Examination of Witnesses (Questions 199
- 219)
TUESDAY 6 JULY 2004
ASSOCIATION OF
LICENSED MULTIPLE
RETAILERS
Q199 Chairman: Good afternoon, Mr
Bish, perhaps you could introduce your colleagues and we will
get started.
Mr Bish: Chairman, thank you very
much; members of the Committee, good afternoon. The ALMR are very
glad to be here and we do hope to be able to help the Committee.
Before I introduce my colleagues, may I give you some background
on what the ALMR is and how we are structured, to put our submission
and our evidence this afternoon in context? We were also formed
in 1992 but this time to represent companies who own and/or operate
pubs, bars and restaurants in the licensed retail market. Our
membership is made up of managed retailers, those who own and
manage their own businesses, the pubcos and the regional brewers
who often have a hybrid retail estate. We have no production or
distribution responsibilities. In membership are 93 companies
and between them they own or operate 27,500 premises. Of those
93 companies, 30—about one third—issue leases, of
which two have very substantial estates—and I think we know
their names—and are specifically, I suppose, the subject
of the original complaints and discussion in earlier evidence
on another day. Obviously there are many other smaller companies
which issue leases and they do have different business models,
not necessarily what we were hearing earlier. We are concerned
therefore that the outcome of this Committee and any subsequent
recommendations do not have unforeseen consequences for the industry
as a whole and particularly not for the smaller leasing companies.
As an association we have been asked many times how we reconcile
having lessor and lessees in the same organisation. We rationalise
this by saying that they are all retailers. The success of the
business at the sharp end is the one which gives them their profits,
by whatever model they have, be it financial or ownership. In
other areas of political life there is agreement on most of our
issues; we have thoughts in common. As far as leases are concerned,
we feel that we are well informed and we hope to be able to help
the Committee this afternoon. We do want to take a neutral stance
and although we will not be partisan for lessees, we are not apologists
for the pubcos. On my left is Kate Nicholls, who is our head of
communications. As well as her public affairs responsibilities,
she has expertise in competition policy. On my right is Alex Salussolia,
who is our elected chairman, but even more particularly for this
afternoon he is the managing director of Glendola Leisure which
is a multiple lessee. His experience of the leasing market is
from that perspective and we hope he will be able to help you.
Q200 Chairman: Thank you very much.
It has been suggested to us that pubcos have described their relationships
with their tenants as a partnership. I wondered whether we could
start off with this point. Some of us are rather uncertain as
to what the word partnership means in this context, in as far
as it may not be a relationship between two equals. The point
I would make here is that in this partnership, important information
such as the price that the tenants pay the brewers for beer might
be kept away from the tenant, but you have the pubco, the brewer
and the tenant. The pubco and the brewery have a relationship
and the tenant and the pubco have a relationship, but never do
the three really come together. Do you find a conflict of interest
in that area when you are representing both?
Mr Bish: Partnerships are an interesting
concept anyway; they do not always have to be equal partnerships.
We take the view that in this context there is a high level of
partnership when we are talking about the size of the cake and
perhaps more difficulty when we are discussing how the cake is
divided. It is true that in the lessor/lessee relationship, the
landlord relationship, that the pubco would seem to be the senior
partner. In the multiples—and throughout our evidence we
are going to be talking about multiple companies because that
is our contribution to the Committee—the relationship can
be much more even, not least because the multiple companies are
better informed businessmen and they can walk away from deals.
There is a partnership in there which is perhaps more even. We
read recently in the Morning Advertiser, one of the trade
papers, that one in four of their lessees believes that they do
have a good partnership with their landlords. So there is a relationship
which could be described as a partnership, albeit with various
amounts of evenness in that relationship.
Q201 Chairman: One of the areas where
there would not appear to be quite the evenness of which you have
just spoken is the question of the discounts and it has been suggested
that perhaps some of the tenants could achieve a higher or better
living from their business if they got a better discount. Do you
think the pubcos could do more to help struggling tenants by offering
bigger discounts?
