Examination of Witnesses (Questions 340
- 359)
TUESDAY 20 JULY 2004
ENTERPRISE INNS
PLC
Q340 Judy Mallaber: Where it might
make a difference is if somebody was trying to decide whether
to go into business with you, with a pub company, or seek an independent
separate pub. I am interested, going back to the Chairman's point,
in what proportion of the tenants that you are taking on, prospective
tenants, do take advice from accountants and, if an accountant
asks you questions, what is the information that you refuse to
give them? You have told us that you would refuse to give them
information about the prices you buy beer at. Do you give them
information about what proportion of the profits you expect to
take as a pub company? Do you share that information with us?
Do you share it with their accountants?
Mr Tuppen: Again, I consider that
it is completely irrelevant in respect of their business plan.
They are putting together a business plan in order to run a pub.
They need to know how much beer they expect to sell and how much
they get for it per pint; they need to know how much they will
pay for that beer; they need to know how many meals they are going
to serve on a Sunday; they need to know how often their bedrooms
will be full. They then need to understand council tax, business
rates, how much it will cost to have a band on a Friday; a whole
host of things that will enable them to build up a picture of
what profit they will make from their pub.
Q341 Judy Mallaber: In other words,
you will not give their accountant the information that I have
just mentioned in order to assist their accountant to advise them
on alternatives? You will not give them that information?
Mr Tuppen: I think if they . .
. I do not think it would be relevant. Were they comparing this
with an independent pub, then, of course, the same accountant
would say, "We are now going to look at buying a pub, so
we will look at how much beer you are going to sell, how much
you are going to be able to sell it for, how much you are going
to pay for it", which, of course, will be less because they
will buy it either directly from a brewer or a wholesaler, "how
much margin we are going to make on our food, how many times we
are going to fill up the bedrooms." He will then run through
all the costs of running the pub and at the end of that he will
say, "Of course, in order to buy that pub you will have to
borrow half a million pounds, so the interest on that is going
to be X." At the end of both processes they will have an
answer to whether or not they should rent a pub or own a pub.
Q342 Judy Mallaber: What proportion
of your prospective tenants do take that full accountancy advice?
Mr Tuppen: As we are saying, we
are disappointed. We saw some statistics in one of the trade magazines
which suggested that something like 40% do not take advice. We
do not believe that is the case in our estate because we are so
determined, as I explained earlier, to push them as hard as we
can to take advice, but, as one of your previous witnesses said,
and she was a qualified chartered surveyor, you would have expected
that person to have read the four different bits of paper that
she saw saying, "Please go and take independent advice",
to have done so. We cannot force them so far to take independent
advice. It is our view, to avoid what we think are—which
are difficult accusations for us to cope with. You talk about
a mountain of letters, and it is disappointing if two or three
hundred licensees have written to you, but, frankly, two or three
hundred out of 33,000 is not the majority of the industry by a
very, very long way.
Q343 Judy Mallaber: So one of your
pubs saying to us, "We have been treated as nothing more
than a money collecting point for the pubcos, we receive little
or no support from them and when we have tried to discuss our
problems with them and find a solution which is fair and reasonable
to both parties we are told that nobody could blame us if we walked
away", you are saying that is absolutely a minority?
Mr Tuppen: I think it is an absolute
minority. If you like, I could read to you—I got this completely
unprompted but, if I may, I will share this with you. This is
from Terry and Carol Costello at the Brewers Arms in Macclesfield:
"Dear Sir, I would like to take this opportunity to thank
you and your directors for allowing me to lease my public house.
I am shortly leaving to go back to live in Tenerife and I do not
want to go without saying a big thanks to all at Enterprise. Your
company has been superb in my time as lessee in all aspects of
the pub game. My managers have been so helpful, along with everyone
else in this great company. If ever you want anyone to stand up
and say how good the company have been you can count on me. Thanks
again to Nick Lawson and Pam Bates who have been so professional
and a pleasure to work with. Kind regards, Terry and Carol."
That is as representative because it is a sample of one, and I
could possibly have 200 if I requested them.
Q344 Mr Hoyle: That is interesting,
is it not? It is a tremendous thing for you to say, "Well,
you have only had 300 letters of complaint", there or thereabouts,
"and there are 33,000 tenants." It is quite amazing
that we have not had one saying how good you are. It is amazing,
is it not? Why do not you look at it the other way? I think you
are the master of spin—Peter Mandelson is not head of the
game with yourself about—but I think you ought to acknowledge
that nobody has taken the trouble to say what a good company you
are. We have not received one letter. So I think we have to look
at it the other way as well.
