Pub Companies - Business and Enterprise Committee Contents

4  Benefits of the pubco tied model

109.  The Trade and Industry Committee concluded that:

On the basis of the evidence presented to us we feel that the immediately quantifiable cost of the tie is usually balanced by the benefits available to tenants.[164]

Their findings were cautious, and they warned that it was possible benefits were overstated. The pubco tied model does offer benefits to lessees; the question is whether those benefits are as extensive as claimed.

Low cost entry and opportunity for entrepreneurs

110.  The ability to lease a pub, rather than having to buy it outright, should provide a low cost entry into the pub industry. Punch provided us with the following comparison of costs for purchasing a freehouse as compared to leasing a tied pub:

Table 11: Capital in-going costs - purchase vs. tied lease



—   —  BUY


—   —   —   —  LEASE


—  Purchase price —  —  £650,000 —  —   —  —  
—  Loan —  70%

—  LTV[165]

—  £455,000


—  —   —  —  
—  Balance —  —  £195,000 —  —  Deposit —   rent—  £8,000
—  Stamp Duty —  4%—  £26,000 —  —  Stamp Duty —  —  £3,048
—  Fixtures

—  & Fittings

—  —  £12,000 —  —  Fixtures

—  & Fittings

—  —  £12,000


—  Stock &

—  Glassware

—  —  £3,500


—  —  Stock &

—  Glassware

—  —  £3,500
—  Total Cash

—  Required

—  —  £236,500


—  —  Total Cash

—  Required

—  —  £26,548

Source: Ev 176

111.  However nearly 60% of those who responded to the question "why did you choose your tied pub" in our survey told us the attraction was "the specific pub".[166] Fewer than 25% cited the cost of entry as a factor. It is possible that respondents underestimated the influence the low-cost entry had on their decision, but it is also clear that the lessees choose their business on the basis of the premises available.

Fig. 3

Source: CGA

112.  Although those buying a freehold property gain an asset, a lease may also have intrinsic value. One of the advantages put forward for a long assignable lease is that it gives aspiring business people the opportunity to build up a business and sell the lease on at a profit. Greene King said:

experienced operators may be attracted to the lease model because of the financial benefit on assignment. The longer lease agreements clearly benefit successful destinational businesses.[167]

Punch said that the average premium on assignment in the 12 months up to September 2008 had been £71,000.[168] It is clear there is a prospect of profit from this route — our survey showed that the average amount lessees had paid for a pub direct from their pubco was less than they paid if they bought a lease assignment from an existing lessee. However, many lessees do not in fact benefit from the power to assign their lease. Fewer than 30% of those in our survey had actually bought their lease through assignment. Indeed, the ALMR found that the number of new openings in the pubco sector was two thirds lower in 2008 than in 2007 and suggested that whereas previously a pubco lease could easily be assigned to a new operator when the lessee got into trouble, or assigned to a temporary management company this was no longer the case.[169] Individual submissions to our inquiry also backed this up — we have heard from lessees who were keen to assign but who were unable to find anyone to take their lease on.[170]

113.  Some witnesses considered that the pubco model no longer offered a low-cost route into the system. Lessees told us:

Nearly all new pubco leases attract a premium and many properties require substantial refurbishment. The argument that a tied lease is a lower cost way into the market is rapidly diminishing.[171]

114.  We conclude that pubcos may offer a lower cost route into the industry and the opportunity for a lessee to create or maintain an asset in the assignment value of the lease. However, this benefit is accompanied by uncertainty about the value of the asset which a lessee is purchasing, and the extent to which that value can be maintained. While those who purchase a freehold property may face higher initial outgoings, they obtain a tangible asset. Purchasers of freehold leases have greater commercial freedom.

115.  Moreover the attraction of low cost entry should not be overstated: a very significant majority of those who responded to our survey said they were attracted by a particular pub, not a particular business model. Lessees apparently often choose tied pubs simply because they are what are available in their preferred location, or because they are attracted to a particular pub. That would mean that pubcos were, by virtue of their large estates, diminishing competition by forcing those who wish to run pubs into their business model.

