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membership structure and no longer represents landlord interests—uniquely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.
MARKET OVERVIEW
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
OWNERSHIP OF UK PUBS
| Type of operator |
1989 | January 2004
| % change 1989-2004 | August 2008 (est)
| % change 2004-08 |
| Independents | |
| | | |
| Single outlets | 16,000 | 16,850
| | 17,700 | |
| PubCo | | |
| | |
| Tenanted/managed | Neg | 34,125
| | 30,800 | |
| Sub-Total | 16,000
| 50,975 | +218.5%
| 48,500 | -5% |
| Brewer | | |
| | |
| National | 32,000 | 0
| | 0 | |
| Regional | 12,000 | 8,589
| | 9,000 | |
| Tenanted/managed | |
| | | |
| Sub-Total | 44,000
| 8,589 | -80.5%
| 9,000 | +5% |
| Total | 60,000 | 59,564
| -0.7% | 57,500 | -3.5%
|
Source: ALMR members and Quantum Business Media.
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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.
UK MANAGED PUB/BAR ESTATE
| 2004 | October 2006
| October 2008 |
| Community local | 4,311
| 3,225 | 2,750 |
| Food led outlet | 3,180 |
3,039 | 3,045 |
| Town centre bar | 3,428 |
3,478 | 3,260 |
| Accommodation led pub | 641
| 374 | 488 |
| Nightclub | 421 | 470
| 485 |
| Seated cafe/wine bar | 1,053
| 1,198 | 1,211 |
| Total Managed Estate | 13,034
| 11,784 | 11,239 |
Source: CGA/ALMR Benchmarking Survey.
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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.
THE PUBCO
LEASED MODEL
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.
CODES OF
PRACTICE
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.
CALCULATION OF
RENT—FAIR
AND MAINTAINABLE
TRADE
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.
BEER DISCOUNTS
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.
MACHINE TIE
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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