Q345 Richard Burden: Could I take
you back to Judy Mallaber's first question, because I am still
not clear about your answer to it. I can understand that you are
saying you think it is irrelevant for your tenants to have the
price you pay for beer, but you went on to say that the reason
you do not give it is because (1) it is highly commercially sensitive
and later on you said, "They could work it out for themselves
anyway." Which is it, because if it is that commercially
sensitive they presumably would not be able to work it out, would
they?
Mr Tuppen: One is dealing with
suppliers who are acting in a competitive market with supplying
us. Everyone knows that on average a pub company of our scale
can get a discount of about £140 a barrel, and that is public
knowledge. It is going to be in that sort of scale. If you had
3,000 pubs it might be £130 a barrel discount. We are buying
two million barrels of beer a year, so, not surprisingly, we buy
it quite cheaply. That I do not regard as particularly commercially
sensitive, otherwise I would say so now, but if I were to say
that I get £140.33p for brand X and £138.20 for brand
Y, that would be massively commercially sensitive to the brewers
who will be supplying to us; it will matter enormously and will
distort the market for the supply of beer to our estate.
Q346 Richard Burden: Right. So it
would be commercially sensitive to broadcast it to the outside
world. Why is it commercially sensitive to share it with your
partner, for instance, Terry and June, sorry, Terry and Carol,
that you said have such a good relationship with you. If Terry
and Carol are having, say, one or two difficulties with their
business and they are trying to share with you possible ways forward
and how the problems they are facing could be shared, how the
opportunities could be shared, what is the problem, perhaps subject
to a confidentiality agreement, of sharing with them how much
you pay, because you said you have got a shared interest in the
success of the business?
Mr Tuppen: I will come back to
my point that it is utterly irrelevant.
Q347 Richard Burden: I can understand
that, but if they feel it is relevant?
Mr Tuppen: Then we should explain
to them why it is irrelevant.
Q348 Linda Perham: Still on the price
of beer and perhaps thinking about what it costs the consumer,
previous witnesses, including the Federation of Small Business,
have suggested that the `beer tie' means the price of a pint in
a pubco pub is in the region of 35 to 45 pence more expensive
than one sold in a free of tie pub. From what you have just said,
are you saying that you cannot give us the typical cost of a pint
of beer to the consumer in terms of how much the brewer, wholesaler
or tenant receives?
Mr Tuppen: Perhaps I can ask Simon
to answer that question specifically.
Mr Townsend: Thank you. I will
certainly try to provide you with the guidance that you are looking
for there, but I have to admit to being at something of a loss
as to how the Federation of Small Businesses have arrived at this
particular assertion. It has certainly been reported widely since
they made it, perhaps not surprisingly because it is a certainly
a fairly headline grabbing claim, but it is a complete myth. The
very notion that beer prices to consumers would fall if the tie
were abolished has no basis whatsoever in fact. The fact is that
pubs will set their prices to consumers based on such factors
as the local competition around them, the particular proposition
that that pub is seeking to make in its local market place, the
facilities that the pub is offering and, of course, the willingness
of its consumers to pay the prices it sets and then come back
and drink some more and pay those prices again. It is those factors
which are the basis on which the pub will set its prices rather
that the particular price it pays for its own supplies. It is
therefore simply not true to suggest that pub prices and beer
prices to consumers are more expensive in leased or tenanted businesses
when compared with independent pubs or indeed managed house chains.
This is not just my opinion. We have submitted to the Committee
independently provided evidence which is available from AC Neilson,
who are the largest independent supplier of regularly audited
information throughout the retail leisure industry, and they are
the most widely used source of information, whether it is by retailers
or by brand owners, and this information clearly demonstrates
that in all of the key categories of drinks products—whether
it is draft beer, draft lager, stout, cider—prices in managed
houses, independent pubs and tenanted and leased business are
broadly comparable and have clearly been so for many years. This
consumer price parity exists regardless of the fact that independent
free houses can command discounts. These houses simply do not
pass these discounts on to consumers and why would tenants do
so if they were in receipt of discounts. Perhaps the final point
I can make there is that the movement in prices over time to consumers
has been broadly comparable, proving that pubs have priced their
goods and services to the market based on the local conditions
that are apparent to that pub at the time. If I can seek to address
the other element of your question which relates to exactly how
does the price of a pint split up between the various parties
involved, if we take the average price of a pint of beer according
to these independent statistics at the moment, they would show
something like £2 per pint for a pint of ale, £2.25
for a pint of lager given the predominance of lager in the market
place at the moment, particularly premium lagers, if I can work
off an average price of a pint at £2.20 I will try and demonstrate
how the split occurs. Roughly speaking it is 30:30:40—30%
to the Government, 30% to the suppliers and 40% to the licensee.
