Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 380 - 399)

TUESDAY 20 JULY 2004

ENTERPRISE INNS PLC

  Q380  Mr Berry: I do appreciate that but, equally well, this is share cropping, is it not? You are taking a share of people's income. Inevitably you are there to get the best deal for your company and there will be a conflict between you getting more and the tenant getting more. The point is you have got to not screw the tenant too much, they have got to keep on working, but you are there to get your share. The idea that somehow there is some objective fair deal is nonsense. It is a question of you getting the best you can and the tenant, hopefully, getting the best he or she can. It is just an observation because it is self-evidently true. Earlier you discussed tenants in difficulty and this is an issue I would like to raise. In your written submission you say that, "Licensees in difficulty through no fault of their own deserve and receive assistance, and temporary rent concessions can be made". Can you differentiate between licensees in difficulties through no fault of their own and those who are just incompetent and not able to run the business?

  Mr Tuppen: Before getting Gordon to answer that specific question, I would like to come back on your apparent self-evidence of the rent review process.

  Q381  Mr Berry: Not the rent review process but your attitude as a company.

  Mr Tuppen: Yes, as I say, we own almost 9,000 pubs and that means 9,000 buildings on street corners and riverbanks, most of them quite smart and quite nice places; they are nothing at all until they have good licensees in them. If we consistently develop a reputation for treating licensees badly and for setting rents too high we will, at best, get bad licensees or, at worst, get no licensees. It is a fundamental part of our business that we have to be fair and to be seen to be fair; because the success of our business relies entirely on a good licensee getting the pub, having a good pub to be in, being motivated to run it and being helped in all respects by us to be successful. Genuinely, other than a completely short-term view of "Let's get in no matter who's running the pub", our whole philosophy is based upon treating licensees with fairness and respect, because without licensees we have no more than just a bunch of buildings.

  Q382  Mr Berry: I am not suggesting for one moment what you have just said is not true, but there will be a minimum income that the good licensee will need to secure to work in the business; there will be a minimum income for your company, that you will require to lease out a property of yours; and I would be very surprised if there was not a gap between the two about which reasonable people will try to get their best deal. That is all I was saying. The fact you are trying to get the best deal out of your properties and your rental agreements is in no way suggesting you do not treat tenants properly; but it does suggest it is not simply happy families out there and you are trying to get the best deal you can. Having made your response and my comment clear, I would now appreciate an answer to my question.

  Mr Harrison: If I can draw a point of difference between rent concessions given where thoroughly justified, and those that we have to ponder on more carefully. Can I cite an example from a little while ago, which illustrates a point, from 2001. With the foot and mouth epidemic which affected many parts of the country, and for us decimated the trade in a number of rural pubs, recognising that due to restrictions on movement of people there was going to be a period when it was going to be difficult for licensees in affected areas to continue to pay rent, without prompting, we immediately offered relief to all those affected who could demonstrate that foot and mouth was having an impact on their sales. From records, approximately 30 licensees in Cumbria, Wales, Yorkshire and the Midlands benefited to the tune of approximately £150,000 over a six-month period. That was a genuine rent reduction. That was a loss of income to the business. It was not a deferral of rent to be paid back at another time. Those circumstances were well and truly outside the control of the licensees and that was our response to it. I spoke earlier this morning of other circumstances arising, where licensees will speak to their regional manager and ask for some form of rental relief. Where it is appropriate the regional manager is empowered to deal with it and does not have to refer it upwards—it stays locally. If the regional manager believes it is the right thing to do then the rent is reduced downwards. If he thinks he is being hoodwinked, if he thinks the licensees are not using best endeavours to improve the business, then he will be reluctant to do so. To give you a feel for how many rent reductions we have currently got within the business, we have got 18 and this is in the core Enterprise business, representing just under 5,000 pubs. The value of those rent concessions is, on average, £10,000 a pub, and the majority of reasons for the grant of those rent concessions is economic hardship. There is a balance that is granted because we are conducting joint works on site to improve the pub but are disturbing the ability for the pub to trade. That gives you an indication of the quantum of relief.