Business support and services

116.  Pubcos also give their lessees business support, which tied operators linked to the beer tie. Marston's stated that:

The existence of the tie enables brewers and pub operators to […] provide support services and advice to tenants.[172]

Punch stated that it believed that the tied model compared favourably with virtually any other business sector, as a result of the high levels of support offered by pub companies.[173] Punch, Enterprise and Marston's have all provided us with lists of services which they believed benefited the lessee in running their pub.[174] Simon Townsend from Enterprise told us:

we passionately believe in the tie and we believe that the services that we can provide can help pubs be more successful.[175]


117.  Business Development Managers (BDMs) — also known by Enterprise as Regional Managers and Business Relationship Managers by Punch — are the main point of contact between lessees and their pubco. They are put forward by the pubcos as an important part of the 'support package' in the pubco model. Ted Tuppen, Chief Executive of Enterprise, told us:

it is this business relationship which was described to me by a licensee, […] who said, "My Regional Manager's fantastic. We have two superb business reviews every year where we go out around the town, we look at the competition, we look at pricing, we see what we can do to improve the pub and then, if anything goes wrong, I ring her up and she sorts it out". That, to me, is almost a perfect definition of a regional manager.[176]

118.  We are sure that there are business development managers who do add value in the way pubcos claim. The late submissions from Enterprise lessees have spoken highly of this support and we have no reason to doubt them. However, many lessees who submitted directly to our inquiry were uncomplimentary.[177] One lessee told us that when she approached her BDM for help he told her he could get her a council house by evicting her.[178] Another told us "our BDM has had no help to offer or any constructive advice, only telling me where he is going for the third holiday of the year".[179] These are only two examples of many, we have also heard from lessees who have complained of bullying and threatening behaviour from their BDMs.[180] One lessee told us his BDM:

showed up on Easter Sunday to perform a cellar-check check, demanded to see personal paperwork during a private family wedding, visited my pub with his girlfriend ordering several rounds of drinks without paying.[181]

119.  BDMs are at the sharp end of the relationship between the lessees and the pubco. However lessees have also written to us about their dealings with people higher up within the pubco. To give one example of many, one lessee told us:

I was told by the most senior person I had access to at Marston's, I had to stay in my pubs until I was bankrupt.[182]

The evidence we have received from publicans includes repeated reports of delay in opening rent review negotiations, lack of transparency in such negotiations, failure to carry out repairs agreed when a tenancy began, verbal agreements being ignored, and of harassment of lessees when they were vulnerable through bereavement. Some of these reports were given us in confidence, as lessees feared reprisals. Some we put to pubcos with the lessees' agreement. The Committee does not automatically consider that all those who complain are justified in their complaints, and understands that business relationships can break down. Nonetheless, we were struck by the way in which the pubcos' responses consistently failed to address the issues raised in the complaints. Not every lessee's complaint will be reasonable or justified, but the way in which the same complaints recur in different pieces of evidence convinces us that some pubco business practice is unacceptable.

120.  The Trade and Industry Committee found that "the performance of business development managers (BDMs) varied across the industry from excellent to dire." That conclusion remains valid. The evidence we have received suggests that there are still too many BDMs who offer lessees little or no support, and some who bully or intimidate them. Moreover, some of our evidence suggests that this culture is not limited to BDMs but can reach further up a company.


121.  Training is put forward by pubcos as a benefit of the tied lease model. Enterprise said that it provided "a wide range of flexible, low-cost and accessible training solutions, together with a money-back guarantee in the event that delegates believe that the course has failed to deliver its value-adding objectives."[183] Greene King said that its training was subsidised, specifically developed for Greene King and was not available to external sources.[184]

122.  Lessees were not so positive about their pubcos' training courses. A lessee described one course as "laughable",[185] another noted that training courses were offered "at a price, which is comparable to and in some cases greater than the prices in the open market."[186]

