Pub Companies - Business and Enterprise Committee Contents

Supplementary evidence from the Association of Licensed Multiple Retailers (ALMR)

  As you will be aware, the Association of Licensed Multiple Retailers (ALMR) has previously submitted both oral and written evidence to the ongoing inquiry into the pub companies. Following discussions with the Clerk to the Committee, we have, as requested, collated additional market information which we believe may assist the Committees deliberations.

  Our previous evidence has focused on providing an objective overview of the problems faced by pub company (pubco) lessees; at that time we did not touch on possible solutions. Again, following discussions with the Clerk, we have set out below some suggested recommendations for the Committee's consideration. We believe these to be sensible, pragmatic and would address the most pressing issues of concern to operators, without the need for further unwelcome regulatory intervention.


  Since the introduction of the Beer Orders in 1989, the nature of pub ownership has changed out of all recognition. No one at that time could have predicted the emergence of the debt market nor its impact upon the pub sector, but the ability of pub owners to issue low coupon bonds against income derived from pubs resulted in an unexpected balance of power between pub property owners, brewers and pub retailers, with tied property owners achieving more market dominance than envisaged.

  At a national level, the model of a vertically integrated business—with one company producing, distributing and retailing product—has been broken. The former national brewers (Whitbread, Allied Domecq and Bass). The only remaining vertically integrated businesses are the super-regionals—Marston's (approx 2,250 outlets) and Greene King (approx 2,553 outlets)—and regional brewers. Brewery ownership of pubs has declined from 44,100 in 1989 to just 9,811 in September 2008.

  In contrast, the growth in pub ownership by property companies with no production capacity has grown apace. The number of pub company owned pubs was negligible prior to the Beer Orders and now account for 27,461 outlets (43.5% of pubs). Around half of these are owned by the two national pub companies, Enterprise and Punch. The Pub Industry Handbook 2009 quotes the following numbers of pubs by owner
Enterprise Inns7,775 pubs
Punch Taverns7,604 pubs
Admiral Taverns2,300 pubs
S&N Pub Enterprise2,200 pubs
Other pubcosless than 2,500 combined
(County Estate, Wellington
Trust Inns, London Town)


  You are keen to understand whether the pub company estate has been particularly adversely affected by the recent trend in pub closures. There has been much speculation about whether the increased numbers of closures have come from the pubco or independent free trade. The ALMR has recently commissioned research from CGA Data on pub opening and closures since 2003. The results are broken down by trading style (segmented analysis) and ownership (operational style). I have attached this for your information at Appendix 1.

  As the attached table shows, the bulk of the closures have come in the pubco and independent/free trade model. The pubco estate accounted for 37% of all net closures in 2008, and the independent free trade some 42%. Taken over the period as a whole, however, the cumulative loss in the pubco estate accounts some 46% of all net closures. In contrast, the decline in the independent free trade is 37%. The trend in net closures is also more marked in the pubco sector and has accelerated more significantly than in the independent sector. Between December 2007 and December 2008, the number of net closures in the pubco sector increased by 27% whilst the increase in the independent free trade was more modest at 14%

  It is worth noting in this context, however, that the reason there are a higher number of net closures per week in 2008 is because new pub openings dropped away dramatically over the course of the year. The number of new openings in the pubco sector was two thirds lower in 2008 than in 2007. This suggests that the pubco business model is not expanding. They are not attracting new entrepreneurs into the market and whereas previously pubco lease could easily be assigned to a new operator when the lessee got into trouble, or assigned to a temporary management company; increasingly the pub is now closing.


  You have asked for up to date information on wholesale beer prices and the level of discount available to the tied and free trade. This type of information is commercially sensitive as the level of discount will be dependent both on the size of the company and the volume of product purchased. Nevertheless, we have canvassed the views of the tied lessees and free trade operators in order to update the figures provided to you by Morgan Stanley; although these are dated 2008, they are considerably out of date.

Morgan Stanley estimates ALMR estimates

List Price
£350 per barrel (36 gallon) £450-480 per barrel (36 gallon)
Tied lessee discount£20-30 £40-45
Individuals free of tie discount£75-100 £140-150
Multiple free of tie discount £170-180
Rising to £205 for larger companies
Pubco discount£150-170 £210-250

  The list price and level of discount will be dependent on the type of product purchased. Broadly speaking, a higher level of discount will be available for premium products owned by the brewer with whom supply agreement is contracted. The prices quoted above are current as at February 2009 and relate to premium lager. The list price and discount for cask ale is, on average, £100 lower.

