Examination of Witnesses (Questions 423
- 439)
TUESDAY 20 JULY 2004
THE WOLVERHAMPTON
& DUDLEY BREWERIES
PLC
Q423 Chairman: Good afternoon, gentlemen,
and thank you for your forbearance. Perhaps if you could just
introduce yourselves and then we will begin.
Mr Findlay: Good afternoon, Chairman.
A very brief introduction from us. This is Stephen Oliver, the
Managing Director of the Union Pub Company which is WDB's tenanted
and leased pub business. Just by way of brief background, WDB
is a relatively unusual company in today's market in that we still
have tenanted pubs and managed pubs. We have about 1,050 tenanted
pubs and 550 managed pubs. In addition to that we are unusual
in that we still brew beer from two sites, one in Wolverhampton
and one in Burton. It is a relatively unfashionable structure
but it is one which we think has benefits both for our customers
and commercial benefits to us as a company so we feel it works
well.
Q424 Chairman: Could you illustrate
what the advantages are to the tenants and your customers?
Mr Findlay: Specifically from
my point of view for a tenant it probably works on two levels.
One is emotive. You get all sorts of different types of tenants
but for many tenants within WDB they would consider themselves
to have a very strong link to the brewing side of the business.
Forgive me for saying this Stephen, but they are more interested
in being Banks's tenants, Marston's tenants or Mansfield's tenants
in our case than they are about the Union Pub Company per se.
All we are in effect is an organisation that is there to sort
out their problems. They are interested first and foremost in
their business and their beer and their customers and the rest
of the organisation is effectively support. It is quite difficult
to work out exactly what their link to the brewery means. It is
a bit intangible. It is something to do with tradition. It is
not necessarily that the majority of their business is in selling
Pedigree, for example. They may be a pub which majors on food
or wines and spirits or whatever but they like that strong link
to the brewing business. That is the emotive side of it. Practically
I think that tenants of WDB get good advice from the brewing business
on keeping beer particularly the types of ales that we sell within
our business because beer is a passion for them. They also benefit
I think from the fact that we are a pub operator. We operate and
manage our own pubs so we know what is going on in the market,
we see what is going on in the market in terms of trends, what
might be happening with gaming machine income or what is being
consumed by people in pubs and we can pass that information on
to Stephen and his team so that they can use that to help tenants.
Q425 Chairman: You also have this
other differentiation between the Union Pub Company and Pathfinder
Pubs. I believe the Union Pub Company average turnover per tenanted
pub is around about £100,000 whereas the Pathfinder Pubs
division has an average turnover of £560,000. Could you explain
what the difference is? How do they contribute to your profit
streams in each of their different ways?
Mr Findlay: The difference in
the level of turnover comes from two things. The first is that
managed pubs will tend to be bigger, and that is a matter of economics.
Tenanted pubs will, generally speaking, tend to be smaller. The
second point is that within managed pubs we have a manger and
all of the turnover that goes into the till is reported by us
as turnover, so we are effectively recording as turnover what
the consumer pays for the product. In the Union Pub Company we
record as turnover rent and the beer we sell the tenant at wholesale
profit but not the amount of turnover they are generating by selling
on to the customer, so there is a difference in what the mix of
turnover is within the business. As far as profitability is concerned,
I think that is an interesting question because there is a lot
of talk about whether tenanted pubs are better or more profitable
than managed pubs and so on. I have to say that from the point
of W&DB we are relatively ambivalent, for example, about whether
we are acquiring tenanted pub estate or managed pub estate because
on average the return on capital that we invest, which in my view
is the best way of measuring profitability, is approximately equal.
There might be a difference of one or two percentage points from
time to time, but that is about it. Overall the levels of return
are very similar.
Q426 Chairman: Just for the record,
you have mentioned that the £100,000 was, you might say,
a pared down figure. Could you give us what you imagine the turnover
to be over and above the £100,000 so we can get a point of
comparison?
Mr Findlay: The best way would
be to put it on a turnover per week comparison. The average retail
turnover per week in the Union Pub Company from a tenant's point
of view—we are estimating—would be about £3,000
to £3,500 a week.[1]
Within the managed pub estate we would be talking about a pub
on average trading at about £10,000 a week. That is a function
of size of outlet.