Financial assistance

123.  Pubcos' size should mean that they are able to give financial assistance to lessees in difficulties. BBPA said that the pubcos had provided between £35 million and £40 million to support lessees during the economic downturn.[187] Ted Tuppen told us that during the last year Enterprise had spent £9 million helping 1,453 pubs: around £6,000 per pub.[188] It was currently spending approximately £1.4 million per month on financial support for its lessees.[189] Punch said it was helping approximately 1,800 of its pubs.[190] Indeed our survey shows that over a quarter of lessees surveyed had received some form of financial help from their pubco.[191] Several of the late submissions from Enterprise lessees cited such support. However, Nick Bish, Chief Executive of ALMR said:

usually my members' experience is that this [rent reduction] comes attached with a number of conditions, like introducing a retail price inflation clause into it [the lease] so that the rent goes cranking upwards in spite of the theory of it having come downwards, and possibly there will be conditions to extend the nature of the tie. Say it was only a beer tie, they might want to extend to a wine and spirit tie or an amusement machine tie.[192]

124.  In oral evidence Simon Townsend from Enterprise told us:

there is a sort of urban myth that has been propounded by various parties that the temporary support provided by companies in some way is repayable, and can I make it very clear that, as far as Enterprise is concerned, no amount of the business support that we provide in additional discounts or rental concessions is repayable; that is simply not the case. This is permanent financial assistance over a temporary period of time designed to prevent the business failing.[193]

Enterprise told us in writing:

I would also reiterate the statement we made in evidence to the inquiry that in providing financial assistance to deserving licensees, whether by adjustment or concession to rent or through additional discounts given, these sums are not refundable to ETI and suggestions to the contrary are entirely false.[194]

125.  Although just under 60% of those who responded to our survey and had had financial help reported that they had been given it without any conditions, the survey also revealed that 24 Enterprise licensees had had an increase in rent after receiving financial help and 18 had had their tie extended so that they were obliged to purchase items such as soft drinks or spirits through the pubco although they had not been tied before.[195] When we pushed Enterprise further on this in writing, they told us:

In the majority of cases, we do require a temporary extension to the tie to include wines, spirits and minerals on the basis that this then provides ETI with even greater clarity on the trading performance and sales mix of each business during the period in which financial assistance is provided. In every case where a temporary extension to the tie is required, any additional cost incurred by the licensee is massively outweighed by the benefits of discounts received on beer and cider purchases and in rent concessions.[196]

It is surprising that the link between financial assistance and the extension of the tie was not made clear in oral evidence. Financial assistance which is offset by an increase in rental or an extension of the tie is, in effect, 'repayable' and does not confer the benefit claimed by the pubcos.

126.  Not all lessees receive financial help, even when their losses are due to external factors. We have heard from a lessee of a rural pub whose only access road was closed for six weeks,[197] a lessee whose pub flooded and was closed for four months[198] and a lessee who had a double shooting on the doorstep of their pub,[199] none of whom received any temporary rent reduction or financial assistance.


127.  We have particular concerns about clauses which prevent lessees from showing their contracts to any but specified persons other than with written consent from the pubco. The prohibition appears to extend to legal representatives. This seems to be particularly the case when support packages are agreed. One Enterprise support package contract states:

The terms of this agreement are confidential and you undertake not to disclose its terms to anyone without our written consent; excepting only that you will be able to disclose these terms to your accountants, stock takers and bankers for the purpose of pushing the terms of this agreement into full effect.[200]

128.  Again the issue is transparency. We accept that pubcos are helping their lessees with financial assistance but there are many lessees who appear to be eligible for aid but do not receive it. Pubcos need to make their policies on the administration of financial help clear with a fair and open application process for such assistance. Lessees need to know on what grounds they are turned down.

129.  The Trade and Industry Committee found that, on the evidence presented to them, the immediately quantifiable cost of the tie was usually balanced by the benefits available to tenants. From the evidence we have received, we are not so convinced. We are particularly struck by the results of our survey which found that 63% of lessees did not think their pubco added any value. The pubcos offer little support that cannot be found by normal market methods.

A fair share of profits?

