Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Interpub plc

  We submitted a report in 2004 and would wish to make the following observations to the questions that the new inquiry has raised.

Has the Licensing Act 2003 had an effect on competition within the market?

  The power now lies in the hands of the Local Authorities who also control planning, environmental and policing matters. Thus there is a perception if not reality that the Local Authority acts as policeman, judge and executioner in the first instance. It is only at appeal to the Courts that any injustice can be corrected.

  Some councils are overzealous in their desire to "control" licensed activities and trading hours to make their life easier with the residents who vote them in. Business operators who don't reside in the Area have no say even though they pay huge levels of rates. It is possible for a single resident to cause significant "nuisance and noise" as part of the review process and the operator is often painted as being "guilty" until proven otherwise rather than the reverse.

  For example the issue of outside drinking which has been part of the culture and ambiance of certain areas is now being challenged by a few residents and councils who take little or no account of the fact that the pub has been there for centuries and that civilised street drinking in the summer is part of the ambiance. Nobody wants a noisy new outlet to open in a quiet residential street but outside drinking in an area where it has always taken place should not be challenged in the same way. The Licensing Act was not designed to change previously established and accepted norms.

   The fact that there is no "independent" person at the initial hearing to take an impartial view is a weakness in the system and leaves the impression that the Local Authority is all powerful.

  This in itself can effect local competition especially where different authorities take a different view for example on terminal hours. If a pub enjoyed a late closing hour say until midnight or 1am prior to the Licensing Act 2003 due to its operators business ability and the neighbouring pubs did not it had an advantage. Many other pubs have been granted later licences now but some councils, notably Westminster, have policies not to grant new licences with hours later than midnight or 1am. Thus the pub whose trade (and therefore rental assessment) benefited from the later trading hour prior to the Act is now commercially disadvantaged.

To what extent has revisions to the framework codes of practice met the committees concerns?

  It would appear that most pubco's have adopted codes of practice that deal with rent reviews, disputes and difficult trading circumstances. Whilst the codes do provide a framework for discussions they give no absolute guarantees and the operator has to rely on the relationship they have with the pubco's representative rather than a legal framework that gives more certainty.

  Short of insisting that the codes become part of the legal agreement between the parties it is difficult to see how they can become more effective, especially when the economic climate is tough for both parties and each side needs to fight its corner.

To what extent are the codes applied by the pubco's?

  As stated the codes do provide a framework for discussion and it appears that the pubco's are more actively discussing issues with their tenants and lessees. Whether this is a genuine desire to help out in difficult circumstances or a response to the fall in Share Prices and the fact that the Committee is asking these questions is debateable.

  Even if we assume that there is a genuine desire to help out, and there may well be, there are still key areas of dispute that remain:

  1.  The assessment of Fair Maintainable Trade and how this is affected by market conditions between reviews.

  2.  The ability to actually obtain a rental reduction either between or at review.

  3.  The absolute price of beer for Tied tenants and lessees compared to those who operate free of tie or to managed houses operated by the pubcos.

  4.  The share of machine income which is often described as 50/50 but in reality is 75/25 as the rent calculation takes a further 50% of the tenants share!!

Is there a need for further regulation in the industry?

  In our previous submission we stated that we did not wish: "to throw the baby out with the bath water but rather that the industry should be encouraged to get together and hammer out a code of practice that guides the way the landlord and tenant relationship should be developed over the coming years in such a way that there is a genuine perception of fairness in the balance of power". We went on to say that: "we live in an uncertain world climate and that a tenant or lessee only has to have a swing of 10% of turnover to go from utopia to bankruptcy".

  Sadly the truth of that statement is all too starkly apparent in the current economic climate especially as not only are overall sales down but the cost base is significantly increased. (Please make reference to the ALMR Benchmarking Survey) The effect of the Tie does little to help the situation as the operator is unable to obtain products at best market prices. Some pubco leases now tie much more than the beer which makes the situation even worse. Please see attachment 1 for an example of tied versus free of tie operating margins.

  The cost of operating long leases where the lessee has full responsibility for the upkeep and repair of the property is now too great unless they have complete freedom to negotiate the price they purchase products for.

  We do not believe that the model is sustainable in its current form as all of the increased operating costs are borne by the lessee not the landlord. The income streams enjoyed by the pubcos before the economic downturn meant that they were able to borrow with relative ease which in turn led to a hike in the price of licensed portfolios. They now have more of a struggle to pay for these borrowings and it is the operator who is squeezed the most followed by the suppliers of products. The pubco is in effect the new "brewery". There is significant pain in the UK pub industry at present and the model does little to help that situation.

  Whilst any upheaval, due to further legislation on the tie, would be regrettable and painful for the industry we do not believe that tied long leases are a sustainable model. We also believe that a majority of operators on long leases would rather have a commercial agreement with a landlord with a slightly higher fixed cost in terms of rent but with the commercial flexibility to negotiate the price for products. Many "tied" rents are now at a level where the "competitive disadvantage" of being tied is in no way addressed by the limited discounting of some products and the so called added services such as marketing support.

  It is therefore our position that the tied long lease, just like the tied cottage of feudal times, has no positive benefit to the industry; in fact the reverse is the case.

Attachment 1


2008-09 Free of Tie Margins versus Tied Margins
Annual Sales Margin %Annual Margin £
Free Pub Co Lease387,866 69%268,461
Free Commercial Lease950,634 70%664,148
Free Commercial Lease494,549 67%331,481
Freehold592,00768% 401,058
Freehold615,21367% 410,975
Free Commercial Lease605,885 68%414,081
3,646,15368% 2,490,203
Tied PubCo Lease388,867 59%228,167
Tied PubCo Lease343,819 56%192,047
Tied PubCo Lease628,689 60%376,586
Tied PubCo Lease813,937 56%457,318
2,175,31358% 1,254,118
Margin loss % Margin loss £
Average Tied House543,828 10%54,383

29 September 2008

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