Memorandum submitted by Kossway Ltd
1. Kossway are the third largest independent
supplier of gaming and amusement machines in the UK.
2. In the past 10 years, the large pubcos
have been introducing new leases in their tied estates under which
tenants are no longer allowed a free choice of machine supplier
but are obliged to choose from a list of suppliers nominated by
3. Admission to the list of nominated suppliers
is not based on objective criteria but on the obligation on the
supplier to pay substantial ongoing fees to the pubco, resulting
in an inflated cost to the pub tenant.
4. The operation of this tie in respect
of machines results in tied tenants having to pay machine rentals
that are substantially in excess of the prevailing open market.
5. The operation of the tie tends to foreclose
the market for machines by restricting access to tied pub tenants
who form an important sector of the licensed market.
6. Pubcos should not be permitted to tie
tenants for goods and services other than beer and other drinks.
The current situation regarding supply of gaming
and amusement machines to the main pubco retailers
Kossway serve approximately 1,200 outlets with
4,000 machines. Aside from ourselves, there are in excess of 150
supply companies engaged in similar supply, of which I understand
no more than 20% are nominated to the supply of the pubco retailers.
Kossway supply approximately 40% of their business
to the free-trade, managed, and tied public house sector, and
are not nominated suppliers to either of the two large pubco retailers,
Punch and Enterprise, despite having applied for nomination. No
reason has been stated as to why Kossway's application was not
It is understood that the nominated suppliers
have experienced a squeeze of their margins due to the greed of
both Punch and Enterprise, who have demanded increased fees paid
to themselves in return for allowing the suppliers access to their
tied estates. However it is unlikely that those suppliers will
in themselves complain as by so doing they will clearly put their
reselection at risk at the next review carried out by the pubco
As a result of the restricted nominated supply
arrangements introduced, Kossway has suffered a loss of business.
In nearly every case where Kossway has been required to remove
its machines from a public house, it has been against the wishes
of the tenant concerned. Tenants have been forced to accept the
pubco nominated supplier as a fait accompli, with no other
choice but to conform.
As a result of the 1989 Beer Orders, large brewers
were required to divest themselves of a large number of tenanted
houses. Following on from this, most of the large brewers sold
off the bulk of their pub estates, which now form the bulk of
the Punch/Enterprise estate. The pubcos inherited a portfolio
of leases varying between 10 and 20 years. Most of these long
leases allowed tenants to choose their own machine supplier, subject
to the landlord's consent, such consent not to be unreasonably
withheld. Accordingly, under these long leases, the machine supply
market operated fairly allowing generally for open access and
free competition. This gave both the machine supplier and the
tied tenant equal opportunity in the market to negotiate supply
terms on a competitive basis having regard both to cost and standards
of equipment and service. This situation prevailed in most cases
throughout the 90s and was entirely reasonable.
However, as the pubcos have grown and particularly
Punch and Enterprise, they have introduced new leases and taken
every opportunity to convert tenants onto the new, more restricted
leases. It is understood that in the case of both Punch and Enterprise,
75% of their combined estates are under these new more restrictive
leases. The remaining 25% of tenants still operate under the old
leases but the number is falling as the pubcos continue to exert
pressure to force tenants on to the new leases. Punch and Enterprise
control over 8,000 pubs each. Out of a total of 16,000 pubs, Kossway
understands that in excess of 12,000 of those pubs are operated
under the new leases.
The new lease terms, the royalties or payments
paid by the nominated supplier via the tenant to Punch/Enterprise
The pubco new leases provide for a nominated
list of machine suppliers. Tenants are no longer able to choose
a supplier outside that list. Furthermore, the pubco sets a "rent
list" applicable across their estate for each supplier for
pub-type gaming machines. This rent list is formed on the basis
of a diminishing rent as the machine becomes older. The rent charged
is high and applied per gaming machine sited and this rent also
includes a royalty to be paid to the pubco. (It is not transparent
to the tenant but included in the overall rent to pay for the
machine). In the case of Enterprise, the supplier has to pay approximately
£24.00 per week royalty to the pubco for each gaming machine
installed. In the case of Punch, the supplier pays £15 per
week for each gaming machine supplied into any one of its locations.