130.  Proponents of the pub companies argue that their model ensures that profits (and risks) are fairly shared between the pubco and the lessee. Campaigning organisations and lessees are not the only ones to dispute this. Mark Brumby of Blue Oar Securities has claimed Punch and Enterprise have:

ratcheted up rents time and time again and jacked them up to such a point where the pubs are running on a margin which is uneconomic.[201]

Morgan Stanley also argued that pubcos are 'taking a bigger share of the pie than their lessees'. Their analysis showed that pubcos profits had risen faster than lessees' over the last five years. They used the example of Enterprise whose EBITDA[202] per pub had risen from £50,000 to £68,000 in the period 2003-07, an increase of 36% but its lessees' profits had only risen 27% from £37,000 to £47,000.[203]


131.  The pubcos we saw considered their lessees were fairly rewarded. Punch said it believed the average profitability of their 'customers' to be around £29,000 which, with an additional 'allowance' taking into account the estimated value of accommodation, made the equivalent 'salary' of approximately £38,000.[204] Enterprise said the average profit of its licensees was £42,000[205] and only 112 of its Licensees were earning profits in the band of £20,000 and below.[206] We questioned Enterprise further on the profits of their lessees:

Q276 Mr Clapham: Do you pursue a policy at all now to ensure that your tenants are in receipt of a living wage?

Mr Tuppen: Yes, absolutely. Whenever we look at the potential for a pub, we always consider that there is no point in letting that pub at a level where the tenant cannot survive, and we have made that point on a number of occasions, I think. There is absolutely no point in our maintaining a pub where it is impossible for the tenant to earn a decent living.

132.  Our own evidence suggests that many lessees are making an extremely meagre living from the pub business. We were extremely concerned to find from our survey that 67% of lessees who responded said that they earned less than £15,000 per annum.[207]

Fig. 4

Source: CGA

Moreover several witnesses told us that they were losing money through their pubs and therefore had to support the business with income from other sources. One told us:

The pub makes £60, 000 before rent and the pubco takes £86, 000 rent leaving us to fund the £26, 000 shortfall. So not only do we make no money at all but have to pay for the privilege.[208]

Another told us:

We do not draw a wage from the business and are in receipt of full tax credits, the majority of which goes to Enterprise Inns or business bills. In the last 12 months the business has turned over £128,829 net and we have paid to Enterprise Inns £89,427 which equate to 70% of net turnover.[209]

An Admiral lessee told us:

My wife and I have taken on full time jobs away from the industry, our pub's hours have been drastically reduced, we haven't drawn wages for three months, and we are having to bankroll the business to keep it afloat.[210]

133.  Increasing a pub's turnover will benefit the pubco as it increases the sale of tied products. To our surprise it does not seem to benefit the lessee to nearly the same extent. We are struck by the fact that only 10 lessees out of the 788 who told us about their turnover and personal income said they earned over £45,000. Where a lessee is part of a couple operating in partnership this income could be split between two. Not only is it clear that many lessees have extremely low earnings, our survey suggests that income level does not necessarily relate to turnover. While more people earned reasonable livings at the higher level of turnover, the relationship between earnings and turnover was not linear. Over 50% of the lessees whose pubs had a turnover of more than £500,000 a year earned less than £15,000. The pubcos may share the risks with their lessees but they do not share the benefits equitably.

Fig. 5

Source: CGA

Lessees' attitude to being 'tied'

134.  Throughout our examination of the rental system to public houses we have been struck by the extent to which the valuation system is described as something which should be close to objective, but is in reality much closer to an assessment of what the market will bear, negotiated between the company and the lessee. In our view, the more transparency there is in those negotiations, the better. We are concerned that the beer tie contributes to the lack of clarity about what it is that lessees can expect to pay for their pubs.

