Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by the Association of Licensed Multiple Retailers

  1.  The Association of Licensed Multiple Retailers (ALMR) welcomes the opportunity to submit written evidence as part of the above inquiry. As the only national trade body dedicated solely to representing the needs and concerns of licensed retailers, and a contributor to the 2004 Trade and Industry Select Committee inquiry, the Association is well placed to review the conclusions reached at that time and to assess changes in the market place since that date.

  2.  By way of background, the ALMR was formed in 1992 specifically to represent the interests of those companies which own or operate multiple estates. At the time of the 2004 inquiry, ALMR included the major pub companies within its retail membership. Since that date, the Association has reviewed its membership structure and no longer represents landlord interests—uniquely amongst other industry trade bodies. Our views and comments are therefore drawn solely from the perspective of the multiple licensees who operate from the outlets.

  3.  Whilst we have a number of national companies within membership, over two-thirds are derived from small independent companies operating 50 pubs or fewer under their own branding. As well as pubs and bars, our members also operate restaurants, clubs and cafe bars. These are predominantly suburban community or neighbourhood outlets, many of which will be operated on a lease issued by a pub company or other commercial landlord. Currently 98 companies are in membership, between them operating 15,200 pubs and bars. Between them, ALMR members operate around half the UK managed estate. These companies are neither brewer nor individual tenant but rather Multiple Lessees—directly managing their own operations but leasing the outlets from a range of property owners.

  4.  The 2004 Trade & Industry Select Committee inquiry was exhaustive. It examined all aspect of public house ownership and took evidence from a wide range of individuals and bodies. We believe the conclusions of the inquiry were robust and reliable. It is therefore right that this inquiry is restricted in scope to a consideration of whether those conclusions still stand and how the recommendations have been applied.


  5.  In our submission to the Trade & Industry Select Committee in 2004, we defined Pubcos as companies with no brewing dimension who own their own properties but issue leases to individuals or multiple companies to operate them. Whilst the 2004 inquiry was more wide-ranging, it is clear that the focus of the current inquiry is on the activities of the largest of these pubcos; it should be noted that there is a large number of smaller pub-owning companies who operate the same model. Retail Pub Chains are exclusively managed operations whose property is either freehold or free of tie lease. Managed pubs are operated by employees or agents of the pub owner. Tenanted or leased pubs are operated by individuals or companies (Multiple Lessees) not related to the pub owner.

  6.  Over the past decade and a half, the total number of outlets in the UK has contracted by around 5%, but the nature of pub ownership has changed dramatically. The introduction of the Beer Orders in 1989 was a catalyst for unprecedented and unexpected change not only in the brewing industry but also the licensed retail sector. At the time the Beer Orders were introduced, the national brewers owned over half of all UK pubs and the share of the independent sector was negligible. This situation has been dramatically reversed, with the national brewers exiting pub retailing and the market share of pub companies and the independent multiple retailers operating their outlets has increased significantly.

Table 1

Type of operator 1989January 2004 % change 1989-2004August 2008 (est) % change 2004-08
Single outlets16,00016,850 17,700
Tenanted/managedNeg34,125 30,800
Sub-Total16,000 50,975+218.5% 48,500-5%
National32,0000 0
Regional12,0008,589 9,000
Sub-Total44,000 8,589-80.5% 9,000+5%
Total60,00059,564 -0.7%57,500-3.5%

Source: ALMR members and Quantum Business Media.

  7.  As can be seen from the above, the pub market has stabilised since the 2004 inquiry. The seismic changes of ownership and ownership model witnessed in the 1990s and early 2000 have settled down, although the trend by pub companies and retail pub chains away from owning and operating a managed estate and towards a leased model continues. There has been a significant contraction in total outlet numbers as the effects of consolidation in the industry during the past decade continue to be felt.

  8.  Consolidation in the UK brewing and pub retailing sectors has resulted in a concentration of outlets in the hands of a small number of players. This is, however, a concentration of ownership rather than operation. The growth in the Pubco estates in particular has enabled a large number of small, entrepreneurial multiple lessees to develop by providing new access to a wider range of premises. The Morning Advertiser recently established a top 100 club for these companies, estimating that there are 100 multiple independent retailers operating an estate of between three and 80 pubs. These companies have a combined turnover of about £800 million and are "the most innovative in the sector, with expansion tending to be dependent on organic growth by dint of trading success... they are the highly prized lessees of the larger tenanted pubcos". They are also ALMR core members.