So, taking the average retail price of a pint at say £2.20,
the division of the proceeds is roughly as follows. The first
33p is VAT, and that goes to the Government, leaving £1.87;
the next 30p is Customs and Excise duty, which also, of course,
goes to the Government, leaving a balance of £1.57. So far
the Government has taken 63p, or 29% in this case, of the price
in tax. The next element of cost is the cost of the product, the
cost of the product from Enterprise in this case as the wholesaler,
but this, of course, includes within the total cost the cost of
the production of the materials, the storage, the distribution,
the marketing of the products, the provision and maintenance of
cellar cooling equipment, but it gets the product to the pub and,
of course, it includes the margins earned by the brewer, the wholesaler
and the distributor, and the wholesaler in this case is Enterprise,
but this in total equates to 69p, which is 31% of the price of
the pint. The balance, which in this case is 88p, is the profit
to the licensee, and that equates to 40% of the price of the pint.
Q349 Linda Perham: Thank you for
that long explanation. I am just thinking about how much is your
take as a commercial rent and how much profit a tenant would make.
We have been given a figure of about, I think it is £26,000,
which is an average, which people are supposed make, average earnings,
but we have had evidence that some tenants only make £10,000
or less a year, which is not much of a profit, and also the fact
that landlords expect to take more than 50% of all profits of
a pub, sometimes up to 70%. What would be your comment on those
figures?
Mr Townsend: I certainly cannot
comment on the particular specific elements of information that
you have described there, but if I can seek to address the point
about what element of the remaining profit might be retained by
ourselves as that element of the commercial rent, then I think
we have to be very clear that the rent we are talking about here
would be that portion of the total rent that could be attributed
to the wet sales of the business: because clearly the total rental
value of the business needs to take account of some or all of
the constituent elements of that business, which includes the
profit streams delivered by other drink sales, such as wines,
spirits and minerals, food sales, of course, other turnover generated
through letting accommodation or functions, and, of course, the
amusement machines income; but if we specifically relate to that
share of the rent which would relate to the beer sales element
of a pub's trade, I can say to you that it would equate to around
17% of the gross margin generated from sales of beer. If we go
back to the example I gave earlier of the 88p per pint of licensee
profit, that would therefore equate to 15p being retained by ourselves
in relation to the value of the commercial rent.
Mr Tuppen: Perhaps I can answer
a bit more of your question there by giving you an example of
a licensee who came to see me saying that his rent was, indeed,
far too high a percentage of his available profit. He had taken
a pub on assignment that was, say, turning over about £200,000
a year. The profit that a £200,000 a year pub made justified
the rent that was being paid, provided enough profit. This man
took this pub on assignment. By the time he came to see me, for
reasons of his unsuitability for that pub—he was not particularly
bad, he was just unsuitable for that pub—the turnover had
indeed dropped from £200,000 to £100,000. Of course,
the rent as a percentage of his available profit at that time
did seem hugely high. We spent some time with him looking at ways
he could improve his business to get back to a £200,000 turnover.
In the end it was not going to work. We enabled him to assign
the pub, we helped him to assign it and, in fact, he got a premium
on assignment of £150,000, so he did very well on that assignment.
The new owner took the pub back to £200,000 a year turnover
and the rent was fine. I am not suggesting that we get the rent
right in every case and that every pubco gets the rent right in
every case, but there are two elements to the residual profit
and often those who are able to demonstrate that rent as a percentage
of their profit is too high could probably improve that percentage,
that relationship, if they were running the business more effectively.
Q350 Linda Perham: Going back to
your profits, are you refuting the claim that the profits you
make from a pub can be an average of 50 to 70%?
