Examination of Witnesses (Questions 1
- 19)
TUESDAY 22 JUNE 2004
FEDERATION OF
SMALL BUSINESSES
Q1 Chairman: Good morning, Ladies
and Gentlemen. I am not quite sure who wants to introduce each
other. Mr Bishop, you are in the middle, so we will ask you to
introduce your colleagues and then we will get started.
Mr Bishop: Good morning Chairman,
Members of the Committee. My name is David Bishop. I am a Parliamentary
Officer for the Federation of Small Businesses. The FSB represents
in the region of 5,500 publicans of whom we believe about 3,000
are tenants of pubcos or of breweries. We have increasingly been
called upon to act as a voice of tenants in the last few years,
and I am joined today by three FSB public members, starting from
my right . . .
Mr Harvey: Good morning. I am
Richard Harvey. I have three Punch leases in and around the Stratford-upon-Avon
area. I have operated those leases for approximately eight years.
Prior to that I was 18 years with Bass as a corporate employee;
so game keeper to poacher, so to speak.
Mr Dunton: My name is Alan Dunton.
I operate two Punch leases in North Wales. I have 20-odd years'
experience in the pub trade and I am a fellow of the British Institute
of Inn-keeping.
Ms Newport: I am Linda Newport.
I own a pub in North Oxfordshire, which is an Enterprise Inns
lease. I have done that for three and a half years, but I have
20-odd years' experience in the pub trade.
Q2 Chairman: I think it might be
to everyone's advantage if you can use the voice that you use
around about closing time! This is rather a large room, and we
have anticipated that it might be of interest to people. We have
had something like 330-odd pieces of written evidence, and much
of it has come on beer mats, or whatever. Apparently we have had
a lot of evidence and there has been interest. I am not sure if
it is all on beer mats, or whatever, but we have had a lot of
evidence and a lot of interest in this: hence this rather impersonal
room which normally is not used for this purpose. We do not normally
like to keep our witnesses that far away from us. Can we start
this morning? As you can appreciate, what we are concerned with
here is as much whether there are issues of market failure; and
in order to determine that we have to have some kind of working
definition of the market in which pubcos are operating. I wonder
if maybe to start off this morning you could give us your idea
of the market you believe pubcos operate within—who are
the suppliers, who are the customers—because it seems, even
from this small group of publicans, some of you have several pubs
and others just have one. Is there a difference in the way you
operate, or do you have a single brewery to supply you? Is it
all sanctioned by the pubco? I think, in the first instance, we
need to get a picture of how you perceive your place within the
market as what we would imagine to be reasonably representative
elements in the pub trade. I hope that is not too vague or complicated
a way of starting.
Mr Bishop: In our view the pub
sector represents a distinct market and a separate market in itself.
The figures that we have seen show that there are about 58,000
pubs in the UK more than half of which are controlled by pub companies;
and 40% of the pubs in the UK are owned by pub companies and leased
to self-employed publicans. The largest two players in the pubco
market are Enterprise and Punch, who between them control or own
in the region of 28% of UK pubs, and their estate tends to be
the community pubs based in suburban areas and rural areas in
particular.
Q3 Chairman: The market that you
are operating in, would you say that you broadly agree with the
way it has been defined by the EC and the Office of Fair Trading
maybe even looking at issues of anti-competitiveness before? Do
you think there is something special about pubs which puts them
into a category that perhaps has not been properly addressed by
these regulatory bodies?
Mr Bishop: My understanding is
that the definition used by the European Commission and by the
Office of Fair Trading is one of "on-trade licensed premises";
so they would include in that definition, as well as pubs, other
competitors such as restaurants, and it is not necessarily a definition
that we would contest. We recognise that there has been a blurring
of the edges to a certain extent between pubs and, for example,
restaurants, and that is the reason why we would not necessarily
contest the definitions used by the OFT and the European Commission,
although we would argue that the pub sector is separate and distinct
in itself.
Q4 Judy Mallaber: As the Chairman
said, this has been investigated by the EC before and claims of
anti-competitive behaviour have been brought to the EC, and yet
none of them have been decided, in terms of current agreements,
in favour of the tenant when they have argued that it is anti-competitive.
Bearing this in mind, why do you think the Office of Fair Trading
or the EC should investigate the "beer tie" again? What
arguments would you be making and what are your arguments for
them looking at it now?