  For example, the list price of Heineken purchased direct from Scottish Courage (Feb 09 price list) is £483 per barrel (36 gallon, 288 pints). An individual free trade tenant would be able to buy it for £333-343 per barrel and a multiple operator would pay £278-£303. The pubco would pay just £272-£233 per barrel, but would sell it on to their tied lessee for £438.

  It is also worth noting in this context that whilst the wholesale list price will change, usually on an annual basis, the level of discount invariably does not. The level of discount is expressed as an absolute figure, not a percentage of the list price. When the tied pubco model was emerging in the 1990s, the level of discount was significantly less than those quoted above. On average, the total discount available to a pubco was £50 per barrel, and this was invariably split 50:50 between the property owner and the tied lessee; indeed, some tied tenants will still only receive £20-30 discount. Whilst the size of the discount available to the pubco has broadly kept pace with increases in the wholesale list price, the portion of that discount passed on to the tied lessee has not. Even the best performing tied lessees and most flexible pubco leases only attract a discount of £45 per barrel.


  In our previous written evidence we have set out in some detail the problems faced by multiple operators. In short, the long lease model operated by the national pub owning companies is insufficiently flexible to deal with the severer economic downturn currently being faced. When the model was developed in the early 1990s, it was based on an assumption that the landlord and lessee would share the economic benefit accruing from the business. Whilst that may have been so in the early days, it is far from being the case today. Rather than an equitable share of the profits of the business, the reality is that the landlord's share is now closer to 70%, and in some cases may be as high as 80%. In seeking to suggest remedies or recommendations to the problems faced by operators, the ALMR's overriding objective is to ensure that the division of the economic benefit from the property is fair and transparent.

  I should stress that the problems arising in the market at present relate to the long, fully-repairing tied leases (typically 10—30 years) operated by the national pubcos—that is those companies owning pubs but with no brewing capacity and with a leased estate which is genuinely nationwide (this could be defined by number of outlets). Broadly speaking, the same levels of problems are not experienced by tenants or lessees of smaller pub companies or regional brewers where the economic benefits, and risks, of the business are shared more equitably. The following recommendations should therefore only apply to the national pub companies and not to the trade more generally. We would strongly urge the Committee to be equally specific in its definitions of where the problems lie and the solutions to apply.

  Again, in confidence, we have attached examples of three actual rental calculations at Appendix 2. [not printed here] In each case, the rent has been assessed by the pub company and the same calculation has been made by an independent retail expert. These examples highlight the lack of transparency in the model and the problems which arise from the use of assumptions of trade and costs. The situation is further complicated by the economic effects of a product tie—and it is the effects of the tie, rather than the tie itself which concerns our members. The examples demonstrate the complexity of the pub leasing model, and highlight the fact that there is no one single remedy which can be deployed in isolation as a panacea. A raft of remedies will be required to address operators concerns. We would therefore urge the Committee to resist the temptation to recommend a simple regulatory solution.

  In the following recommendations we refer to a "Code of Practice". This should be taken to refer to the industry code of practice on the issue and management of leases as well as the individual codes developed by the individual companies. We further believe that any company issuing a lease should be required to publish a code of practice for their lessees.

    —  Rent Calculation: the basis of calculating rent in the pub trade is done by means of reference to a hypothetical tenant and an assessment of Fair Maintainable Trade. These assumptions are, in the first instance, based on calculations from the landlord. The examples provided at Appendix 2 clearly demonstrate how this model applies in practice. In a declining beer market and a contracting economy, the model over-estimates the turnover the unit can realistically sustain and significantly under-estimates the costs of doing business.