Further, from the net take of each gaming machine, after VAT,
licence fee, rent and nomination payments, in the case of Enterprise
35% of the remaining machine income is paid to Enterprise and
in the case of Punch 50% of the remaining machine income is paid
Suppliers are effectively controlled by the
pubco and are required to provide collection staff to empty the
machines to ensure there is a full papertrail of data to support
not only the rent and royalty payments but also the pubco's percentage
of the machine income cut
Pubcos are, in effect, receiving a double payment
in respect of the same space. The tenant has already paid for
the space occupied by the machine in his lease. The pubco is then
charging the tenant a further rent on the same space by way of
royalties and income share received from the machines.
Tenants initially agree to this restrictive
and unfair practice but I consider this to be force majeure
as a potential tenant has no option but to sign if they wish to
run their own pub as a business.
The restrictive and anti-competitive situation
as a result of the new lease nominated supply arrangements with
regard to those tenants affected
In effect, the pubco is operating an anti-competitive
and, I believe, an illegal tie. The tenant is locked into the
lease with the imposition of an exclusive tie for beer and usually
other drinks. The pubco is exploiting that dependence by extending
the tie to other goods and services unrelated to the core business.
What is there to stop a pubco extending this tie to food, cigarettes,
or even cleaning or maintenance services?
Pubco tenants are seriously disadvantaged by
the imposition of the machine supply restriction imposed by the
new leases. Tenants of tied pubs should be free to operate without
interference from pubcos outside the provision of the premises
and the purchase of beer and other drinks.
Whilst it is not my business to comment on the
success of both Punch and Enterprise as trading companies, I think
it's fair to remark that they are very profitable and that the
income generated from machines represents less than 10% of their
overall profitability. Their machine income in my view is a greedy
lucrative side income that they are loathe to forego.
The financial tables I submitted to the TISC
enquiry in 2004 (and were published) clearly show that the income
lost by the tenant from their machines in the payment of machine
royalties and further income share to the pubcos is substantial
and probably accounts for 20% of the tenant's annual living income.
How on earth can this be fair or reasonable?
The restricted and anti-competitive situation
as a result of the new lease arrangements against existing and
potential suppliers of the tenanted estates
Additionally, there is clearly an unfair exclusion
of suppliers who are not approved and nominated by the pubco retailers.
I believe this is a restrictive issue. Whilst the pubcos may well
argue that there is ample selection amongst those nominated suppliers
available for choice by the tenant, it clearly is restrictive:
both Kossway and approximately 120 other suppliers are prevented
from supplying such tenants, despite the fact that they may offer
the tenant a better deal, better standards of supply, and better
equipment at more competitive terms.
The foreclosing effect of the machine supply
restrictions are substantial and as the Business and Enterprise
Committee are doubtless aware these are tenanted pubs and are
a distinct and separate market from managed pubs.
The justification and reasons given by the pubcos
for their new lease nominated supply arrangements
Both Punch and Enterprise attempt to justify
their restrictive nominated supply arrangements in respect of
gaming and amusement machines by stating that they are working
in a business partnership with their tenants, ensuring they are
only supplied by reputable suppliers and affording the tenants
their expertise via their machine control departments. In addition,
they also seem to refer to a notional allowance and discount from
the true value of the rental of the pub in consideration of participation
in the profits of the gaming and amusement equipment. There is
no evidence to support this argument.
In fact, within the restrictive new leases,
it is not mandatory to have gaming and amusement machines installed
at all, and I understand that, if a tenant decides not to have
machines installed, it would make no difference to the rental
charge for the pub, proving (a) there is no actual discount in
consideration of machines being placed in the pub and further
proving by inference (b) gaming and amusement machines installed
are not core to the pubco retailer's activities in renting the
pub to the tenant and supplying beers, spirits and other drinks.
The operation of the machine supply restrictions
are simply in place to enable the pubco to further profit with
little or no assistance to their tenants.
Punch and Enterprise claim that their strict
control and machine department is assisting the tenant. Are they
saying on the one hand that the tenant is either too stupid or
incapable of selecting the best terms for themselves for their
gaming and amusement machine requirements as, on the other hand,
they are happy to enter into their "business partnership"
with those tenants in the general running of their pubs. If so,
this is not true. If a tenant is deemed fit and proper to run
a pub and promote the sale of beers, wines and spirits to the
best of his ability, to maintain and keep that pub and pay the
rent, then surely he must be deemed as capable of making a simple
decision as to whom he wishes to supply his gaming and amusement
machines and at what terms. The pubco's claim that they provide
assistance to the tenant is nonsense. Their real objective is
to gain as much income as they can get away with from the gaming
and amusement machines sited throughout their tenant's estates.
