Examination of Witnesses (Questions 540
- 559)
TUESDAY 20 JULY 2004
PUNCH TAVERNS
PLC
Q540 Chairman: Do you enable the
prospective tenant to see the accounts of the previous tenant
over the previous 12 months?
Mr Thorley: We do not have them
and they are not our information.
Q541 Chairman: Do you not think that
perhaps people should be required to provide you with the accounts
when they are finished because you are going to great lengths
to provide people with training, to provide transparent contracts,
but the one piece of evidence, apart from the price of beer that
you pay to the brewery that we will not bother wrestling over
at the moment, surely if somebody is taking over a business the
first thing they want to know is how the previous person had got
on? Do you not think you should have within your contract a requirement
for the person to whom you are giving a lease to be provided with
the last year of business activity or the last period of the year,
or two years? If you were an accountant advising someone to take
over a business surely you would be saying to them, "You
had better find out how this business has operated, especially
if you are going to buy the lease" as happens in some cases?
Mr Thorley: I think that is a
very good suggestion and, if at all possible, that would be fine.
The only difficulty I envisage, and this is not to talk against
it, is consistency of accountancy standards for small businesses.
To get a document which is materially efficient and consistent—I
am not an accountant, perhaps my colleague, Mr McDonald, will
want to comment—would be extremely difficult. Another thing
which should not be overlooked is that small businesses would
be even less inclined to pay tax than they are to pay rent.
Q542 Chairman: Yes, but the rent
is determined by you, the beer price is determined by you, what
they pay the staff is determined by them, I imagine, the number
of staff is determined by them, the electricity and gas they can
by and large find out within reasonable bounds, so what is the—
Mr Thorley: The range—
Q543 Chairman: What is the scope
for fiddling the taxman then?
Mr Thorley: The range of goods
and services offered by a pub, today 30% of the sales of a pub
is food and in our estate it will range from anything from 60%
or 70% down to nothing.
Q544 Chairman: Is it not reasonable
if somebody is going to come in and maintain the good name of
one of your enterprises that they should know what the food accounts
are like then?
Mr Thorley: I think it is a good
idea, all I am saying is—
Q545 Chairman: This is not rocket
science. It did not come as a bolt from the blue.
Mr McDonald: We would agree with
you that we would like them to know as well but it is just the
sheer practicality of how you get that information reliably.
Q546 Chairman: You could produce
a pro forma where they would have to make a monthly return to
you. You have them jumping through every hoop and hurdle as it
is. Another one would not make that much difference, would it?
Mr McDonald: I think they would
view that differently because they would view that as information
that they would rather not share with us.
Q547 Chairman: Do you not think they
should share it with the person whom they are selling the business
on to?
Mr McDonald: The instance where
they are leaving the pub is a different one and perhaps at that
time there is something that they could be required to prepare
that would be of use for the person coming in. It would not be
their audited accounts though because that would take some months
and would be out-of-date before we get there. This is something
we could discuss with our Retailer Forum and see what sort of
views we get from our retailers.
Q548 Judy Mallaber: How much financial
information will you therefore have available on different pubs
when, one, you are doing the rent reviews and, two, which the
business development manager has? Surely you must have a fair
amount of information on their progress and what they are doing?
Mr Thorley: Yes we do but that
information is based upon our understanding of the industry and
not necessarily the specifics of the individual outlet. That is
the point because of course they are independent business people
and they are going to operate their business in whatever way they
see fit and therefore we do not have the entire picture. Nor for
that matter do I think it would be a good idea that we have the
entire picture because that is the whole point. They are independent,
they are free to do as they wish.
Q549 Chairman: Except they have to
buy their beer from you.
Mr Thorley: But, as I said, the
beer itself is only an integral part of the sales. Within a one-mile
radius of here you can go into probably 40 pubs and they will
all be slightly different. They will be catering for a different
market. If you go into the St Stephen's Tavern it sells more food
than the Red Lion.
Q550 Richard Burden: Can we turn
to the decision of the Court of Appeal in Crehan v Inntrepreneur.
If that judgment stands do you think it will have any relationship
or relevance to the way Punch does business?