Mr Bishop: I think there are two
separate issues, a very distinct issue and then a more general
one. The distinct one is that much of the statistics that we have
used in our submission come from the Office of Fair Trading itself
from a report that they concluded in 2000, but we have drawn markedly
different conclusions from those statistics that the OFT did and
our view is that the OFT mistakenly used an RPI figure relating
to services when we believe that they should have been using an
RPI figure relating to goods; and, in fact, the Office of Fair
Trading has stated that, if they were to look into the pub trade
again in the future, they would reconsider which RPI figure they
would use for their statistical comparisons. The more general
point is that, even since 2000, when the Office of Fair Trading
last looked into this issue, we have seen a marked concentration
of the market, and I think I am right in saying that the estates
of both Punch and Enterprise have roughly doubled over that time,
and it is our belief that hopefully we will be able to explore
further at today's Committee that, as a result, pubcos materially
influence the price of beer in this country.
Q5 Judy Mallaber: Would that be the
main force of your argument about anti-competitiveness in relation
to where the beer price is at the moment?
Mr Bishop: Specifically in relation
to competitive issues, it would, but we believe that the remit
of the Committee itself is far wider and that the relationship
between pub company and tenant is worthy of further investigation
in its own right.
Mr Dunton: As a businessman I
can only give you a few examples of how price, which includes
the price of goods and rent, influences my businesses. I have
two leases, both with Punch. Pub number one is an original Allied
Domecq lease, called a Vanguard Lease, which Punch inherited when
they took over Allied Domecq in 1998 or 1990. That has two years
to run. I pay full price for beer. Pub number two has a Punch
Growth Lease, which is the latest Punch lease, and I get £45
per barrel discount but a proportionately higher rent. The first
pub has two years to run on its lease, on its original lease;
it then has to go into a Punch Growth Lease. The Punch Growth
Lease allows for an average of £45 a barrel discount, but,
of course, the rent will soar for that privilege, plus pub number
one loses its guest beer right, which, of course, is extremely
valuable to us. Also, we lose 50% of our machine takings. That
is with the Punch Growth Lease. If I could just give you an example
of barrel prices, because I find this extremely interesting. On
the current price lists, which I have in this folder, pub number
one, for Tetley cask bitter, pays £278.80 per barrel. Pub
number two, on the Punch Growth Lease, pays £233.00 per barrel.
That is a discount of £45.80. But, interestingly enough,
the supplier for Punch, the nominated supplier, is Carlsberg Tetley,
and I have just acquired a free-house—free trade, free house—and
I asked Carlsberg Tetley to give me their best prices free of
"tie". As an example, again, Tetley bitter, the free
house, Carlsberg Tetley, in their own right will give me £115
per barrel discount, which nets down to £163.80. So pub number
one pays £278.80 and my free-house will pay £163.00,
all from the same supplier. It is uncompetitive. We cannot manage
on this at all with the leases.
Q6 Judy Mallaber: Can I ask you about
the Crehan case, the very recent case, because obviously
that has changed conditions in which we are looking at this? Can
you say how far you think the Court of Appeal's decision will
impact on pubcos, on your members, on beer consumers generally?
That is assuming, of course, that that judgment stands and is
not over-turned. What effect do you think it will have?
Mr Bishop: We do not believe that
the Crehan case will provide a remedy for any tenants other
than the 600 people who were lessees or tenants of Intrepreneur
at the same time as Mr Crehan; and I think the case is different
to the relationship which the Committee is investigating today,
in that I think I am right in saying that Intrepreneur was a brewery.
pubcos are very distinct from breweries in that they do not brew
their own beer, and therefore we do not think that the Crehan
case has a direct relationship to this inquiry, although, of course,
some of the damage that Mr Crehan suffered as a result of too
high a rent can be compared to the situation that tenants find
themselves in as a result of paying too much for beer and paying
too much for their dry rent.
Q7 Chairman: I think Mr Harvey wanted
to come in. Mr Harvey?
Mr Harvey: It was following on
from Alan's point. It can come out later.
Q8 Chairman: It is okay if you want
to get it in now?