Q427 Chairman: You are talking about
£180,000 a year for one as against £560,000 for the
other?
Mr Findlay: Correct.
Chairman: That is fine. It was just that
it was not quite the whole story. That is fine.
Q428 Sir Robert Smith: WDB Brands,
your brewery division, supplies beer to other pubco pubs. How
do the discounts that WDB Brands give to the Union Pub Company
compare with those that it offers to other pubcos?
Mr Findlay: I have to be slightly
careful about that question because there are customers of ours
in the room. The fact is we supply the Union Pub Company at broadly
the same price that we would supply beer to other pub companies
of a similar type, ie tenanted pub companies. The average discount
that we would give across the products that we supply is approximately
£120 a barrel. It will be more for certain products and less
for others. On a lot of products it will depend on the type of
product it is, but that would be the average.
Q429 Sir Robert Smith: Do you also,
from the consumer's point of view, have a figure for the average
price of beer in the Union Pub Company compared with a Pathfinder
Pub?
Mr Findlay: I could not give you
an average. What I would say is that within the Union Pub Company
we would have pubs which operate at the premium end of the market
where their prices will be high and we would have pubs operating
at the value for money end of the market where their prices will
be relatively low. Pathfinder, as a managed pub business, generally
speaking would be a value for money operator. It is not cheap
but it is not expensive, it would be very much mid-range pricing.
Mr Oliver: I think it is also
worth making the point, of course, that the pricing of beer, and
any other product for that matter, in a tenanted pub is entirely
within the gift of the tenant or the lessee.
Q430 Sir Robert Smith: Obviously
affected by how much they buy it for.
Mr Oliver: And affected by local
market conditions, etcetera.
Q431 Mr Evans: We heard from Mr Tuppen
that he said something like 84% of his tenants were happy and
he thought there was only about 16% that had a problem. Have you
done a survey of your tenanted pubs and found what the reaction
to you is by them?
Mr Oliver: We have. We have not
surveyed the whole of our estate, which is just over 1,100 pubs.
What we do do as a support for new starters is every tenant or
lessee who joins the Union Pub Company is surveyed on a regular
basis, in fact every month right up to six months, to find out
what issues they may have, where they need additional support
and help from us so that we can do something about it. What we
find, of course, through that process is that there is a very
small degree of discontent with us. I would hesitate to put an
absolute figure on it but I would like to feel that in the majority
of cases, the vast majority of cases, customers are pretty happy
with the service that we provide.
Q432 Mr Evans: I think you got the
gist as well in the questions I was asking previously about the
discontent that is there by the tenants that it goes to the fact
that they are unhappy at paying higher prices when they are tied,
the income streams on behalf of the pubco coming from the gaming
machines and the fact they have to look after all their own maintenance,
get their insurance from the pubco, all of those sorts of things.
Do you think it would be better for the industry, for the consumer
particularly and for the tenants, if the tie was broken completely
and it was just a rental that was charged, very transparent?
Mr Oliver: Without wishing to
rake over all of the answers that Ted Tuppen gave, because I thought
they were pretty comprehensive answers, our view very definitely
is that the tie is really important to us and it is important
to the industry. This is a package deal. This is something that
tenants and lessees go into with the opportunity of full support
from the brewery, particularly in our case. We have, of course,
a very strong interest in maintaining the tie because of our heritage
of brewing with two breweries, one in Wolverhampton, one in Burton,
both of which produce cask ale, both of which sell a lot through
our own pubs. I think you have got to think what would happen
to our business if that tie were broken. The chances are, frankly,
that the ales that we sell would be replaced in many instances
by products from the major breweries and we would see possibly
the closure of one, if not two, of our breweries.
Mr Findlay: The risk is that the
beneficiaries of a removal of the tie would be the lowest cost
producers with the biggest marketing budgets and my view would
be the lager brands of the national brewers, so the trends that
you have seen in the market over the last ten years of a move
away from ale into lager would be exacerbated by a removal of
the tie.
Q433 Mr Evans: Do you see it as more
choice for the consumer, for the customer and the tenant, being
able to offer a wider variety? Why do you think that two of the
breweries might close?
