Memorandum submitted by Karl Harrison
INTRODUCTION
1. I have been a licensee in the London
area since 1992 and have been involved in the successful ownership
and operation around 25 bars, pubs, restaurants and clubs in that
time. At present I own and operate five units, one of which is
tied to Enterprise Inns plc and one of which is tied to Mitchells
and Butler plc through its franchise business.
2. I am a founder member of the Westminster
Licensees Association and I am a member of City of Westminster's
Entertainment Forum as a representative of licensed trade.
3. I understand that in 2004 the Business
& Enterprise Committee conducted an inquiry into those property
companies calling themselves "Pub Co's" and including,
inter alia, Enterprise Inns plc, Punch Taverns plc etc.
4. I understand that the Committee at that
time made certain recommendations as to how these companies should
moderate their behaviour and with the intention that the Committee
would return to the issues at a later date with the current review
being the result of that process.
MARKET OVERVIEW
AND PUBCOS
5. Over the past 15 years or so the number
of pubs in the UK has contracted by up to 10% but the ownership
profile has changed greatly. The 1989 Beer Orders were intended
to remove the dominance and control of the brewers over the pub
sector. In fact what happened was that the loopholes in the legislation
were exploited by venture capitalists and accountants to create
the large freehold pub estates in the hands of property companies
now known as "pubcos". These property companies now
own more pub freeholds than were owned by the brewers. This is
a significant legislative failure which should be addressed.
6. In practically all examples the "pubcos"—which
interestingly now include many brewers—own pub freeholds
but actually operate no pubs at all. The pubs are let or leased
out, usually at high rents, to tenants that are often ill-informed,
ill-resourced or very often, both. The tenants then have to purchase
some or all of their wholesale drinks supplies from the "pubco"
acting as an intermediary at prices that are very much higher
than the prices at which the tenant could otherwise buy the drinks
in the open market. We operate both tied and free-of-tie premises
and know this to be true.
7. In its previous inquiry the Committee
stated that "the cost of beer ties are usually balanced by
the benefits available to tenants". This is untrue and I
cannot imagine what evidence could possibly have been presented
to justify such a statement being made. The business I own that
is tied to Enterprise Inns plc would be better off by a six figure
sum each year were I were able to buy beer in normal market. We
receive no tangible or intangible benefit from being tied to Enterprise
Inns plc.
8. It was a principle established in the
inquiry in 2004 that the tied tenant should be no worse off than
if they were free of tie. Given the above and further evidence
I shall present further down, it is very difficult to see how
this principle holds at present for my business tied to Enterprise
Inns plc.
9. The "pubcos" claim that they
provide support through so-called Business Development Managers.
I have met several of these BDM's and have yet to meet one who
has any meaningful experience at all in direct management in the
licensed trade. The meetings with BDM's usually consist of the
tenant being shown how much beer they have bought from the "pubco"—information
which of course the tenant will already have.
10. It is a well known that a great many
pubs are now closing or will do in the coming months as the economic
slowdown beings to bite. The "pubcos" and the BBPA will
consistently blame factors such as "the smoking ban"
and "supermarkets" for this phenomenon. In reality the
vast majority of closures will be down to undercapitalisation,
underinvestment and loss of profitability. A great many pubs that
are closing will be tied to the main "pubcos". Both
major "pubcos" admit to needing tenants for 10% or more
of their estate. Anecdotal, and including those in distress, it
is likely to be many more.
11. The "pubco" model has not
been through a period of serious economic downturn or recession
such as we are likely to now experience. The "pubco"
model starves small businesses of cash and profits that will be
needed to survive in a downturn. In the free of tie market pubs
can generate profits of between 100% and 300% more than in the
tied sector. In the pub sector, with high gross margins but high
costs the net profitability is often low in any event and a relatively
small fall in sales can erode all profits from a pub. It does
not take too much to realise that if a pub has low profits in
good times because of the tie then it will be under unsustainable
pressure in a downturn and if its owner cannot carry losses then
it will close. We will see this downturn take its toll much more
heavily from "pubco" tenants who do not have the profits
available in free houses to cushion them.
BRITISH BEER
AND PUB
ASSOCIATION
12. The BBPA is an entirely partial organisation
that claims as follows on its website:
The BBPA is the leading organisation representing
the UK beer and pub sector. Our members account for 98% of beer
brewed in the UK and own more than half of Britain's 58,000 pubs.
Beer is Britain's national drink, and pubs are
the home of hospitality in the UK. These major national industries
are a much-loved part of our culture, and employ over 600,000
people, as well as sustaining many other UK businesses.