Mr Harvey: The argument from pubcos,
of course, and the scenario that Alan was painting in terms of
the beer price is that the beer price is supplemented by a lower
commercial rent, a lower rent than you would pay on a standard
commercial rent on the High Street. That may well have been true
in the past, and certainly in the brewery days when leases would
attach to the breweries, but in the environment we are in at the
moment my view, and certainly in my experience of my own rents,
it is not the case.
Q9 Judy Mallaber: Just going back
to the Crehan case, it is, of course, the first time that
damages for breach of competition law have been awarded by a UK
court, but to clarify, you are saying that you do not think that
any of those arguments, because of the particulars of that case,
will move over to the position in relation to pubcos? You do not
think that there is a connection or an argument that would be
able to be made legally?
Mr Harvey: My personal view is
that the general principle is the same. We are talking here, in
the market place that we are currently operating in, of the comparisons
between the beer price that we pay as lessees, which is the standard
wholesale price in the industry, versus the rent that we pay.
As I have said earlier, in previous years that sort of business
model, or the balance between those two items, ie the wholesale
price and the rent, were, in my view, favourable in terms of having
a 50:50 business partnership with the landlord. Years on and the
way pub companies operate now, I personally believe that there
is an unequal business partnership there because of the beer price
and the rent. In essence the Crehan case is based upon
those principles.
Q10 Mr Clapham: Before I move on
to look at anti-competitiveness a little more, could I ask Mr
Harvey in relation to what you have just said, how do you feel
that situation could be bettered?
Mr Harvey: I personally put it
down to the arrogance of pub companies. They are certainly very
different to the relationship I had with my brewer, which was
Bass, when I first signed up the Bass lease, bearing in mind I
worked for Bass as well, and I actually worked for the Bass lease
company. The relationship is totally different because pub companies
are publicly quoted companies—I am not saying brewers are
not, but they are publicly quoted companies—and they are
basically, in my view, rental companies, property companies. They
basically are looking to get the highest possible rent to the
detriment of the business operation or business opportunity that
is there, and, of course, compounded, therefore, with the beer
price as well. We just cannot compete with what is happening at
Yateses, Wetherspoons, free-houses. We just cannot compete. It
is the arrogance of pub companies. When you have a rent review,
when your current rent is £32,000 and they come to you on
a five-year rent review and say, "You are now paying £38,000",
with no market reason for that particular increase, then that
just shows arrogance. I did not settle at £38,000, but that
is the arrogance of the pub companies in the current environment
we are in.
Q11 Mr Clapham: Mr Bishop, could
I go a little further on the anti-competitiveness issue? I am
thinking in terms of the submission that you made in which you
say that, "Pubcos negotiate large national contracts with
suppliers which bars market access for local suppliers".
Have you done any research at all by looking at, for example,
other sectors to see how other companies in the market operate
to see if there is any model of, could we say, best practice?
Mr Bishop: I think Enterprise
claim that they sell 90% of the beer brands that are available
in this country, but, of course, 85% of beer brands available
in this country are produced by the big six brewers, or the top
six brewers by market share, and the evidence from our members
who ran small breweries was that, to enable them to get contracts
with pubcos, they would almost have to be selling at a loss, and
there are other elements of the relationship: for example that
they would have to deliver to a depot 100 miles down the road
for a pub on the same street as themselves. I think there are
comparisons with, for example, the model used in petrol retailing
which may be worthy of consideration, and we certainly would be
happy to submit some further evidence comparing the two, but actually,
of course, the pub industry itself did have a model under which
they hoped to improve market choice and consumer choice through
a guest beer right, and under the Beer Orders there was the right
for a licensee to buy a guest beer. Unfortunately that has been
seriously eroded over the last few years and, I believe, is a
thing of the past in most pubco leases.
Mr Harvey: If you think about
what the Beer Orders were trying to achieve, certainly some of
the objectives of the Beer Orders in 1989 were to transfer ownership
of pubs to smaller operators or to individual operators. As it
has turned out, we are in a far worse position now in terms of
what that legislation was trying to achieve then compared with
now, because now 25/28% of the pubs are in the ownership of two
companies.
Q12 Mr Clapham: Mr Bishop, given
the contact that you have with your members, and I know that you
have got a good number of members in the licence trade, is there
a feeling that if we went back to the guest beer provision that
would be a big help to those landlords and, in fact, open the
market up?