Ms Nicholls: We as an association
dealing with multiple lessees are less in the area of struggling
tenants and struggling individuals and it is very difficult for
us to comment therefore on those individual cases. As to whether
sharing a greater proportion of the discounts is necessarily a
solution, in itself I do not think it is. It may appear outwardly
attractive, but as Tony was saying earlier, there is an offset.
If you increase the level of discounts you get, you will probably
find that the dry rent will go up and that is a fixed overhead
which you have to meet under any circumstances. So you might end
up in the longer term not being any better off. Also, the majority
of tenants are probably making an average wage. There was a recent
lifestyle report in the Publican paper which we are happy
to share with the Committee if you do not have a copy of it already.
This suggested that around 40% were earning £16,000 to £25,000
a year before you took into account their accommodation. I do
not think you should paint a picture that the majority of tenants
are struggling and are not making a living wage. What more could
landlords do? It is not really our area of expertise. There is
probably a genuine need for a greater degree of flexibility and
a greater ability to apply in exceptional cases and to look at
cases in the exception rather than applying a standard model,
but it is something you would probably need to talk to the pubcos
about.
Q202 Mr Clapham: One of the things
we have heard in some of the evidence we have taken and in many
of the written submissions is the real problem of the rents and
I just want to probe the rents. It has been suggested by pubcos
that wet and dry rents paid by their tenants are equal to the
rent of a pub free from tie. Would you agree with that?
Ms Nicholls: That is certainly
the theory against which it is designed to operate. That is the
basis of it. Alex is probably better equipped than I am to talk
about details of rents, but certainly we have no reason to suspect
that is not the case.
Q203 Mr Berry: It is the theory and
it sounds like a fair deal. The question is whether that is how
it works in practice.
Mr Salussolia: In practice our
multiple retailers are well informed, well resourced, well advised.
When it comes to taking on premises, be they tied or not tied,
they are pretty well informed on what the right level to pay for
that business is. For our members that is not the issue. I suppose
the issue where we think the system falls down is at the rent
review point, where the share of the rent is disproportionate.
A lot of retailers feel that they go into business at a rent which
is sustainable in the business and then when they get to their
rent review period, the benefits and profits they have made out
of that business are shared unfairly with all landlords.
Q204 Mr Clapham: Given what Ms Nicholls
had to say about the linkage between the wet and the dry rent,
what is your reaction to the suggestion that pubcos should charge
a full market rent to their tenants and in so doing split the
business up, between the wholesale side and the pub estate side?
Ms Nicholls: You really have to
look at them as two separate pieces of information. There is a
question here about passing on discounts—passing on discounts
is different from charging full market rates for the beer—and
this idea of splitting up the business into wholesale supply and
property ownership and having two distinct business models. I
am not quite sure why they should be obliged to do that. They
have a legitimate business model; it does not infringe any competition
or regulatory concerns as far as we are aware. If it were profitable
for them to do that, if there were something they wanted to do,
there is nothing stopping them. Equally, there should be nothing
requiring them to do so. There are also implications in that suggestion
for the smaller wholesalers and we should not forget that when
the Beer Orders were introduced and when they were reviewed recently,
there were concerns about the wholesale market within the UK and
the situation that smaller wholesalers were facing. If you followed
that suggestion to its logical conclusion, we would all as an
industry be back before this Committee, or back before the competition
authorities, because you would find that there was a problem in
the wholesale market. The pub companies would want to establish
a wholesale supply mechanism to get to their current estate and
arguably to get to anybody else's estate they wanted to. You would
find that there were real problems there if you followed that
to its logical conclusion. At the moment they have size and market
power to negotiate the best possible terms from producers and
to get a wide range to pass that on to their customers. If you
were to force them to divest their business and to split it into
two, that would just continue. There is nothing wrong with that.