Mr Findlay: I think you would
get an illusion of choice because what you would get is a lagerisation
of the product portfolio with very similar lager brands where
you cannot actually distinguish one from another and the loss
of opportunity for other products which are actually very unique.
Mr Oliver: It is probably worth
making the point that although we are from a cask ale heritage,
we are very passionate about cask ale in general and recognise
that customers going into our pubs want to see a range of beers,
not necessarily just the ones that we brew ourselves. In fact,
Wolverhampton & Dudley Breweries in total, and the Union Pub
Company as part of it, offers nearly 40 cask ale brands in total
at some point during the year, only 16 of which are actually brewed
by us. There are over 30 which come from other brewers. Some of
those are very big, well-known national cask ale names, some of
them are very small local breweries who we try and support in
areas where we have got a concentration of trade and where there
is a local market demand. We are as flexible as possible in offering
consumer choice.
Mr Findlay: If you take a brand
such as Marston's Pedigree, nearly 50% of Pedigree is sold to
pubcos, so the way that the tie works and the ability of the pubco
market to buy product from us and distribute it through their
own estates is extremely beneficial to us as a brewer.
Q434 Chairman: How much of your cask
beers do you sell in your own pubs?
Mr Findlay: Of everything we brew,
approximately 30% of our production goes through our own pubs
and the rest is into the free trade market, other pubcos and the
take-home market, mainly supermarkets and stuff.
Q435 Chairman: And how many of your
pubs stock your real ales?
Mr Oliver: Round about 30% of
all of our pubs stock real ales as a main line.[2]
A significant extra proportion of course have them from time to
time on a guest basis but round about a third.
Q436 Chairman: So we are talking
about 500 of your 1,600 pubs roughly?
Mr Findlay: When you say real
ales you are talking about cask ales?
Q437 Chairman: Cask.
Mr Findlay: They all stock the
beers that we produce.
Q438 Chairman: What I am trying to
get at here, following up the questions and the answers, is that
you are almost going back to something before the Beer Orders
and you are saying that where there is this link between beer
production and the protection of real ales then that could be
separated from the other questions of just the straightforward
pubco which only exists to rent premises and sell beer?
Mr Findlay: If you strip away
the issue of ale production and take that out of it, having explained
our views about that, I have to say that I think the idea that
a pubco could be split into a wholesaling operation and a property
company would be bad news for the public house sector as a whole
because what pub companies do is invest a lot of resource in managing
what is actually legally a very complicated business. We provide
a lot of advice to tenants that a property company just simply
would not be able to do. An example of that would be the introduction
of the licensing reforms and the new Licensing Bill which is coming
out next year. We have invested over £1 million in helping
our tenants through that process. That is the sort of thing we
do because we have a relationship with them based on knowledge
of the business, knowledge of the trade, and the fact that we
sell beer to them as well.
Q439 Mr Evans: On the answer you
have given the Chairman about the percentage of your own estate
that takes cask ales, do you not fear that there is a lagerisation
within your own estate?
Mr Oliver: There is indeed a lagerisation
because again as we are from a cask-brewing heritage we are over-represented
in ale in total within our business so we are seeing a growth
in lager and have done consistently over the last few years. That
does not mean to say that we are trying to downplay ale—far
from it—but actually our category is out of line.
Mr Findlay: It comes down to the
fact that we run our pubs to reflect what consumer demand requires.
If that requires more lager and particular brands of lager that
is how we run our pubs. What it does mean is for our beer business
we will work doubly hard to extend the distribution of our ales
through pubs that we do not own. That is again coming back to
the point about the tie—it is important to us.
1 Note by witness: We
estimate that the average tenants' turnover within The Union Pub
Company estate is £4,400 per week, not £3,000 to £3,500
as stated. The annual turnover referred to by the Chairman at
Q427 would thus be £230,000, not £180,000, as stated. Back
2
Note by witness: 84% of our
tenanted and leased houses stock cask ale on a regular basis.
30% take a guest ale. The number of houses stocking cask ale in
The Union Pub Company and referred to by the Chairman at Q436
is therefore 950, not 500. Back
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