  Q383  Mr Berry: Obviously with foot and mouth and flooding, things like that which are beyond the control of the tenant, a rent concession would be an obvious mechanism that you would adopt. Your company obviously own other pubcos and has shares in other pubcos, do you expect them to have similar attitudes towards rent concessions? Is it your experience that they do?

  Mr Tuppen: You may well be referring to a situation where the word "flooding" springs to mind, where I believe one of your constituents has written to me recently saying that, whilst the pub was in previous ownership, she was not particularly satisfied with the service she got. I have written to her saying that I would take a look at it. My initial investigation of this, which we clearly cannot speak about too openly because it is a matter of court review, is that she was already (and I hesitate to use the word) lost, she was not successful in court. My own understanding having seen the facts, and I am only scratching the surface so far, is that some of the delays which caused problems for your constituent may indeed have been of her own making. In particular, and this is often the case with insurance claims, she appears (and I say this guardedly) to have sought under the auspices of the insurance claim certain works to be carried out that may have been outside the damage which had been caused by the flooding. When that was taken issue with, not by us, not by the company even but by their insurance assessor, she then chose to appoint independent assessors. So far (and this is as far as I have gone into it) there appears, at best, to be two sides to the story. I am more than happy to share with you further correspondence we will have with this particular constituent of yours.

  Q384  Mr Berry: Thank you. I was being very careful not to raise that particular case, because I knew you were looking into it and I was grateful for that; but there was the basic principle here about the use of rent concessions and whether your attitude to rent concessions (which I think appears to be very reasonable) applies throughout the pubco industry? Are you setting the best example and others sometimes may not live up to your high standards?

  Mr Tuppen: I do not think we should blow our own trumpet too much. We have a corporate philosophy which will definitely support rent concessions in time of need. We are aware that on occasions, as Gordon has said, we are being hoodwinked. It is vitally important for our own shareholders that we do not give money away willy-nilly. I am equally prepared to accept that on occasions we may make mistakes. A regional manager who is faced with this difficult situation of trying to find out what exactly is going on may well, on occasions, make mistakes. At that point we have an escalation process. Any licensee who has asked for a rent reduction can look at the Code of Practice where it is clearly set out; if you are not happy with what the regional manager has said speak to your divisional director; if you are still not happy speak to Gordon; and if you are still not happy speak to me. We do have an escalation process. Some of them have a much shorter escalation process which is, "I'm not happy with the regional manager so I'll write to my MP"!

  Mr Berry: This happens in all walks of life—and sometimes not even the regional manager first!

  Q385  Mr Evans: For the record, I am Vice Chairman of the All Party Beer Group and a member of CAMRA. Do you see Enterprise Inns predominantly more as a property company or a wholesaler?

