Pub Companies - Business and Enterprise Committee Contents

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 the pubco.

  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 accepted.

  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 concerned.

  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.

Previous history

  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 to Punch.

  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 consumer.


  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

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