13. The above is carefully worded. There
membership includes most brewers and most of the "pubcos".
They may `own' 50% of Britain's pubs but they operate very few
of them. The sector may employ 600,000 people but their members
do not. The BBPA has no right at all to position of doing so in
the media it only. The committee will no doubt be appraised of
this matter elsewhere.
ROYAL INSTITUTION
OF CHARTERED
SURVEYORS
14. Members of the RICS are generally charged
with providing the guidance as to how pubs are valued and how
rent reviews are resolved. The RICS generally provides members
of its institution to act as third parties to settle rent reviews.
Much of the RICS guidance relating to pubs is steered by the Trading-related
Valuation Group. The Chairman of that group is Rob May MA FRICS
with "special expertise in the valuation and licensing of
pubs". I understand that Mr May is an employee of Enterprise
Inns plc and he has long been a consultant to that company and
the Unique Pub Company which was acquired by Enterprise Inns plc.
It is very hard to imagine that there is not a conflict of interest
here.
THE BEER
TIE AND
PRICING
15. The "beer tie" is the mechanism
by which tenants of brewers were forced to acquire their beer
from the freeholder of their pub which was the brewer. The 1989
Beer Orders were intended to remove this ill-placed dominance
and control. As previously mentioned the legislation failed to
do that and at this time the "pubcos" have assumed the
dominant controlling position previously occupied by the brewers.
"Pubco" tenants are compelled to buy their wholesale
product from the "pubco" at prices far in excess of
those in the open market and for the term of the lease.
16. I have set out below a comparative table
to show the difference in pricing that exists between one of my
free of tie businesses and one of my tied businesses. In both
cases the products are provided by Scottish & Newcastle (Heineken):
Prices from Enterprise Inns to tenant
| Product | per keg
| per pint retail | net GP
| net cash margin/pint |
| Fosters | 101.72 |
1.16 | 3.20 | 57.56%
| 1.57 |
| Kronenbourg | 118.82 | 1.35
| 3.50 | 54.67% | 1.63
|
| San Miguel | 116.87 | 1.33
| 3.50 | 55.41% | 1.65
|
| Heineken | 122.63 | 1.39
| 3.50 | 53.22% | 1.59
|
| Guinness | 110.75 | 1.26
| 3.50 | 57.75% | 1.72
|
| Strongbow | 99.70 | 1.13
| 3.30 | 59.66% | 1.68
|
| St Austell Tribute | 80.27 |
1.11 | 3.30 | 60.30%
| 1.69 |
| |
| | | |
Prices Direct from Scottish & Newcastle to tenant
| Product | per keg
| per pint retail | net GP
| net cash margin/pint |
| Fosters | 70.69 | 0.80
| 3.20 | 70.50% | 1.92
|
| Kronenbourg | 87.81 | 1.00
| 3.50 | 66.50% | 1.98
|
| San Miguel | 89.30 | 1.01
| 3.50 | 65.93% | 1.96
|
| Heineken | 96.38 | 1.10
| 3.50 | 63.23% | 1.88
|
| Guinness | 87.22 | 0.99
| 3.50 | 66.73% | 1.99
|
| Strongbow | 68.85 | 0.78
| 3.30 | 72.14% | 2.03
|
| St Austell Tribute | 69.39 |
0.96 | 3.30 | 65.68%
| 1.84 |
17. From the information supplied above in 16 it can
be simply seen that there is a very substantial discrepancy between
the retail opportunities available to tied and free of tie tenants
respectively. Prices per keg across real ales, lagers and ciders
can be more expensive to the tied tenant by as much as £31/keg,
or over £100/barrel or £0.35/pint at cost. This places
the tied tenant at a severe competitive disadvantage to those
pubs that are free houses.
18. The "pubcos" will say that the rents levied
on their tenants are less than those that might be borne by a
free of tie operator. This is simply untrue and is discussed more
fully in the section below on Rent Reviews.
19. The "pubcos" will say they offer a discount.
Enterprise Inns offer a sliding scale of discounts up to a maximum
of £42.12/barrel for tenants with volumes over 500 barrels
for annum which is a considerable volume for an average pub and
not achieved by most. The sliding scale is as follows:
| Annual Qualifying Purchase | Discount Per Barrel
|
| 0-150 | 0
|
| 151-200 | 14.04 |
| 201-250 | 18.06 |
| 251-300 | 22.05 |
| 301-350 | 26.07 |
| 351-400 | 30.09 |
| 401-450 | 34.11 |
| 451-500 | 38.11 |
| 501+ | 42.12 |
This discount offer is very much below that which can be
readily realised in the open market by an average operator. It
should also be pointed out that the discount offered above only
applies to the number of barrels shown in at each level. For example,
should you purchase 540 barrels of beer then the maximum discount
is applied only to the last 40 barrels purchased. The total discount
paid would be £10,811.30. Should the maximum discount be
of £42.12 be applied to the whole volume—as of course
it should and as is done by direct suppliers—then the total
discount paid would be £22,744.80. This is a significant
difference to a small business but not even this amount is offered
by Enterprise Inns in this example.