  Mr Townsend: I think there are perhaps three key elements that I will try and cover in addressing that particular question. The first is the principle of a property company which, in effect, determines there is a rent-only relationship; the second would deal with the whole balance of rent and beer pricing, beer discounts in this case; and the third is the whole idea of Enterprise as a wholesaler. If I can start with the point of the property company which, in effect, is a rent-only relationship. This would be completely at-odds with what we believe and what we have sought to describe to you as the most important principle of the tenanted and leased business model that we operate, and that is the principle of partnership. Fundamental to that partnership is the tie, on the basis of which the interests of both the company and licensees are aligned towards the motivation of beer sales growth, but also sharing the risks as potential beer sales decline. If we were to operate, therefore, without the tie it is difficult to see, under the prospects of a rent-only relationship, how those interests could be aligned with such assurance as we believe they are now. I think that is the first point to address to a property company principle. The second point is that we, in fact, already have a variety of discounted supply agreements in place in our business within the Enterprise estate, and that the rent which is charged to those businesses is assessed accordingly, and taking full account of the prices of beer that is paid. In all agreements our commitment to the principle of the tie is absolute, albeit in its various forms. We have over time, by virtue of the acquisitions we have made, inherited a number of agreement types and tie types; and what we have been able to do over time, therefore, is fully understand the advantages or disadvantages that would apply to each of these agreement types, seek to learn from the experience of operating these agreement types, carry out extensive research amongst our licensees and therefore develop our range of agreements accordingly. As far as the principle of rent versus beer pricing (the two aspects of the balance) is concerned, we have developed a new suite of agreements, which we referred to earlier today and we have detailed the agreement in our submission to you, which offer a variety of options to prospective licensees which includes discounts in excess of what we would suggest is the full current market rate of discount, and £100 a barrel is the proposal we have in our new agreements. Clearly, the rental that would be charged to a business opting for discounts of £100 would be higher than that for a business opting to receive no discounts at all. The key here is that the different businesses operating under different agreements by different licensees will respond in different ways to the options that are available. The key principle we adopt is that we are committed to the idea of choice and flexibility in order to find the right agreement type and the right mix of incomes that will apply to a particular business, rather than adopting a formulaic approach as might apply. I might add, the same principle of flexibility applies to the allocation of amusement machine income within our agreement types. We take no income from amusement machines in around half of the estate, and we take less than 50% of the amusement machine income in around 20% of the estate. The balance falls somewhere in the middle, but clearly demonstrates we are looking to find the right mix of agreement type and mix of incomes in relation to the particular business, particular pub and particular circumstances. The final point to address is the idea of a wholesaler. In fact, Enterprise already acts as a wholesaler in many or most ways, albeit limited only of course to the supply of those pubs that we own, and of course the supply of products under the tie. In order to ensure that Enterprise pubs can compete most effectively, we seek to provide the most comprehensive range of products available, all ordered through one telephone call and available on one delivery, in exactly the way that an independent wholesaler might. Furthermore, we can then provide the benefit of a comprehensive range of non-tied products at competitive prices, and the evidence we have previously supplied demonstrates that a very large number of licensees do choose to source their non-tied product requirements from us, presumably because it makes sense to do so. Hopefully I have addressed the point in three ways: specifically that the rent-only relationship is completely at odds with what we are seeking to do—that would be the property company.

  Q386  Mr Evans: You know exactly where I am going, which is the tie, because this is the first time this morning we are really getting to grips with this particular issue. When we introduced the Beer Orders initially it was to rectify what we saw as a problem. The unintended consequence of that is the creation of pubcos, such as Enterprise Inns; but the problem still exists. For a number of people who have written to us, they have got real problems with the tie. They have got real problems with the fact that they get charged a lot more for their product, which you readily concede because it is part of this complex arrangement you have with your tenants as to how much they are charged. There is a real problem which they have. It is almost going back to the 19th century and factory shops. They have got no choice when they sign up to their lease, and their dream pub, and for whatever reason they thought they could make a go of it; yet they cannot make a go of it because of the tie and because of the high prices they are being charged. Enterprise Inns is a very profitable company, and I have read one article where Mr Tuppen says that the average profit for a pub is £37,000 including £8,000 for the rent which they would otherwise have paid for the property in which they live. Of course they have to live there; part of the lease would say they have to live above the shop. That is the real problem—that they cannot make a profit. Indeed, the Chairman of Wetherspoons, a non-executive director and I am sure you have read his letter, says that a lot of the money remaining to them has to be re-invested into the pub. Can you understand why a lot of your tenants want the tie removed?