Mr Thorley: No, primarily because
it does not have any effect on the type of tied agreement that
we operate to. Specifically and to show that we are very open-minded
in terms of our approach to this process we appointed an independent
law firm who represented the retailer in the case of the Crehan
judgment to write a report for us. That is Messrs Maitland Walker
and we produce the report in the documents. They categorically
state that the Crehan judgment has no impact and moreover
they actually highlight the fact that the tie as in operation
today is materially different in competition terms to the tie
that operated in the case of Inntrepreneur and also at the time
of the brewers. I think they gave an example that Inntrepreneur
offered 24 beers on their price list; we offer 190.
Q551 Richard Burden: But that case
rested on two points, did it not? One was the nature of the tie
and that was the tie that foreclosed the market to competing breweries.
What you are saying there is because you offer a greater range—
Mr Thorley: The example of J W
Lees or Adnams. Had John Willy Lees wished to sell their beer
in the pub estates of the mid-80s they would have been unable
to do so. There was no ability to get to those pubs because the
brewers had a tie which would restrict them from selling that
beer.
Q552 Richard Burden: This was a case
of a tenant. The issue is if the tenant felt that by going to
a different kind of brewer or a different brewer, even if he had
got a big range there already, the prices involved (if the tenant
wanted to go elsewhere and because of the tie you had foreclosed
their chances of doing that) would that not satisfy the same condition
that was in that case and was based on a 1991 case?
Mr Thorley: No, it is a totally
different set of circumstances. I am not a legal expert. We did
provide analysis of this in our submission and are quite happy
to provide analysis from lawyers if that is what you wish but
it is materially different. I will just refer you to the pages.
It is paragraphs 326 through to paragraph 339 and it does give
an understanding.
Q553 Sir Robert Smith: You have mentioned
already that you take a 50/50 share of profits from the slot machines.
Do you take any royalties from the machine companies for allowing
them to put machines in?
Mr Thorley: We use it to subsidise
the rent. The rent in our estate has gone down by 7% in the last
two years as we have negotiated better terms. Because there are
reasonably good statistics on the machines—
Q554 Sir Robert Smith: Sorry, do
you charge?
Mr Thorley: To the extent we get
royalties I am not entirely sure because there are a large number
of different suppliers and each contract will be subtly different.
We have used it to reduce the levels of rent. I can give you some
statistics but the levels of rent we charge for machines are materially
lower than are available in the free trade, and we can give examples
of that. Moreover they have fallen I think by 7% in the last year.
Q555 Sir Robert Smith: Do you take
royalties for any other products coming into pubs?
Mr Thorley: We have an arrangement
with a company called Sinclair Collis for cigarette machines but
it is not a royalty as such, it is based upon the sales of the
machine. We take a small commission on cash machines. I think
there are 200-odd cash machines in pubs. Again in all cases only
to the extent that the deal is better than would be available
to the retailer individually.
Q556 Mr Clapham: Can I ask Mr Thorley
a couple or three questions about breweries. For example, we have
got lots of small breweries in this country and you mentioned
Barnsley Bitter now being produced by a small brewery, but they
do find it difficult to get on to a distribution list. How would
a small brewery get on to your distribution list? Would they have
to pay a fee to be on that list?
Mr Thorley: We sell a very large
number of brewery beers. We have two arrangements depending on
the volume essentially. If the volume is of a reasonable size
that we can distribute regularly then it will go through the normal
process, it will be on our price list pretty much permanently.
In addition to that, focusing particularly on pubs that demand
an even wider range of cask ale, we have a cask ale scheme and
in that we offer 15 products each quarter and those 15 products
we are talking about are very small volumes, frankly, which are
easily within the abilities of even the very smallest brewers.
Some of the brewers I have never heard of. Possibly a much more
widely read audience, particularly Mr Evans, will know some of
the beers but we do seek to try and extend that range as much
as possible. In terms of how that works perhaps I will pass you
on to Francis who will explain.
Mr Patton: In essence if there
is a demand for a product from the customer using a pub then we
will do our level best to supply that. As Giles has said, there
are the main brands which go through the central distribution
network and as long as there is a throughput of five containers
a week of any particular product from depot then we will distribute
that. In terms of the finest cask the way it works is that we
will take the order a week early so we can ensure that the demand
is there for the smaller brewers and they know in advance what
is needed to be brewed (which helps them because one of the biggest
problems they have is managing demand for such small quantities
of product. They need to know quite well in advance what is happening
so that is the way we operate. We take an order from a licensee
a week in advance, place that order with the smaller brewers,
that comes into the central network and is distributed through
the network. In terms of a listing fee we do not have a listing
fee as such. We ask that each of those small brewers gives us
a small amount of money which we give to the licensee for him
to use to promote those products within his pub because, unlike
the major brewers, a lot of those licensees do not have national
advertising campaigns and it is quite useful for them to be able
to promote, whether that is through glassware or marketing in
some form or another. That is the way that we operate.
