Examination of Witnesses (Questions 500
- 519)
TUESDAY 20 JULY 2004
PUNCH TAVERNS
PLC
Q500 Sir Robert Smith: Have you ever
been tempted to rent out commercially some of your properties
on a non-tied basis?
Mr Thorley: Because of competition
regulations we have a very small number. I think it is about 40
that are leased on a free-of-tie basis. I should say that one
of them is leased to McDonald's in South London so it is hardly
selling much beer, unlike Mcdonald's in France! So we do have
some experience of that and on average the sum of the income streams
from those rents alone—let's face it, it is much less effort
to collect just rent. Invariably it is much more straightforward
to calculate because we are not that interested operationally
in the underlying business and those are factors which would be
horrific for the vast majority of pubs if we took that attitude.
Q501 Sir Robert Smith: From your
point of view, if you are saying on those 40 it is a much cheaper
operation and much more straightforward, what is it that makes
you not want to do that for all the pubs?
Mr Thorley: Because we are a specialist
operator of pubs. We run some of the best pubs in the country—I
am sorry, our retailers run some of the best pubs in the country
that we own and we take the view that it is a particularly important
business model which protects a huge majority of the pubs in the
UK and I would be absolutely horrified as to how many pubs would
disappear if it went just to a rent model. The number of times
that I have seen when there are pubs for sale property companies
poring all over them looking to convert them into flats or bijoux
residences, particularly at times when the property market is
high, would have very, very significant consequences in terms
of the number of pubs lost. For us our interest is much wider
than that. We can continue to operate the outlets as pubs because
we have an interest in the operation of the business. I will give
you one example. You could look at two pubs, one rented for £20,000
on a free-of-tie basis and one whereby the income received by
the pub company is £20,000. For argument's sake it is £8,000
worth of rent, £4,000 worth of machine income and £8,000
worth of margin that we are not allowed to tell you how much we
make—allegedly. I can tell you one thing. The two of them
are making us exactly the same money. One of them is materially
lower risk. That is the one where the rent is only £8,000.
From the retailer's perspective one reacts immediately to any
change in the trading performance of the pub and that is the one
which is tied. It reacts immediately when the guy who regularly
plays his machine goes on holiday. It reacts immediately when
one of the locals dies, as I found to my cost talking to a retailer
once in Coventry who had a very unfortunate situation where he
bought in ten barrels of mild for Christmas and one of his four
regular customers of mild, who drank 12 pints a day, keeled over
the week before Christmas and he had too much stock. It reacts
immediately to that far more quickly than we could ever react
in rent reviews or in any form of rent assessment process. Even
if my business and area managers went round every single week
to assess the rents they could not react as quickly as the actual
volume of beer that is sold in a pub and that is what protects
the vast majority of individual outlets.
Q502 Sir Robert Smith: So how does
the yield on your pub estate compare to the yield on wider commercial
properties?
Mr McDonald: I think the way that
the rent is assessed on a normal pub is not on the same basis
as it would be for a commercial property. Commercial property
companies have very little information about the operation of
that pub and hence they can only rentalise on the things that
they know, so they might rentalise on the value of the pub or
they might rentalise on the square feet or what have you. The
average rent for that is about 7.8%, as we have seen. The way
we would calculate rent is very, very different from that and
is on a share of the profit that the retailer can make in that
pub and typically, as has been said, we look at a 50/50 share
of the profit that is available to that pub. That is a much fairer—and
I think everybody in the industry agrees—and better way
to calculate the rent for that pub. If you look at the return
capital that we make it is quite a different thing from the yield
that a property company would make but you would be talking in
the order (after tax) of about 7.4%, which would be our return
on capital. That compares with our cost of capital of about 6.4%.
You can see at the end of the day that the sort of levels of income
we make are not huge compared with the cost of funding the estate
that we have.
Q503 Sir Robert Smith: How do you
react to the suggestion that there should be an industry standard
for tied rents as a percentage of turnover?
Mr McDonald: I just think percentage
of turnover is a very inaccurate way to assess the proper rent
and the fair rent for a pub on a tied lease. We know far more
about how that pub operates than any property company would ever
know about the properties that they have and therefore we can
calculate a much more appropriate rent than simply a percentage
of turnover. Different pubs have very different characteristics
of turnover. They might have different costs, different mixes
of sales, so percentage of turnover would be far too bland.
Q504 Mr Evans: I suppose we should
make it clear that the person who keeled over: it had nothing
to do with the mild, did it?
Mr Thorley: No, definitely not.
The licensee was a former fireman and would have been able to
look after him had he keeled over for that purpose!