  Mr Tuppen: You have raised a lot of issues there, and I think you are probably confusing the economics of the pub, in the first instance, with consumer choice. If we go back to this nirvana of the day before the Beer Orders, a typical pub was tied to an individual brewer; that meant if it was a Bass pub it sold Bass beer, probably Bass sherry, almost certainly Bass wine and mostly Bass crisps. If the licensee did quite well—bear in mind that in those days the licensees were not protected under the Landlord and Tenant Act—the rent would go up at that three-year review by a hell of a lot. There was no real review process which could stop that happening. If the licensee did really, really well Bass, or whoever, would have the pub back. They would say, "This is such a successful pub we are going to throw you out. We're not offering you the option of paying a higher rent, we're going to throw you out and we'll have this pub back under management", and they would then run it themselves as a managed house. Not exactly nirvana. Not exactly nirvana for the licensee who is in a very, very tenuous position, but also for the consumer. If the pub in your village happened to be a Bass pub you had absolutely no choice—you drank Bass beer. I think to draw parallels between where we have got to with pubcos and where we were with the big brewers is confused. We now, as you will know from our submission, buy beer from a very wide range of brewers.

  Q387  Mr Evans: I am not saying that. What we have done is replaced one complex monopoly with another, and that is the problem. You have got so many income streams coming in from these pubs, from all sorts of levels, and we have heard of the multiplicity of deals that you have with your tenants, but you have got your tenants over a barrel. Yes, they have been given some protection in some ways, which is better than the situation which you mentioned under the old days but it is still not good enough. You have to confront the fact that we have had hundreds of letters, more than I have ever seen in any select committee I have been on, from people who are really dissatisfied with the situation they currently face. You cannot be happy with that?

  Mr Tuppen: No, I cannot be happy with your conclusion, but I understand that you have received in the region of 200 or 300 letters, and I presume some of them were from professional organisations and some from pub-goers. Let us say you had 250 letters from dissatisfied licensees. Out of 33,000 that is going to be less than 1%.

  Judy Mallaber: They have to work so hard they do not have time!

  Q388  Mr Evans: I suspect that some of them are actually quite scared to write to us. I think that is part of the problem. These ones which have written to us have actually put their names to it and I applaud the fact they have written to us to tell us the problems. Let us put it squarely to you now: if we as a committee were to recommend removing the tie, what is going to happen?

  Mr Tuppen: As was explained to you in some detail by Tony Payne of the Federation of Licensed Victuallers (who, after all, is the tenants' representative) and indeed by both of the other trade associations, you would creating a very difficult situation for licensees. The reality is, as I said when I started, that the system we operate (the leased and tenanted sector) with tied pubs enables 33,000 individual pubs to be operated as individual businesses; not part of the J D Wetherspoons chain where they are all going to be the same; not part of something that in the end will become a tired old brand; but individual pubs, run by individual people. The tied system (and I thought Tony Payne expressed this very well on behalf of the majority of licensees) offers a fantastic opportunity for people with relatively small resources. You do not need to spend half a million or a million to buy a pub; with £25,000/£30,000 you have the chance to take on and make money from a business. You are in danger, I fear, of drawing conclusions on the basis of an unrepresentative sample. I am not suggesting that, if you went out and spoke to all 33,000, there would only be 200 who were dissatisfied. We indeed admit in our own estate that out of the people we surveyed 84% think we are probably okay; that still leaves 16%, so there is no reason for us to be complacent. To attack the tie would be to attack the very structure of an industry which provides a tremendous business opportunity for 33,000 individual licensees and all of their customers.

  Q389  Mr Evans: It is seen as a straitjacket to a lot of your tenants, and that is the problem. If we were not to recommend getting rid of the tie to free up these businesses to actually grow properly, what would you recommend we would do then to ensure there was more freedom with your tenants to be able to sell their products and to actually retain a bit more profit for themselves than the £37,000 you say they are making, but in a lot of instances we have got examples where they are not making anywhere near that?

