
£43.00 per week (6.8% less than the free trade).
— After the purchase of the Pubmaster
estate in 2003, implementation of the Punch rates results in a
collective average annual saving for these new retailers of £223,000.
1 hope this has been useful in responding to
the specific issues you and your colleagues raised when we gave
oral evidence. If we can be of any further help please do contact
us.
Francis Patton
Customer Services Director
2 September 2004
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