THE ALL
PARTY PARLIAMENTARY
BEER GROUP
20. The largest of the all party parliamentary groups,
this group is, to my knowledge, the largest of such groups with
350 members. It purports to take an objective view of the beer
and pub sector and yet it is funded and effectively managed by
its patrons, the brewers and "pubcos". Its chairman,
John Grogan, MP for Selby, is well known for previously having
written articles for Enterprise Inns' in-house magazine, being
remunerated at a rate of around £200 per article. As for
my comments in relation to the RICS above, it is hard to imagine
that the members of this group are able to achieve a wholly objective
and impartial view.
Has the Licensing Act 2003 had an effect on the competition
within the Market
21. Local authorities have in some cases formulated quite
restrictive policies on licensing which has limited the actual
extent and impact of the new act in many areas. Notwithstanding
that fact most pubs have found it relatively simple to extend
their licensed hours to midnight during Monday to Thursday and
a little later on Friday and Saturday. This has resulted in a
negative impact on those operators with late night venues that
were reliant on traditional pub trading hours turning large numbers
of customers onto the street after 11pm and who would still be
prepared to pay admission fees to enter late night venues to continue
their evening.
22. I would contend that the greater flexibility in licensing
has had an overall benefit to pubs in terms of helping operators
to more easily manage customers and to make closing time a less
strenuous affair. It was never a good idea to close at 11pm and
then to tell people to drink up in 20 minutes before making them
leave the premises. For those operators that have chosen to extend
hours to midnight or so the process of closing is better for customers
and management alike.
23. There is a possibility that with the current downturn,
the cost of the operation of extra trading hours for little financial
benefit may place pressure on the finances of some pubs.
CODES OF
PRACTICE
24. I have notice no effect or implementation of any
Code of Practice. Only now as I face a forthcoming rent review
have I even see a copy of a document entitled Code of Practice—The
Letting and Operating of Leased and Tenanted Pubs. I have
been told that this document is prepared by the BBPA and the "pubcos"
and so it is no surprise at all in reading it to see that it simply
seeks to reinforce the existing operation of the "pubco"
model with little or no recognition of the interests of the tenants.
25. The Code of Practice is apparently endorsed by the
British Institute of Innkeeping although it is very unclear as
to what purpose such nepotistic "rubber-stamping" should
serve. The BII does not operate pubs and does not represent publicans
so who is it endorsing the code for? The Code I have seen is,
frankly, questionable. Take the section on grievances for example.
This advises that a tenant should take its grievance in the first
instance to the company ("the pubco") with which it
has the grievance and beyond that implies that a third party could
be involved if both parties agree. The "pubco", a property
company, want that third party to be a member of the RICS, whose
members largely represent, of course, property companies!
26. In truth, the `pubcos' know, as I do, that a lease
is a contract in property and that document is an entire agreement
not subject to outside influence except where specifically provided
for in the document or elsewhere by the Court. Unless it is made
so by statute the Code of Practise is not going to be binding
on either party to the lease.
MACHINE TIE
27. The position regarding the Machine Tie remains as
inequitable now as it was in 2004 when the inquiry concluded that
it remained unconvinced of the benefits of the tie. There is little,
if any, transparency regarding the sharing of the revenue and
the true cost of the tie to the tenant. The tenant is certainly
not able to have direct access to details of the revenue that
is actually taken from the machines and has to rely on information
given by others. There is considerable scope for "leakage".
28. The "pubcos" take 50% of the machine income
but as the income is also included in the calculation of profit
used to set the rent then the "pubco" will effectively
take a share of 75% and this is totally unfair and further evidence
of the contempt in which the "pubcos" hold their tenants.
29. Additionally, many "pubcos" charge machine
suppliers a "royalty" (or kickback as it is more usually
known) for being on the approved list of suppliers. This money
is pocketed by the "pubco" in addition to the share
of income from the machine and is not used at all, as some "pubcos"
claim to subsidise machine rents which are much higher through
the "pubcos" than in the open market. The same as for
beer as previously demonstrated. Why, you will no doubt ask yourself,
should a tenant pay over the odds to rent a machine when it then
has to hand over 75% of the takings to the landlord?