  Mr Tuppen: I would not expect the people who are making at least the average profit to feel it was necessary to write to you, so you are dealing with a sample which is undoubtedly skewed. Again, I think you are confusing the economics of running a pub with the consumer offering. A pub company offers a far wider range of products than any brewer ever did. So the consumer is given a wide range of products. The effect of the Beer Orders in that respect is entirely positive. I would remind you, from our submission, that the managed houses we bought from the major brewers had something like a 2% penetration of independent cask ales. We have grown that since we have owned those businesses to 14%. Those pubs which used to sell hardly any at all, because they were in the grasp of managed house companies, are now able to buy from us and have increased their penetration of cask ales to a massive 14%, which is substantially above the national average of 8%.

  Chairman: I think the point is this: we are talking here about trying to analyse competition. Vertical integration does not support competition. Our job is to look to see if the degree of vertical integration, which your operation suggests, is consistent with having a competitive market. That is the criterion we will be using. It is not namby-pamby stuff on the partnership and being nice to your tenants, and being better than the brewers were; it is seeing whether or not the public, as consumers, and the people who are operating are getting a fair deal when you have such a big whip to crack if you choose to crack it, and that is what we are trying to assess. With respect, we are coming at it from a rather different position from you. We expect you to say what you are saying, but do not expect us to agree with you at this stage because we have not taken all the evidence yet and are still sceptical. I think this is one of the problems we sometimes suffer from when we have information overload of the kind we are getting this morning. Very fulsome answers to questions, but we are not here to be covered in snow. Therefore, you should recognise we are not here to return to the status quo. As you said yourself, it was not a nirvana before. The status quo-post is perhaps better but it is not necessarily ideal. You would probably think it is because you have got a vested interest in it. We are here to represent the public at large to see if there is a case. Silent pain evokes no response—we know that as MPs, we get it all the time. I think you have to recognise that the numbers game is not all of it. Market analysis suggests there is a degree of vertical integration. What we have to comment on is the vertical integration (and it may be acceptable to you, you are doing very nicely out of it and making pots of money and your shareholders are delighted) and whether or not the public, who are not shareholders, are getting the same good deal. That is where there is a difference between us and perhaps you have lost track of what we are about it.

  Q390  Mr Berry: If you were wanting to set up in the pub business yourself that requires you (a) to get a property and (b) to get a supplier of a wide range of refreshments—and I take your point entirely that the advantage of pubcos is that they provide a range of products because that is good for consumer choice; but you keep using the consumer choice argument and moving away from the basic problem. If you were setting up a pub you would want to lease premises and then shop around the different companies that provide a range of things to sell. I cannot imagine anybody, if the market was such that that was possible, who would not much prefer to do that. It avoids precisely the vertical integration which the Chairman referred to. It avoids precisely the fact that you have got the landlord/tenant relationship that inevitably, in a complex arrangement of this kind, involves a lot of bargaining and to-ing and fro-ing—you have got more information than tenants have and so on. Would you not concede if you were setting up a pub you would much prefer to go to that two-stage process? Would it not be simpler, clearer and more straightforward, and consumers of course would benefit as well?

  Mr Tuppen: I see absolutely no correlation between consumer benefit and what you have just said.

  Q391  Mr Berry: Each individual pub tenant would be able to shop around.

  Mr Tuppen: Perhaps I can explain to you how the consumer would likely be disadvantaged. If, as I do, I buy two million barrels of beer, I am able to buy from everyone and then make that available at a standard price to my entire estate. If I were that person who was going out looking for this individual pub, and I can go and buy one—

  Q392  Chairman: I thought there were several standard prices being charged; is that not right?

  Mr Tuppen: Let me just explain. If I was going out to buy my individual pub I might either buy it or rent it free of tie. There are 18,000 individual pubs out there I could go and buy if I had the cash. I would then look at buying my beer. Bearing in mind my pub is probably buying 200 barrels of beer per year, I would go along to four different brewers and the chap down the road and say, "I want one barrel of beer per week from you because I want to offer my consumers a lot of choice," He is less likely to give me a substantial discount than if I went along to one of the national brewers and said, "If I buy everything from you it will be a lot cheaper." The situation that you describe in the interests of profit for the individual pub would inevitably restrict consumer choice.