They are not doing anything anti-competitive with that. But that
would continue and the reality would be therefore that smaller
wholesalers in the market would suffer; arguably so would smaller
tenants and smaller lessees who are less able to negotiate bespoke
prices with the brewers or with the wholesalers themselves and
would not get it passed on.
Q205 Mr Clapham: So you do not think
that the transparency which is likely to come from that would
be more conducive to the market.
Ms Nicholls: I am not sure necessarily
that you would get full transparency. You still would not get
the price at which beer was being wholesaled and the price at
which it was being supplied on. If pubcos were to split their
beer supply business and their property owning business they would
still be buying beer at a price and selling it on at a price.
That is the nature of the market. There are no particular problems
at the moment, but you would cause more problems than you would
solve by doing so.
Q206 Chairman: Do you not think that
the fact that this area is covered by a block exemption granted
by the EU in itself identifies that there may be an issue here?
If you had the landlord acting purely and simply as a landlord,
you would no longer have wet and dry rents and then you would
have a discrete business which would involve wholesaling of beers
and other things.
Ms Nicholls: There are two points
which I should like to make in response to that. One is that the
block exemption applies to certain categories of agreement which
were caught by Article 85(1). The pubco agreements were not caught
by Article 85(1), they were not held to infringe Article 85(1),
so they do not need to benefit from block exemptions. The second
is that in the experience of our multiple lessees they take leases
not only from pubcos but they will take them from institutional
landlords as well. The evidence we have from our multiple lessees
is that if you want to talk about playing hardball, it is the
institutional lessees to whom you need to talk, the big property-owning
companies and the more property-orientated a company is, the tougher
the line they will take on issues to do with rent and they are
the ones who are more likely to come up with the scenario which
your colleague Lindsay Hoyle came up with, which is to say "This
is the market, this is the package, take it or leave it",
to play hardball.
Mr Bish: Mr Salussolia is obviously
experienced in that he has institutional leases as well as tied
ones.
Mr Salussolia: Absolutely. Certainly
if you are dealing with someone who is purely interested in the
property and not the volume of the business, you tend to find
they tend to be more aggressive on their interviews. Our experience
as a multiple is that there is a relationship with the pubco,
because when you look at a site and you bid for a site with a
pubco, they take into account what you are going to do with that
site. You may not give the biggest rent bid, you may be chosen
because you are going to give the biggest volume of return out
of that business. There is a partnership and understanding between
the two parties. Where it does fall down is the way the rent review
process is structured and when you get to rent review any volume
or goodwill you have built up is generally disregarded at the
rent review process. The pubco does not share. When they look
at what that business generates, it excludes the volume or any
other aspects they would generate from that business. I am not
proposing that pubcos should be forced to show their buying prices,
but when they look at what they call fair and tenable trade and
the profit the business makes, there should be more transparency
on what profit they make, after all their logistics and running
costs that they associate with that business. Then the lessee
and landlord can look at what that is in total and make a fair
share of it. At the moment the share is only based on what the
lessees make.
Q207 Mr Clapham: In relation to a
suggestion in the media that at least one pubco is considering
the option of allowing publicans to buy beer at market price in
return for increased rents are you aware of any pubcos which are
thinking of going down that path?
Ms Nicholls: We do have evidence
that pubcos are looking to pass on greater levels of discount.
I have not heard of any which are suggesting that it would be
completely at market rates, although it is worth noting in this
context, that there are free-of-tie leases available where you
can buy beer at market rates completely free of tie. We do have
evidence that increased discounts are becoming available and you
are getting closer to market prices.
Q208 Mr Clapham: In any arrangement
like that, would the publican not still be tied to the pubco,
because the pubco is still the wholesaler?
Mr Bish: No, not necessarily.
Ms Nicholls: In the free-of-tie
leases you are not.