Punch and Enterprise also state that their total
control ensures that the suppliers are of a credible status. Every
supplier of gaming machines in the U.K. is subject to a vetting
and certified authorisation from the Gambling Commission (previously
the Gaming Board for Great Britain).
Even among those nominated and approved suppliers,
the pubcos further state that good practice standards from the
supplier will be observed by the manner in which they control
their approved and nominated suppliers. I totally refute this
as it is expressly forbidden by the pubco retailers that those
nominated suppliers be allowed to market into tenant's pubs they
do not already supply. The existing nominated suppliers are not
allowed to offer any better deal, better standards of operation,
increase or remove the amount of equipment, or market in the best
interests of the tenant, without the express consent of the pubco
retailer machine department. In other words, it's a closed shop.
Surely this must be working against the interests of the tenant
and be deemed a restrictive practice.
I respectfully request that the Business and
Enterprise Committee recommend that legislation be introduced
to prevent the introduction of ties for products and services
other than beer and other drinks. If the Business and Enterprise
Committee agree with my recommendation but feel that legislation
is not a short-term practical mechanism at this point, then all
members of parliament involved in the committee should be encouraged
to sign an Early Day Motion, which could be phrased as follows
"That this House believes that pubco
retailers aside from renting to their tenants pub premises and
participating in the supply of beers, wines and other drinks should
cease their restrictive supply clauses in respect of non-core
products and services, ie food and/or gaming and amusement machines
to the benefit of those tenants and consumers".
I believe that an Early Day Motion signed by
those MPs in the Business and Enterprise Committee who are in
agreement would be expanded on greatly by other members on both
sides of the House. I further believe that individual tenants
would gain further support from their local MPs to a point where
pubco retailers would have to take notice or else the enactment
of legislation would quite fairly and reasonably ensue.
Further, any supplier duly certificated by the
Gambling Commission should be entitled to supply a tenanted pub
if that tenant in his judgement decides it is in his best interests
so to do.
If the above proposals I put forward are implemented,
I believe this will result in:
(a) A fair deal for the tenant. At the moment
it is totally unfair with Punch and Enterprise extracting extra
profits from the gaming and amusement machines.
(b) A competitive free enterprise marketing structure
and proper freedom of choice to the advantage of the tenant.
(c) A normal and open business structure for
the benefit of all suppliers across the UK, giving them equal
opportunity of supply on the merits of the standards of operation
of that supplier.
When combined, all of the above proposals will
lead to a fair and non-restrictive and competitive market place
for the benefit of the tenants, the supplier, and ultimately the
The 1989 Beer Report gave rise to a change in
legislation that prevented the control that brewers had over tenants
through a monopoly from continuing, and that legislation was designed
to protect the rights of tenants and their ability to earn a decent
living. The Beer Orders in particular prevented pubcos from applying
purchasing restrictions or ties for products or services other
than beer and other drinks.
The new lease arrangements of both Punch and
Enterprise are a return under a different guise of those same
feudal and baronial terms and conditions working so unfairly against
those tenants concerned and in particular in regard to gaming
and amusement machines.
If Punch and Enterprise maintain that the restrictive
conditions of their new leases in regard to gaming and amusement
machine supply is to the benefit of the tenant, then that tenant
should be able to decide for himself whether he wishes to use
the pubco retailer's restrictive approved nominated supply system
or not and, given freedom of choice, it is extremely unlikely
that tenants would wish to continue under the existing restrictive
conditions imposed in the new leases.
The pubco enters into a lease with their tenants,
not a franchise.
The 2004 TISC conclusion clearly stated:
"In our opinion, pucbos do not add sufficient
extra value from their deals to justify their claims to 50 percent
of the takings from AWP machines. We remain unconvinced that the
benefits of the AWP machine tie outweigh the income tenants forgo
and we recommend that the AWP machine tie be removed."
29 September 2008