  Q393  Mr Berry: If you look at it from the point of view of what market structure would be most competitive and most desirable to the consumer and the tenant you would want pubcos like yourself supplying beer having the ability to buy wholesale, get beer at a good price and there would no doubt be one called Enterprise and one called Punch and a few others. Why from the tenants' point of view and consumers' point of view should you be allowed to be involved in owning property and making tied deals? Should there not be other companies then that have properties and the potential landlord can go around and lease a property that he or she feels is appropriate? It is splitting the link which is the whole point—coming back to my colleague's question—between your role in letting out property on the one hand and on the other hand providing beer at competitive prices. I think that is the logical way to structure the industry myself and you have not persuaded me that I am wrong.

  Mr Tuppen: I imagine that would be quite difficult! Perhaps we could draw a parallel with franchises where a lot of people are very successful with their Pizza Huts or their McDonald's or whatever and they take on those businesses freely. If they do that it is a complete franchise as far as I understand it and they buy everything from McDonald's. It all arrives on the truck and there they are, they sell the right-shaped burgers in the right-shaped boxes and the whole thing is entirely controlled. They pay a rent, they pay a franchise fee. They choose to be in that business. There are 33,000 pubs available to licensees in this country which operate a system which says, "Here is a business and the cost of entry is relatively low. The deal is, compared with normal commercial rent of 7.8%, the rent we are going to charge you is about 5%. The rest of that deal is we will either (or not) take a little bit of your gaming machine income and we will either (or not) charge you full price for beer or give you a £40 a barrel discount or indeed in the case of our new agreements give you as much as £100 a barrel discount. If we give you a £100 a barrel discount clearly the rent is going to be a higher price. You will be pleased to see that our price list runs to several pages. Pretty well everything you want can be made available, obviously with some exceptions." That is a structure that works very well for the benefit of the vast majority of licensees and I believe for the benefit of consumers. The danger I think was well spelt out by Tony Payne who, as I say, is far more representative of licensees than ever the FSB could claim to be. His concern was were that well-understood traditional structure to be changed it would act to the disadvantage of the majority of licensees. Take the situation where we could become a pure property company and a wholesaler. I could demonstrate to you on countless occasions areas where our licensees recognise that being part of Enterprise Inns and having a business which is committed to helping them helps them to succeed in their business. You have heard from a very small group of people who find that not to be the case. I share with Tony Payne the view that you would be at your peril if you were to change the structure of an industry on the basis of such a small sample.

  Q394  Mr Hoyle: Just a couple of things because what worries me is that you have put this assumption across to the meeting now that there is a standard price that everybody gets, that you sell out and everybody benefits from this standard price. You said earlier that you acted as "price busters" as well because where the competition is a bit tough in an area you will drop the price of your beer in order to keep your market share, so therefore there is no real competition. If competition comes in you are willing to drop your prices. What you are saying is you will fix the price in the rest of the country so therefore the consumer gets no advantage unless somebody else comes into the market to take you on. That is a worry in itself. Also do you buy near end-of-life beers?

  Mr Tuppen: No.

  Q395  Mr Hoyle: Because we do know that some people do buy near end-of-life beers to get extra money. So you do not?

  Mr Tuppen: A categorical no.

  Q396  Mr Hoyle: Okay. How often do you use those price buster specials?

  Mr Harrison: We have got over 100 licensees currently who take advantage of those.

  Q397  Mr Hoyle: Out of?

  Mr Harrison: 5,000.

  Q398  Mr Hoyle: Out of 5,000? I thought you had 9,000.

  Mr Harrison: Within our core business of 5,000 Enterprise pubs.

  Q399  Mr Hoyle: How many out of your 9,000?

  Mr Harrison: I do not know about the other 4,000 I am afraid.


 
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