RENT REVIEWS
30. Much has been made by the "pubcos" of the
fact that their rents can go down as well as up. My lease with
Enterprise Inns contains an upward only rent review provision
and even though we now face a rent review, there has been no mention
from Enterprise of any attempt to remove that provision. I do
not believe at all that the "pubcos" have any intention
of honouring the commitment regarding rent reviews as the UORR
provisions are enshrined in the UK commercial property system
and probably form an intrinsic part of the "pubco" business
model.
31. The rent review model for pubs is deeply flawed in
that it is based on a calculating a divisible balance split 50/50
between landlord and tenant, removing the "pubcos" effectively
from the normal laws of supply and demand that apply to every
other part of the property market. Interestingly, bars and restaurants,
selling the same products as pubs and competing in the same market,
have rents calculated entirely differently and on the basis of
per square foot comparables. The rent review clauses in my lease
with Enterprise are no different to those in my free of tie leases
and yet Enterprise want to use method to which no reference at
all is made in my contract with them. We intend to test this in
Court. The current system fails to take account of the standard
disregards in relation to goodwill that are explicit in the contract.
The system I have seen used in the pub sector for tied pubs results
in rents that can be as high as 15% of more of the tenant's net
sales. In my experience in the free of tie sector we operate usually
with rents that equate to around 10% or our net sales. A lot of
tenants are subjected to financial intimidation by the `pubcos'
such that they feel unable to involve a third party to determine
the rent review.
THE RATING
SYSTEM
32. The current system of arriving at rateable values
for pubs was "agreed" by the Valuation Office, the BBPA
and a firm of surveyors acting for the main "pubcos".
Neither the BBPA nor the "pubcos"—neither being
pub rate-payers, or representatives of publicans had any right
to "agree" anything with the tax authorities on behalf
of the pub sector and this position has recently been supported
by the Court. The Valuation Office is very guarded on this issue
and we are challenging them in the UK courts and at the European
Commission.
33. The system relies on the VO requesting detailed trading
information from the rate-payer and then applying a percentage
to the sales that are revealed in order to arrive at a rateable
value. The higher your sales, the higher the rateable value so
quality operators are disadvantaged and can end up paying rates
for the same property that are far higher than those paid by a
poor operator. The system purports to relate to the same system
as used in rent reviews but in fact the system has been manipulated
by the "pubcos" and their representatives to enable
low turnover "pubco" tenants to pay less rates whilst
allowing the "pubcos" to charge higher rents for the
same property effectively disengaging the pub rating system from
the law. Effectively, the tax payer is subsidising the "pubcos"
rental stream as were the law to be applied properly then many
tenants could not afford to pay the "pubco" rent as
well as rates based upon that rent. The rating system for bars
and restaurants, selling the same product and in the same market
relies on the rateable value being based on the rent as provided
for in the Local Government Finance Act 1988 upon which the rating
system is based.
To What Extent have the Pubcos met the concerns of the Committee
from the 2004 Inquiry?
34. I would say that with the exception of lip service
being paid to the Committee through the Code of Practice,
the "pubcos" and their representatives and lobbyists
have worked hard to avoid changing anything and to ensure that
it was "business as usual".
35. The only thing starting to compel the `pubcos' to
take a different approach at the current time is that the city,
city analysts and financial journalists are rightly starting to
question not only the "pubco" model but also the precarious
financial structure that lies behind them, based on high debt
and good times. The current downturn might force them into commercial
changes but this should not prevent the Committee from subjecting
the "pubco" industry to further scrutiny.
Is further Regulation required?
36. The Committee should make the necessary recommendations
to initiate legislation that will remove the beer tie from the
pub industry.
37. The Committee should make the necessary recommendations
to initiate legislation that will remove the machine tie from
the pub industry.
38. The Committee should recommend an investigation into
the calculation of pub rents using the Profits Method and including
an investigation into the role of the RICS.
39. The Committee should recommend an investigation into
the agreement reached by the Valuation Office, the BBPA and the
surveyors acting for the "pubcos" in relation to the
rating system as applied to pubs.
40. The above will have a positive effect on the entire
pub sector and the same for the independent brewing sector releasing
back into the pub sector's economy the hundreds of millions that
is currently sucked out by property speculators otherwise known
as "pubcos".
41. The main beneficiary of the above will be the public
at large whose pubs will see further investment and improvement
and competition.
29 September 2008
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