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

  9.  The Committee's terms of reference specifically ask about changes arising from the Licensing Act 2003 which may impact on an economic definition of the market. The Act had yet to take full effect at the time of the 2004 inquiry, and it was therefore unclear whether it alter any economic definition of the market and assessment of competition concerns within it.

2004October 2006 October 2008
Community local4,311 3,2252,750
Food led outlet3,180 3,0393,045
Town centre bar3,428 3,4783,260
Accommodation led pub641 374488
Nightclub421470 485
Seated cafe/wine bar1,053 1,1981,211
Total Managed Estate13,034 11,78411,239

Source: CGA/ALMR Benchmarking Survey.

  10.  As can be seen from the above table, the Licensing Act has not itself introduced further significant changes to the nature and size of the managed pub market—the only segment of the market on which it is possible to get reliable and robust information of this nature. Change has been gradual and organic, with outlets broadening the scope of their offering rather than changing its overall nature. There has undoubtedly been a move away from the traditional public house model with the pub as an outlet for driving beer sales and now towards a more diverse commercial offering; whether this is due to the Licensing Act, the Smoking Ban or social trends is a moot point. The trend is undoubtedly market led, arising from demographic change as much as change in ownership, and hence purpose, of the pub estate. It may have been accelerated in recent years as a result of regulatory change.

  11.  Whilst the emergence of a robust casual dining out market is perhaps one of the most significant trends in the on-trade over recent years, viewed purely from an economic perspective, this has not significantly altered the definition of the public house market from a competition perspective. The ALMR has recently introduced a new research project designed to benchmark key financial data within the industry. This looks both at the costs of operating an average pub and how sales are made up. The latter information in particular highlights the fact that however diverse the market is, in economic terms, the make up of the business is remarkably similar—regardless of trading style (see table at Annex 1 on turnover mix by trading style).

  12.  In summary, and to answer the Committee's specific question, we do not believe that the Licensing Act 2003 has had a significant effect on competition such as to justify a revised market definition.


  13.  There are two distinct models of leasing arrangements: the traditional short-term tenancy agreement developed historically by the brewers and still favoured by many of the regional brewers; and, the long, assignable lease developed initially by Inntreprenneur and adapted by the pubcos. Over recent years, the latter has gained precedence over the former. The difference between the two is essentially the length of the term and the degree of involvement of the property owner in the repair obligations of the outlet. Longer leases also have the benefit of accruing value to the tenant enabling to be assigned or used as a means of raising finance for further investment or expansion.

  14.  The pub leasing model is by no means perfect; as in other commercial business relationships, there are inherent tensions. On the one hand, tenants resist direct costs and constraints and, on the other, the landlord needs adequate compensation to reflect the nature and level of risk taken on as a property owner. What is beyond doubt is that the business model for leases has to work for both parties—without stable and successful lessees the pubcos unarguably have no business.

  15.  On the whole, the model works reasonably well: but it is a model predicated and established in an expanding market at a time of economic prosperity. In a weakening market, characterised by rising costs and declining consumer sales, it fares less well. The model is unduly rigid and does not react quickly enough to market and retail pressures. In the current market, with high beer prices due to duty increases and soaring costs, the only point of flexibility is the lessee's profit margin.

  16.  It is also worth noting in this context that the inherent tensions in the relationship particularly surface at times of particular friction such as rent reviews, lease renewal negotiations or end of lease issues such as dilapidations.

  17.  The 2004 inquiry highlighted some of the issues of greatest controversy and debate between landlord and tenant, and there is little doubt that the pubcos have done much to attempt to address these. Tensions do, however, remain and these are exacerbated in times of financial and economic stress.


  18.  The most tangible outcome of the 2004 Trade & Industry Select Committee has been the revising of the industry Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases. This in turn forms the basis of individual companies' codes. Our understanding is that all major pub companies issuing leases and tenancies have now adopted their own code of practice.

  19.  A number of companies have also applied to the BII for accreditation of their code. This process is testimony to the activity undertaken by the industry in response to the 2004 inquiry and has served to publicise the existence of the codes themselves and the requirements on the companies issuing the lease/tenancy. BII accreditation should not be seen, however, as a kitemark or as an endorsement of the quality and fairness of a code's provisions, it is simply an assessment of the transparency of the code and whether the terms and conditions are clear to would-be tenants.