135.  When asked what would happen if the tie was removed, Giles Thorley of Punch said:

you would see a significant reduction in the amount of inward investment into pubs by the pub companies because we would have no incentive and we would have no connection with the trade of the pub anymore.[211]

Ted Tuppen of Enterprise told us that if there was no supply tie pubcos would become:

just straightforward property companies and, for a start, one would not see anything like the £9 million of support that we gave to our licensees in the past year.[212]

It is clear that rents would increase, Giles Thorley of Punch told us:

we could lease the pub for £20,000 income, just straight rent on a free-of-tie basis, or, alternatively, we could lease the pub for £8,000 and we would receive, say, £2,000 for the machine tie and £10,000 from the tie for the beer supply.[213]

Morgan Stanley said they thought that it was unlikely that if lessees were offered to go free of tie they would take it:

under the terms of their contract, pubcos can put up rent if the tie is removed, and we doubt lessees want a doubling of their fixed rental cost.[214]

However Enterprise told us that it was not in their best interests to over-rent:

"Over-renting" a pub is completely counter-productive, leading to an increased likelihood of debt and outright business failure. Furthermore, "over-renting" is likely to result in limited future growth prospects, limited assignment prospects, a lack of reinvestment, disillusioned licensees and ultimately the complete breakdown of our business relationship.[215]

136.  Despite the very real prospect of an increase in rent, there is an almost unanimous view from lessees and their representatives that the tie needs to be broken. We were struck by our survey responses to the lack of satisfaction with the tie — only 13% of those responded were happy with their tie. The only pubco which had more satisfied than dissatisfied lessees operated free of tie. In addition 94% of respondees to the FSB poll wanted an end to the tie. One of their members said "I would rather pay more rent and have no tie to products, leaving us free to shop around for the best prices."[216]

137.  We are also keenly aware of the very real and serious financial pressures under which the pubcos are operating. While at least one pubco does operate without a tie, the tie is integral to most companies' operations. We are concerned that the simple breaking of the tie in these very challenging economic times could lead to a chaotic situation in which the finances of the pubcos were completely undermined, with unforeseeable consequences for their ability to maintain their businesses and, we believe, the very real risk of widespread pub closures as a direct result. We have no wish to be the cause of an even sharper decline in the number of public houses.

138.  The dispute over the tie could be ended easily: every lessee could be offered the choice of being free or being tied. This would enable both sides to prove their competing claims. We believe each and every existing lessee should, in a phased programme, be offered this choice and the same choice should be offered to every new lessee as he or she takes on the lease. To make the choice fair, the process of agreeing revised rents must first be improved as we have previously recommended.

139.   Although a voluntary agreement is preferable, we doubt that the pubcos would respond effectively to such an approach. We therefore recommend that the Department considers how best to achieve this end and that it opens an urgent consultation into the principle and phasing of this proposal. The status quo is not an option.

164   HC (2004-05) 128-I para 188 Back

165   Loan to Value is the proportion of the value or price of the property (whichever is the lower) that is borrowed on a mortgage Back

166   59% of lessees said it was the pub itself which was whey they chose their pub, 23% said it was because it was a low cost entry into the pub trade - Ev 299 Back

167   Ev 205 Back

168   Ev 163 Back

169   Ev 91 Back

170   Ev 266 Back

171   Ev 155 Back

172   Ev 198 Back

173   Ev 164 Back

174   Ev 171, 110, 202 Back

175   Q 289 Back

176   Q 289 Back

177   Ev 282 Back

178   Ev 265 Back

179   Ev 266 Back

180   Ev 158 Back

181   Ev 96  Back

182   Ev 118 Back

183   Ev 103 Back

184   Ev 207 Back

185   Ev 218 Back

186   Ev 153 Back

187   Ev 186 Back

188   Q216 Back

189   Ev 119 Back

190   Q 218 Back

191   Ev 310 Back

192   Q166 Back

193   Q218 Back

194   Ev 108 Back

195   Ev 310 Back

196   Ev 119 Back

197   Ev 266 Back

198   Ev 261 Back

199   Ev 281 Back

200   Ev 228 Back

201   Ev 132 Back

202   Earnings before interest, taxes, depreciation and amortization Back

203   Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008 Back

204   Ev 180 Back

205   Including a £10,000 average living cost allowance. Back

206   Q 208 Back

207   Ev 304 Back

208   Ev 183 Back

209   Ev 264 Back

210   Ev 215 Back

211   Q 294 Back

212   Q 294 Back

213   Q 214 Back

214   Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008 Back

215   Ev 106 Back

216   Ev 151 Back

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