Mr Tuppen: I think that there
I just refer to an industry standard. In the end rents are not
set, rents are assessed and negotiated. Let's be very clear about
this: we do not force people to pay a particular rent; rents are
assessed and we try to assess them fairly. The industry standard
is that the profit before rent is split, broadly speaking, 50:50
between the licensee and the pub company. That has been the industry
standard for a very, very long time, a long time before I joined
the industry, and so, if the company's share is running at the
70/80% level, that would suggest either that the original calculation
was ill-informed or, most likely, I have to say, that the pub
is under-performing. When we have an under-performing pub we work
very had to try and help the licensee improve the performance.
Perhaps I could ask Gordon to cover some of the areas that we
look at to try and help the licensee.
Mr Harrison: There are a number
of different ways that we can do that. The most prolific is when
a licensee recognises that they are struggling, they approach
their local regional manager to discuss the problem, and often
the lead question is: "Can you reduce my rent? Can you reduce
that burden?" The onus is placed squarely on the shoulders
of the regional manager to make that assessment, and I believe
he is the right man for the job. He lives and works in the same
area as the licensees, he knows the marketplace, he has a good
understanding of local economic conditions, so if there are circumstances
which have affected the pub which are largely outside the control
of the licensee, the regional manager can factor that into the
rent and can make an adjustment outside the normal rent review
process and reduce that rent. There are other things that he can
also do to assist. We provide promotional and marketing packages
to help lift the turnover of pubs, we produce what we call price
fighter brands for pubs that are in price sensitive areas, brands
that will allow the licensee to maintain the margin but reduce
the retail price to a level that allows them to compete locally.
We have capital development programmes available to invest into
the pubs to either change or improve the retail offer, again to
make it a more attractive proposition to consumers, but at all
times when we are approached for assistance we do rely upon the
licensee to use their best endeavours to pull the business round,
and in many cases that is freely offered to us, in other cases
it is not. We dealt with a case fairly recently where a lady licensee
asked us to consider the level of rent, as she considered it to
be an undue burden. We examined the business with her. We suggested
that she should consider lowering the tariff for her letting bedrooms
as a way of improving occupancy and therefore raising turnover
and margin, but her response to that was that she did not like
getting up early to do the breakfast; it was not something she
found particularly attractive. Under those conditions, you would
be perhaps not surprised to know, we turned down that application
for assistance; but that is an exception. In most cases there
are things we can do to help people who are struggling.
Q351 Linda Perham: I am really talking
about your proportion of the profits. I will leave it there, Chairman,
because I think we need to move on, but you will admit, will you
not, that you are making a very healthy profit out of this and
we are getting a lot of complaints from people who think they
are only getting a few thousand a year. That is what I am trying
to elucidate from you. I am interested to hear what you are saying
about helping tenants, but the complaints we are getting are that
you are getting more than your fair share and people are suffering
and having to give up their leases. That is the several hundred
complaints that we have had.
Mr Tuppen: If I could help on
that just a little. I think there is a misunderstanding between
the profitability of independent pubs or leased and tenanted pubs.
The fact is that there are some pubs in this country, and I am
glad to say we have relatively few of them, which are becoming
unviable. Whether they are privately owned independent pubs that
somebody has brought or they are leased or tenanted, they maybe
have a level of potential turnover which makes it very difficult
to make what we might regard as a good profit from them. The assumption
that I think is quite dangerous is that these are all leased and
tenanted pubs. The performance of leases and tenancies as a group
of businesses is far more stable than a normal business. I understand
from an article I saw in one of the Sunday papers that the rate
of business failures in small businesses is currently running
at about 20%. Within the leased and tenanted sector I understand
that this figure is about four%. So I think that I would like
to steer you away from the connection between failing pubs and
the fact that they are leased and tenanted and ask you to consider
the overall performance of pubs of a certain scale.
Chairman: I should just point out to
you that we have actually sought from the FSB information about
their allegations relating to the 45p differential. When we get
it we will distribute it to people like yourselves and ask you
for your comments on it, but at the moment we are still awaiting
the FSB's justification for the points that have been presented
to us rather than going over that with the future witnesses as
well, but when we get it we will return and ask you for your comments
on it.
Q352 Richard Burden: Can we go on
to the calculation of rents again? In your evidence you say that
the overall rent is a variable combination of property rent, wet
rent and machine share and that the total of that equates to a
normal commercial rent. Who calculates the normal commercial rent?
Mr Tuppen: That figure that we
quote in our submission we lifted from an industry sector analysis.