To what extent have revisions to the codes of practice met the Committee's concerns?

  20.  The existence and accreditation of the codes is clear evidence of the efforts taken by industry landlords to address the Trade and Industry Select Committee's concerns. The principal objective behind the Committee's recommendations for the framework code to be revised was to ensure that tenants knew what they were letting themselves in for at the start of the process, with a view to minimising potential areas of dispute. By and large, the codes have addressed that objective. They are relatively open and transparent and address many of the concerns of critics of the system.

  21.  Since the 2004 inquiry we have also witnessed a greater willingness on the part of the pubcos to engage with their lessees to address generic issues of concern. The ALMR has set up a series of "contact group" meetings with the major pub landlords and multiple lessees to discuss issues such as buildings insurance costs, beer pricing and discounts policy—all of which were raised during the 2004 inquiry. At times the parties have agreed to disagree, but at least there is a willingness to listen.

  22.  That said, the existence of the codes has not addressed all the concerns of lessees and there remain issues on which leases are far from clear and transparent. These principally relate to the assumptions made in the establishment of fair maintainable trade and hence rent, beer discounts and the implications of the amusement machine tie. We have set these out in detail in separate sections below.


  23.  The basis on which annual rents are set is the subject of a complex formula taking into account market and trading conditions, the degree of flexibility in the other terms of the lease, the nature and extent of the tie and the degree of risk being undertaken by both parties. Principally, however, rents are related directly to the anticipated trading levels expected from a particular outlet and the net margins the lessee is likely to be able to achieve. This is an imprecise science, but pubcos are now increasingly willing to enter into detailed negotiations, to consider additional factors and to review rents accordingly. But the price for this flexibility is a higher initial annual rent or further lease restrictions.

  24.  The assumption is that lessee and landlord each take a 50% share of divisible profits. This is derived from the landlord's assessment of "fair maintainable trade" achievable by a "good average tenant". The landlord calculates what their 50% share will be and takes it in the form of rent stipulated over the next five years and regardless of the actual trading position of the pub. In a strong market, this is less of a problem because reasonable business growth and price inflation will compensate to an extent for over-rental. In an economic downturn the rent stays the same and the lessee's share of a reducing profit diminishes to sometimes an unsustainable extent. The lease model does not generally have the flexibility to recalculate a new divisible profit in a declining market.

  25.  Recent analysis by licensed trade surveyors, Fleurets, suggests that the 50% divisible profits model in current market conditions actually translates into a landlord share of closer to 55-60% of divisible profits over a five year period. This is because, over a five year period, rent is index-linked but costs have increased by more than the rate of inflation. The reality of the FMT calculation is still not transparent to all potential lessees.

  26.  Of far greater significance and concern, however, are the assumptions used by the pub company to reach the net profit figure. In rent calculations, it is common for the landlord to make an allowance for common controllable site operating costs—such as staff, cleaning, utilities, glassware etc. This is invariably set at around 30-35% of anticipated turnover and has remained unchanged for many years. This figure is presented as a headline figure in the rent calculations, it is seldom broken down into its component parts and no justification is provided as to how it has been arrived at. In short, it is little more than an assumption of how much the landlord thinks it will cost the average lessee to run the average pub. The calculation is neither transparent nor evidence based.

  27.  Over the past year, the ALMR has been working on a new research project to benchmark common controllable site operating costs within the sector. The results of this research reveal that the assessments of costs being used by landlords in rent calculations are unrealistic and the true costs of operating the business are not being fully taken into account. As a result, the property is likely to be over-rented, further squeezing the lessee's income.

  28. Our research data reveals that the average cost of running an average licensed retail premises is just over 52% of annual turnover. This excludes rent and cost of sales. This varies depending on style of operation from 44.5% to 61.5% of turnover. Full details of this, together with the impact this has on lessee's margin is included in Annex 1.


  29.  Beer is sold into the market at a wholesale price, and pubcos are able to negotiate significant discounts from this wholesale price by virtue of the volume of product they are purchasing. During the early part of this decade when the beer tie was scrutinised by the UK and EU Competition Authorities, and indeed the Trade and Industry Select Committee, there was a view that the distribution of beer discounts was reasonably equitable. At that time, roughly speaking, the average discount on a brewer's barrel of beer (36 gallons) was about £120. This was divided as to £50 for the pubco, £50 for the tenant and about £20 for distribution costs.