Q505 Mr Evans: You talked about certainty
of price. One of your tenants says "The Punch list price
for a barrel of Carlsberg is £313.43. The off invoice discount
amounts to £52.56, making the price to me £260.87. If
I were a free house this price to me would be around £195.
So I am paying 22p a pint more as a Punch pub." Do you want
to comment on that?
Mr Thorley: That may be the case
in those individual circumstances for a single spot price for
a barrel of beer. We offer 80% of the beer brands brewed in the
UK. If that retailer wanted to get a package which gave him certainty
for the length of his lease of not only the price but also the
discount that we are offering and also certainty of delivery of
the product and the range of products then I would ask him what
the price would be. I do not dispute that on an individual basis.
Individual prices for individual products may be more than would
be the case for an individual product, but it is interesting that
one of the previous submissions by Mr Jacobs suggested that a
200-barrel pub received a discount of around £50 which, as
that letter said, was about the discount that our retailer was
getting under our agreement.
Q506 Mr Evans: You say certainty
of price, what he is saying is certainty of a high price, and
that is part of the problem. The fact is that an individual tenant
would not necessarily go to individual brewers to buy his beer
but he would go to a wholesaler and there would be competition
out there. That is what he would do. It is not as complicated
as you make it sound, is it?
Mr Thorley: The biggest wholesaler
in the UK is owned by the biggest brewer. The second biggest wholesaler
in the UK happens to be owned by the second biggest cider maker.
The reality of the situation is that the brewers will cut out
the wholesalers. The international brewers, as they are now, account
for more than 80% of the beer sold in the UK and we account for
less than 12% of the pubs.
Q507 Mr Evans: You do not think that
a number of wholesalers that are not currently there would come
into being to meet the demand?
Mr Thorley: I should say the people
that distribute the beer, the only people that have the distribution
capability to distribute to the country, are the national/international
brewers. The people who already control the biggest wholesalers
are the international brewers. That is the reality and that is
the danger. That is what the competition authorities have investigated
many times and sought to avoid. We act as a counterbalance to
that. We are not as big a counterbalance as the supermarket chains
who have 70% of the off-trade but we are a counterbalance to that
and at all stages we seek to use that counterbalance to subsidise
the package.
Q508 Mr Evans: Let me go to another
former tenant of yours, because this one went bankrupt. He wrote
to us and he said: "I believe that a monopoly situation was
broken under the Beer Order review only to be replaced by a potentially
more draconian monopoly by the pub companies. If this is allowed
to continue there will be many more cases such as mine and more
unsuspecting individuals will face financial ruin".
Mr Thorley: I cannot comment on
the individual circumstances, but the fact of the matter is that
the number of pubs in the UK has fallen by less than 1% in the
last 15 years since the Beer Orders. The number of pubs are not
going, there are many, many people seeking to operate them and
the vast majority of our retailers are doing exceptionally well.
The number of people who fall into financial difficulty, or bankruptcy
in the case of that individual, is very, very small and tiny compared
to virtually any other industry.
Q509 Mr Evans: This brings me back
to the tie which is basically something I am very interested in.
You say that not many of them are going through but it looks as
if a lot of them are going poor, a bit like the farmers in my
area, they do not go through they actually get poor. Tim Martin,
the Chairman of Wetherspoon's, indicated that in the letter he
wrote referring to the £37,000 less the £8,000 rent
and then they have got to invest all that money in equipment and
what have you. These people are not making huge profits. Would
it not be far better if we released these people from the draconian
tie that is there to allow them to go into the free market to
test whether they would either want to have a contract with you,
which they would do voluntarily, or they could go to a wholesaler
and do it themselves and then you charge a proper market rental
for that pub?
Mr Thorley: It is not a draconian
tie. It is a tie that has protected the pub industry for a very,
very long time and it will continue to protect the pub industry
for a very long time. There are 17,000 to 18,000 pubs which are
free of tie which are readily available for an operator to run.
They can test the market. As evidence has already been provided,
the price of beer is not different between these different sources.
Managed house chains, like Wetherspoon's, buy their beer materially
cheaper than we can and yet in managed house companies overall
the price of beer is about the same as it is in free trade outlets
as well as in tied outlets. That is not my information, that is
the information of independent statistical organisations like
Nielsen. That is the reality of the situation. If that is the
belief, that there would be considerable improvement if the tie
was removed, I am afraid the only people who would materially
benefit from that would be the international brewers who already
have the infrastructure and the ability to service those outlets
and would do so quickly, and consumers would lose considerable
amounts of choice. International brewers make decisions which
are made in Copenhagen or in Leuven for completely different reasons.