You saw the reference that we put in there. It was a sector review
carried out in May 2004 and took the view, published the number,
that the current market for retail property equates to approximately,
they said, 7.8% of the property value. That is the percentage
that the market is currently prepared to pay in order to rent
a building in order to run a retail business. That is not our
number, it is a publicly available statistic.
Q353 Richard Burden: But the normal
commercial rent for a specific property . . . The overall percentage,
yes, that is fine, but the commercial rent for a specific property
is likely to vary?
Mr Tuppen: Absolutely; it is market
driven.
Q354 Richard Burden: So who will
set it with a particular tenant, a particular property? Will you
say, "Right, the normal commercial rent for this is X and
our combination of the three factors equate to that." Do
you say that or do you say ask somebody else on a specific property
to set a commercial rent?
Mr Tuppen: There are a range of
answers to this. We do not set rent. As I say, we try and assess
rent. We try and assess rents that are fair, because, after all,
we are looking to attract good quality licensees. If we were to
set the rents too high we would not get any good licences, we
would just get bad ones. So what we are looking at is to come
up with a rental package that makes sense. Just looking at our
estate we have got three-year tenancies, 21-year leases; some
are assignable, some are not. Let us take two examples. We might
have a traditional tenancy, a traditional old-fashioned three-year,
like a brewery tenancy. We would charge full price for beer and
cider, the full wholesale price for beer and cider, we would take
a 50% share of the net machine takings and we would retain responsibility
for the structure of the building. The licensee has no ability
to assign that three-year tenancy and therefore no ability to
generate a capital value for himself. The calculation of the rent
in that, the rent element, might end up to be on the low side.
At the other extreme the licensee may have a 21-year assignable
lease with average discounts per barrel of £40 given by us,
he might retain all of the gaming machine income and he might
have the right to sell a guest ale. The rent there will be different.
Q355 Richard Burden: The rent I was
referring to was your definition of rent, which is the overall
package not the individual element, and you are giving me an answer
about the individual element. I am asking about the overall package,
who sets the overall rent and whether that equates to a normal
commercial rent for a specific property in a specific business.
Do you set that, do you refer to someone else or do you negotiate
that total amount, not the individual rents, but the total amount,
with the tenant?
Mr Tuppen: In the first instance
we have got a series of what we call retail valuers all of whom
have got long experience in the trade.
Q356 Richard Burden: So you say!
Mr Tuppen: And are fully qualified.
Q357 Richard Burden: So you say!
Mr Tuppen: In the first instance
they will assess what the rent, what they think is a reasonable
rent for a pub, having assessed that they will then sit down with
the potential licensee.
Q358 Richard Burden: Are we talking
about the package rent, or are we talking about the rental elements
of the package?
Mr Tuppen: They will talk about
the whole package; because when they sit down and negotiate with
the licensee they will have on the table the various elements
I have just been speaking about: the length of the lease the licensee
may or may not want, and we are very flexible in giving the licensee
the style of lease they choose; the length of the lease makes
a difference to value; the underlying rent makes a difference;
whether or not they are going to get discounts and whether or
not they are going to share gaming machines; whether or not they
are going to be responsible for repairing the building. Having
established what we think is a good basis for this—and we
have provided you in our submission with details of our computer-based
programme which helps us to assess what is probably a fair number—we
do it very responsibly and very accurately. Once we have done
that, we sit down with one, two or three potential licensees who
would like to take on that pub. Even one of your more vocal witnesses
admitted that when we first looked to negotiate rent with her
our chaps had said it ought to be £28,000 and she thought
it ought to be £20,000 and they ended up agreeing £24,000.
We assess what is a fair rent and then we sit down and negotiate
with full information with the licensee. A new licensee, of course,
does not have to sign up. If he does not like it, he will not
sign up. That is very easy and very straightforward—if they
do not like it they do not have to join. Unless we get it right
we will not get any licensees. If we put the wrong rent on a pub
no-one is going to come, except for the idiot with a bag full
of money who is going to run the pub into the ground, and we really
do not want those. At the point of rent review the balance, I
must admit, is not quite as fairly balanced, because they cannot
just walk away—their kids may be in school, there may be
a lot of reasons why they do not want to leave that business—which
is why, at point of rent review, they have an absolute contractual
right for independent review or arbitration.
Q359 Richard Burden: What is the
independent right for review or arbitration of?
Mr Tuppen: Of the rent that is
being set for the pub, taking due account of all of the circumstances
of that lease.
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