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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