The Chairman himself has experienced a brewery closing in his
constituency simply by reason of one merger not taking place and
another one going a different way. That reduced choice, that reduced
the availability of Skol lager in Scotland, and yet if you talk
to retailers today they complain that not having Tennent's lager
is much more important. The market changes. The market is extremely
competitive in the tied environment. It would be dangerously uncompetitive
if the tie did not exist and pub companies like ourselves did
not act as a counterbalance to the international brewers.
Q510 Mr Evans: Do you accept the
fact that the Beer Orders tried to solve one problem and in essence
they have created another, they have created the pubcos?
Mr Thorley: No, far from it. I
think the beer market has become incredibly competitive. That
is not our view, that is the view of the OFT and that is the view
of the European Commission. The thing that was unfortunate about
the Beer Orders was that when the national and international brewers
were required to sell their pub estates there was no requirement
as to how they should sell them, so naturally they took the strategy
of selling the worst first and continued to keep the biggest and
best pubs for many, many years. It is only recent market pressure
by shareholders predominantly that has forced them to sell those
remaining estates. In fact, the biggest national brewer only just
recently sold its pub estate earlier this year.
Q511 Chairman: You said that the
ending of the Beer Orders was a great success but we have discovered
that the sale of beer on licence has collapsed. A 19% drop, is
it not?
Mr Thorley: The highest point
in sales of beer was 1982. The thing that had the biggest effect
on the sales of beer in the on-trade was the miners' strike. Ever
since then, the de-industrialisation of the country has had more
effect than that. If you track the performance of on-trade sales
from 1982 right the way through to today it is very, very consistent.
That was a period during which the brewers had control of the
pub estates right the way through the advent of the pub companies
and continuing.
Q512 Chairman: Okay, the trend had
started but a supposedly more competitive market has done nothing
to turn it round. The miners' strike was 1984-85, it started two
years before that you are telling me and it was in 1989 that the
Beer Orders were withdrawn.
Mr Thorley: 1992.
Q513 Chairman: Sorry, 1992. In the
succeeding 12 years nothing has happened to turn that round, has
it, or has the trajectory smoothed off?
Mr Thorley: No. In actual fact,
if you look at a different trajectory, which is one that looks
at the alcoholic content of beer, we talked about my gentleman
in Coventry who drank 12 pints of mild and he probably would not
have done himself any harm drinking 12 pints of mild other than
regular trips to the toilet but the alcoholic intake of a person
going to the pub today is very similar. In fact, that graph is
almost flat. What is happening is people are drinking lower quantities
of lower alcohol standard lager, higher quantities of premium
lager, higher quantities of premium ale at higher ABV and actually
the alcoholic content is broadly the same. They are also drinking
considerably more wine, considerably more spirit mixers, products
like blueberry flavours, etcetera. That is changing the dynamic
of the marketplace. It does not mean that pubs are less profitable,
far from it, all the surveys suggest that pub turnover and profit
has improved in that time.
Q514 Chairman: The number of people
going to pubs?
Mr Thorley: Is about 80% of the
adult population.
Q515 Chairman: I am talking about
before the Beer Orders and now.
Mr Thorley: I could get the statistics
for you but I honestly do not know, to be honest.
Q516 Chairman: What I am not clear
about is if the Beer Orders were so good and the amount of beer
has dropped, you tell us that pubs are roughly the same number,
the estate is roughly the same for the country, have we, as citizens,
benefited from it? You might have benefited but I am not sure
that we, as citizens, have benefited.
Mr Thorley: If you had gone to
a pub prior to the Beer Orders and you had one pub in your village
which was a John Smith's pub in a village outside Barnsley, you
would have got John Smith's bitter and you would not have been
able to get Webster's, you would not have been able to get Stones,
you would not have been able to get Ward's, you would not have
been able to get Tetley's. Now those products are all available
to that pub in that same village from the pub company. The pub
company that owns it now offers all of those products and the
retailer can choose. For that matter, as a result, breweries have
been reinitiated, so Barnsley Bitter is now available again.
Q517 Chairman: What about the price?
Mr Thorley: The price of the product
will be determined by the market.
Q518 Chairman: I mean over the period
has the price of beer been RPI or has it been more than RPI?
Mr Thorley: The statistics suggest
that the price of a pint of beer has gone up by just a little
bit more than the level of RPI.
Q519 Mr Hoyle: That huge list of
choice, how many breweries does that actually represent?
Mr Thorley: Stones is made by
Corrs, John Smith is made by S&N, Ward's is now made by Jennings.
It was made in Sheffield, yes. Tetley's is made by Carlsberg.
Barnsley Bitter is Barnsley Beer Company.
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