Q557 Mr Clapham: Are there any other
measures that you use to help small breweries? For example, some
of them would find it difficult to deliver their resource to a
centralised point. Do you help at all with that?
Mr Patton: We do. On top of that
what we do do on limited occasions where the demand is there—and
we have got five in place at the moment—is allow them to
deliver direct to the pub and invoice through our system so that
we can reinvoice back out and we use that to try and help build
demand in particular areas to get them to a level where they can
then start taking part with the big brewers.
Mr Thorley: We have a small arrangement
with the "beer seller" as well to distribute some brands
but again it is only a small proportion. I think it is an area
we need to do more work on frankly primarily because I speak to
Nick Stafford at SIBA quite regularly and one of the big issues
that some of the smaller brewers have is the return of containers
and the responsibility for the return of containers is our distributor
who is not as good at taking back empty barrels as it is at delivering
full ones, surprise surprise.
Mr Patton: It is quite an important
area because obviously being a live food product (unlike the lagers
that have been talked about today) once it is delivered it has
only got a short shelf life, particularly once it has been broached
it has three days to be served, and once in the pub you are talking
about a ten-day shelf life anyway. So it is something that has
to be managed quite carefully to ensure that nobody suffers with
product going out of date and being unsaleable on site.
Q558 Mr Clapham: Obviously you go
to some lengths to help small brewers but, given the situation
across the industry, do you feel that a guest beer provision would
be helpful?
Mr Thorley: My big concern about
a guest beer provision is I have seen how it has not worked to
the benefit of regional brewers at all and yet I have seen how
the tie arrangement has worked materially to the benefit of certain
regional brewers. I suppose my bias is to the fact that those
who embrace the situation get advantage out of it. We have around
500 outlets in our estate which still have a guest beer right
which is a legacy of their original brewery ownership. In the
surveys that we did only 17% take advantage of that guest beer
right, which is buying a guest beer from somebody else, and 68%
buy brands which we sell already from the brewer even though it
is already on our price list. That does not materially increase
choice. One of the most curious effects of Beer Orders and the
Guest Ale Provision as it worked historically was that it did
not restrict the brewer that was the tied supplier to the pub
from selling beer independently and separately to the pub. I had
an example in a previous job where 90% of the guest ale that was
being supplied was being supplied by the national brewer who had
historically supplied that beer, albeit they took the order themselves
and delivered it on the same lorries as the deliveries from the
pub company went. That did not give any more choice whatsoever.
What I would like to do is look at companies like Charlie Wells,
like JW Lees, like Adnams, who have taken advantage of the system
and grown their volumes and grown their business immeasurably.
We sell almost 30,000 barrels of Adnams beers now. Adnams is in
Southwood, it is about as isolated as Ochil or Aberdeen in terms
of distribution, and yet they have embraced the situation that
has existed and done exceptionally well out of it.
Q559 Mr Clapham: Are there any suggestions
that you have got as to how a small brewer might be helped?
Mr Thorley: I think that we definitely
need to look into logistics. My belief was that having a small
brewer deliver a larger quantity in one go to a depot and for
us to then take responsibility for delivering it to the individual
outlets was more efficient, that made sense, but clearly for a
number of the smallest brewers they felt that did not give them
control of the protection of their product and they are very passionate
about the quality, etcetera. All we really need to look at is
a better way of getting the very smallest brewers' products to
the pubs in the most efficient way. As I said, I have been in
regular discussion with Nick Stafford at SIBA about working out
ways to do that.
Mr Patton: Our estate base is
70/75% local pubs. One of the previous witnesses was asked about
cask ale and over 75% of our pubs stock cask ale, it is a core
part of their proposition, and if we are going to attract the
right customers into those pubs to help those retailers we have
got to offer the right brands. It is in our interest to make sure
that they are available and give a point of differentiation in
those pubs. The one point of differentiation between pubs and
the off-trade is cask ale. That is the only thing we have which
is different and it is something that we should play to and make
better use of.
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