Mr Bishop: I think it would be
a big help to small brewers. I think for landlords or for publicans
it would be of benefit, but other recommendations that we make
in our submission, specifically in relation to the "tie"
and specifically in relation to the rent view process, would be
of greater benefit to the majority of publicans.
Q13 Mr Hoyle: Can I take you on to
something that has been touched on already, and that is about
barrel discounts. It is quoted in the papers that between £70
and £100 discount can be offered. Who benefits: the pub company,
yourselves, or the consumer?
Mr Bishop: The short answer is
the pub company. The difficulty we face with beer prices is that
they are not transparent; and I would urge the Committee, if at
all possible, to probe pub companies about the prices that they
pay for beer, in particular. At present we cannot get figures
for the price that a pubco will pay a brewery for a barrel of
beer. They maintain that it is a commercial secret, but, in fact,
we believe that the discounts or the margin that the pubco makes
on a barrel of beer is even greater than the figures that we have
created in the submission, and, in the absence of transparent
information about beer prices, we have turned to the analysis
made by investment banks such as Investech Securities and Deutsche
Bank, who are brokers for Enterprise; and their models suggest
that for a barrel of beer that sells at £2.20 a pint, a 36
gallon barrel of beer, pubco are paying in the region of £130
for that barrel. The same barrel of beer would be available to
a free-house at between £190 to £230 a barrel, depending
on the volume purchased, and the same barrel of beer is sold on
to publicans, pubco tenants, at £300 a barrel, which is a
margin there, on the basis of the figures quoted by analysts,
of £170 for the pub company or a percentage margin of about
130%. The short answer is at Pubco there have been some moves
towards passing on some of the discounts to Punch tenants in particular,
I think, but they are really a drop in the ocean compared to the
discount which the pubco itself retains.
Ms Newport: If I can confirm that.
From an independent supplier we can buy our beer 39.4% cheaper
than we have to get it through Enterprise. That makes an awful
lot of difference to our overheads and our profit margins. Having
had a meeting with my PDM manager a couple of months ago, he said,
"Oh, when Enterprise do take on these new pubs we might consider
getting discount or passing the discount on to the tenants."
There has been no mention of that. Enterprise tenants do not get
any discount whatsoever, as far as I am aware, in my experience.
Mr Harvey: My particular example,
I am on a target-based scheme, and, if I hit my target, in terms
of volume, then I get £5.00 a barrel in a declining market
place with an MATV (moving annual turnover volume) based on last
year in a declining market place. So the black and white answer
is, I get no discount.
Q14 Mr Hoyle: So you need England
to play every night to try and make a profit!
Mr Harvey: Absolutely, yes.
Mr Dunton: That would be fair
to say.
Q15 Mr Hoyle: Would it be fair to
say that we can establish that the pub companies are doing well
and the only people that are being shafted are the tenants and
the customers?
Ms Newport: Yes.
Mr Dunton: Yes.
Q16 Mr Hoyle: They are the losers
in all this. So somebody somewhere is making a bag full, putting
it into the bank at the expense of yourselves and the poor old
consumer out there is once again hit over the head?
Ms Newport: Yes.
Q17 Mr Hoyle: So we have got to do
something about it?
Mr Harvey: I could not have put
it better.
Q18 Mr Evans: I just want to come
in on this, because the differential that you have just given
on a barrel that somebody who is not tied to anybody can buy from
the Cash and Carry or direct from the brewer as opposed to what
they are charged by a pubco can be quite substantial. If a free-house,
which is perhaps only half mile down the road from you, is being
able to buy that £110 a barrel cheaper, that means that they
could push it out to their regulars at a substantially lower price
per pint than you can?
Ms Newport: Yes.
Q19 Mr Evans: Do you find that is
what is happening and therefore it puts you in a doubly worse
competitive position than if you were not tied at all?
Mr Dunton: Absolutely right.
Ms Newport: That is exactly what
is happening?
Mr Dunton: May I also add to that
that the guest beer provision, which, of course, is a freely available
product, enables pub number one, as far as I am concerned, to
sell and make 10% more gross profit at round about 35 pence a
pint cheaper. The customer then benefits from the guest beer.
If it was all available to us, or at least the discounts that
the pubcos achieved were shared to some degree . . . Your colleague
mentioned earlier on about what could be done to assist us. We
would at least say a share, fair share of discounts, not this
paltry £5.00, zero! I mean, it is a disgrace.
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