  30.  Since 2004, whilst the wholesale price of beer has increased by around 50%—largely due to the increased cost of raw materials—pubcos have continued to be able to negotiate ever larger discounts. This is because, in a declining market, the competitive position of beer producers has been substantially weakened. Discounts have been offered in order to push volume sales. Despite this, and contrary to the position in 2004, the pubcos have not passed those discounts onto their lessees. The pubco may now receive a discount of £230 per barrel, but the lessee still only receives the original £50 share. This has forced retail prices up in a difficult market and contributed to the widening gap between the pub and the supermarket where maximum discounts are passed on to customers.


  31.  The situation with regard to the amusement machine tie remains as inequitable as it did at the time of the 2004 inquiry, when the committee concluded that it remained unconvinced of the benefits of the tie. There is an absence of transparency regarding share of machine income and the true cost to the lessee. This is an issue of significant concern to tenants and lessees because machine income makes a direct contribution to bottom line.

  32.  Most lease agreements provide for the pub company and the lessee to share net machine income equally. In reality, however, the lessee's 50% share of net machine income is often included within the pub's net profit and so the lessee is "charged" twice and effectively only receives 25% of the machine profit.

  33.  In addition, many pub companies oblige machine suppliers to pay a royalty to be included in their approved list. At the time of the 2004 inquiry, the pub companies claimed that this royalty payment was used to subsidise rents and ensured that lessees had access to the most up to date games which generated the highest incomes. Evidence from within our membership suggests that this is not the case. One of our members reported that he was being charged £70 per week rent for a machine in an outlet on an Enterprise lease. The rent for exactly the same machine, provided by the same supplier at the same time in another outlet in his estate operating on a Fuller tenancy was just £53.50.

  34.  The lack of transparency as to how machine rents are determined, royalty payments and the effect of including machine income in a premises rental calculation is contrary to the spirit, if not the letter of the codes of practice.

To what extent are the codes applied by the pubcos?

  35.  We are not aware of any problems with regard to the application of the codes by the pub companies. This is an issue of trust—the pubcos need to ensure that their employees always follow their codes, not only to the letter but also in spirit, and it is incumbent on them to constantly police the situation.

  36.  There is one interesting issue which has arisen during our discussions with members. At the time of the 2004 inquiry, the major pubcos said that they were in the process of removing upward only rent reviews from their leases and others said that they would not enforce those provisions if contested. This latter point is emphasised in most codes of practice. Many old leases will still contain UORR clauses, however, and it is a moot point as to what happens when the terms of a code of practice conflict with what is said in the lease. In a contested rent review, it would be unclear whether an Arbitrator will have regard to the lease wording or the perceived intention of the codes of practice.

Is there a need for further regulation of the industry?

  37.  Despite these above concerns, we do not believe it would be appropriate to have additional legislative intervention in the industry. The pub industry is already heavily regulated and further statutory burdens would be unlikely to prove helpful. Just as with the Beer Orders, the Association believes that there would be unexpected and unsatisfactory outcomes that would destroy confidence and disrupt an industry that is still in a state of flux. Moreover, in an industry which continues to function through small business units, it is the imposition of new legislative and regulatory burdens which impact on the competitive position of tenants, and indeed all companies within the sector, far more than perceived deficiencies in the competitive structure of the industry.

  38.  Continued public scrutiny of their actions has resulted in a step change in the relationship between lessees and landlords. As a result of the 2004 inquiry, we now have a voluntary system of best practice which means that all prospective tenants are aware of the rent review process and that a complaints and dispute process is established. There is still a way to go before we have a fully transparent system with the full disclosure of information, but we hope that further pressure from this committee will resolve that through a voluntary route.

  39.  We believe it would be helpful were this inquiry to concur with its predecessor's conclusions and recommend that its "successor Committee in the next Parliament review the situation in the public house industry". This will maintain pressure on the pub companies to resolve outstanding issues of concern.

  40.  The pub leasing model is by no means perfect and there will always be tensions inherent in this relationship as both sides seek to extract the maximum value and to obtain minimum risk to themselves from the arrangement. The key is achieving an acceptable balance to enable all sides to achieve commercial success. The different priorities are not necessarily mutually exclusive and can, with goodwill, be aired and resolved within the industry.

29 September 2008

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