Mr Bish: In the free-of-tie leases
you are not. The nature of the industry now is that many of the
companies and the two major pubcos especially are looking at a
sophisticated range of alternatives so that they can try to get
this balance which we looked at earlier on, the wet and dry balance,
in reaching the open market rent. It is what Alex Salussolia said
happens subsequent to that, which is perhaps as much an issue
as the ingoing rent and the grant of the initial lease. This question
is another perm of the area we are discussing and it is—I
do not say infinitely—flexible. All the companies are looking
at other ways of doing it and it will be very interesting, when
the Committee seeks answers from the pubcos, to hear what they
have to say. I think you will be interested in where the industry
has moved to.
Q209 Mr Clapham: So do you see these
sophisticated alternatives you talk about as being fairer, giving
greater fairness for the publican?
Mr Bish: There are wider options,
but this issue of fairness is obviously in the perception of everybody
who is taking part in the deal. We are talking about a business
here. We touched on that with the partnership question.
Q210 Chairman: I think I understand
how you get a wet and a dry lease and how they interact with discounts,
but could you tell us how we arrive at a free-of-tie lease? What
calculations are involved in a rental of that nature?
Mr Salussolia: It tends to be
on market lettings; it tends to be nothing to do with the volume
but on the property, where it is and what comparable lettings
have been made of similar properties and what people are prepared
to pay for those.
Q211 Chairman: Would that be based
on the work of a district valuer or would it be local estate agents?
Mr Salussolia: Yes, it would be
industry estate agents or property agents.
Q212 Chairman: If we were to ask
the Royal Institute of Chartered Surveyors (RICS), would they
be able to give us some kind of chapter and verse on that?
Mr Salussolia: I think they would;
absolutely. The only point I should like to make, going back to
rent reviews, is that the situation which exists at the moment
is upwardly-only rent reviews. The position of an independent
expert and arbitrator, which is supported by the RICS, is quite
an expensive process, not only for multiple companies but particularly
individual tenants and one has to be wary of the impartiality
of those independent experts, because the majority of the work
does come from working for institutional landlords or pubcos.
Q213 Chairman: So the so-called professionals
may not be as independently minded as people would have us believe.
Mr Salussolia: Yes, I would suggest
so.
Mr Bish: We are getting into the
question of panels here. Your question was specifically about
setting open market rents. Those who understand the licensed trade,
but also the retail user of properties on the high street, would
take a view and they would be experts in that area. They would
not be biased in any particular way in that context. Alex's point
is well made in another context, when you are talking about rent
reviews on the mixed . . .
Q214 Chairman: What I am really trying
to get at is that there would appear to be a model which enables
people to buy beer on what would, to all intents and purposes,
be the open market. But there is no kind of automatic predisposition
to the wet/dry fudge which seems, at least to a layman, to be
open to abuse in this uneven partnership which we call the relationship
between the tenant and the pubco.
Mr Salussolia: In reality the
entry level is different. If you look at the businesses which
the pubcos represent and the businesses you would be buying or
attempting to take a lease on in a free trade or open market level,
the entry costs of going into those free lettings is very high.
Normally there is a big investment, capital investment; normally
there is high rent to pay and it does preclude the smaller individual
tenants being able to enter into that market, not in its totality,
but it is more swung that way. However, the pubcos, historically
and I still believe today, do offer more cost-effective ways of
getting into business.
Q215 Linda Perham: What is the reaction
of pubcos and pub operators to having a code of conduct? We had
some calls in our previous evidence covering areas such as pre-contract
structural surveys on properties, a cap on wholesale beer price
rises and independent rent review panels. Would you think that
would be helpful?
Mr Bish: Most pubcos have their
own policies. Some of them are enshrined as codes and they are
proud of them. There have been attempts at an industry code. We
would be reluctant to look at an industry code, except as a combination
of good practice amongst the various pubcos, mostly because, if
you start to look at a national and industry code it probably
dampens down any sort of flexibility for both landlord and tenant,
lessee, in how the relationship can move on. For example, we are
looking at the various sorts of leases which are increasingly
becoming available. If they were set in the context of a code
which was writ in stone, as it were, they would be more difficult
to implement. There is obviously a case for a code—and Tony
Payne made a good point—when the circumstances which prevailed
when the lease was first granted might change when that lease
is transferred to another landlord, and we have seen enough of
that over the last 10 years, and if the code or the circumstances
do not transfer forward into the new ownership, then that could
be to the disadvantage of the lessee. There is a case for codes,
or the conditions which were implied in that code, being included
into the contract, but we are very wary of there being any sort
of code which somehow or other gets enshrined in legislation.
Q216 Linda Perham: It would produce
a kind of standard for people. We have interviewed some of the
tenants themselves including the Federation of Small Businesses
representing a lot of them and there is a lot of anger out there
at what seemed to be the imbalance between their rights and the
rights of the pubcos. You mentioned earlier the upward-only rent
reviews and it just seems to me outrageous that there is such
a thing as upward-only rents. We have talked about flexibility.
Mr Payne did as well. I can see no flexibility where people are
being told they have to have their rents going upwards regardless
of how their business is going. You talked about review panels
and other things, but there is a whole list of things which have
been put forward for a code of conduct, including transparency
and lease negotiations, advice and support to be supplied by the
pubco. Do you not think that if it were left to different pubcos
or there was no standard code of conduct, then this simmering
of anger from the tenants, which has been the reason we have had
this inquiry, will just be perpetuated and they will not be feeling
that they have a fair deal?
Mr Bish: We understand their point,
but I am not sure that it is valid. There are codes which the
companies are developing and espousing at the moment as a marketing
tool for them. The very fact that two of the major pubcos have
abandoned upward-only rent reviews for their new leases is nothing
to do with the national code because there is no national code.
They have decided to do it themselves. Just suppose there had
been a national code and in some way upward-only rent reviews
had been enshrined in it, and up until a few years ago that was
the case, it might have been rather more difficult to dig ourselves
out of that situation. It would have inhibited flexibility. The
point about codes is that they should be helpful for both parties
to the agreement and should be sustainable when there is a review
and when there are disputes.
Q217 Linda Perham: If it is not standard,
if it is not enforceable, it means you might say that the good
guys would actually change things for the benefit of everybody
and there would be people there who would not have to do it. From
a business point of view I can see why you might not be keen on
the code, but my point is that if you do not have to do it, a
lot of companies would not do it and you would still be in a position
where you would have aggrieved tenants who feel that they are
very much the junior partner and not getting the benefit of the
profits they could make.
Mr Bish: That is different from
a code, with respect. There is no code which says you have to
share the profits differently or which anyone would buy into and
would be sustainable. The companies want to do their codes and
that is as it should be. The point about transferring the implied
terms and conditions of those codes when there is a change of
ownership is important and companies should make it clear that
they will stand by their code when their relationship with the
landlord and the lessee is a matter of dispute.
Q218 Linda Perham: So you are not
in favour of an industry-wide code of practice. You would like
these things to be worked out between the companies and their
tenants.
Mr Bish: I would go one further,
but short of it being enshrined. The function of a trade association
could well be to compare between one company and another and their
codes and between them perhaps to suggest good practice, but the
industry would not be enthralled by the prospect of the code being
enshrined in legislation.[1]
Q219 Chairman: Mind you, a lot of
trade associations come to the conclusion that self-regulation
through an agreed code is preferable to legislation. It might
be that if we were to recommend that and ministers were to offer
you the gun or the voluntary option, you might go for the voluntary
option.
Mr Bish: Absolutely. Those sorts
of options are very persuasive.
1 Note by witness: The ALMR could promote the
idea of a national code of practice for leases, this would distil
the agreed best practice of individual codes. The Association
would not support the idea of such a national code being enshrined
in legislation. Back
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