        It is this latter point which is particularly significant and which we believe should be assessed. The allowances made for the costs of running the business have remained broadly unchanged over the past decade. At the same time, the regulatory costs have increased exponentially. In particular, employment costs as a percentage of turnover have increased by 62% over the course of the last decade—from 17% of turnover in 1998 to 27.6% of turnover in 2008.[4]

        As a percentage of turnover, operational costs now amount to 52% of turnover. This includes around 7% for a manager's salary—which a multiple operator would bear as an additional cost but is not normally taken into account by pubcos in their rent calculations. For the purpose of pubco rent negotiations, the operating costs of an average pub would be 43-45% of turnover. The majority of these operational costs will be outside the lessee's control and will be costs that he has no choice but to bear, however efficient an operator he is. Despite this, landlords still routinely make allowances for costs of just 34% of turnover in rent calculations—both initial rent negotiations and subsequent rent reviews. Some surveyors used by landlords as independent experts in rent reviews will only make allowances of 29% of turnover for operating costs.

        We recommend that the Code of Practice be amended to require the landlord to assess costs by reference to nationally published independent, authoritative statistics about the level of operating costs incurred by that type and size of business, such as the annual ALMR Benchmarking Survey.

        In order to assist with the implementation of this second recommendation, we would be happy to make the results of our Survey available to all within the industry and would extend the coverage to include non-ALMR members, individual tenants and other interested parties

    —  Rent Review Process: as has been demonstrated above, the system of rent review is heavily weighted in favour of the landlord. The timing of the rent review and the decision on whether to invoke the provisions of the lease allowing the rent to be reviewed are in the hands of the landlord. Equally, it is for the landlord to prepare an indicative profit and loss account justifying the new rent, and for the lessee to argue against it.

        We believe it is essential that the method of rent calculation is made more transparent so that all sides know and understand how the profits of the business are being divided. The existing Codes of Practice clearly stated that a lessee is obliged to provide full business disclosure to their landlord. Enterprise Inns Code of Practice obliges the lessee to "operate with complete transparency and be required to provide copies of VAT returns and annual accounts as requested". Similarly, there is a requirement on the lessee to be "open and honest in all discussions about the rent" during a rent review. There is no corresponding obligation upon the landlord to be transparent.

        We recommend that the Code of Practice be amended to require the pubco landlord to operate with complete transparency regarding the level of income that they derive from the business, from all income streams. On the basis of this, they should work to ensure a fairer division of profits and economic benefit between the landlord and lessee. It would be for the landlord to decide how best to achieve this and this could be negotiated on a case by case basis using such remedies as a greater level of discount, additional support or removal of part or all of the tie on income streams.

        In addition to the regular system of rent reviews, lessees of some pubcos are able to request a rent review outside of this cycle if they are experiencing particularly difficulties. There is currently a waiting list for such reviews, but there is evidence that the pubcos are listening and responding to genuine cases. Our attention has just been drawn to two worrying developments, however. First, where downward rent reviews are agreed on non-RPI leases following negotiation, the pubco has asked for the terms the lease to be changed to provide for an annual increase in line with RPI, even though the Code of Practice is silent on that point. In some cases, this has nullified the benefit of a rent reduction. Second, one pub company has recently changed the rules such that any review under its Code of Practice can only have effect for a period of one year. Previously they were recorded by deed of variation until the next formal review, whenever that fell. Whilst the pubco would point out that the tenant could keep calling for Code of Practice reviews, that process is time consuming, stressful and not in the spirit of remedying the ills of a business that it is fundamentally over-rented.

        We recommend that the Code of Practice is amended to outlaw the practice of RPI increases. Although this is not a major issue in the current low-inflation environment, it may be a concern in the future.

        In addition, the Code of Practice should be expanded to include more details on the how the rent review will work, the process and procedure to be followed, what the lessee can expect in terms of outcome and what will be expected of them.

    —  Issue resolution: if a lessee disagrees with the outcome of the rent review process, the Code of Practice provides for them to refer the matter to arbitration or determination by an independent expert. The existing arbitration route is expensive and not easy for an individual lessee to navigate. It also relies upon the input of "independent experts". In practice, the majority of these are surveyors or members of the RICS pub valuation group. As many work for the pub companies, their `independence' is sometimes seen to be in doubt. Moreover, whilst they are experts at assessing the value of a property, they are not well equipped operationally to determine fair maintainable trade and likely profit.

        What lessees need is access to a quick and cheap means of resolving disputes and disagreements over trading levels, costs and other variables in the rent calculation model. We recommend that the industry works to develop a voluntary system of dispute resolution whereby disputes between the national pubcos and their lessees are referred to an Independent Rents Panel.

        An Independent Rents Panel should comprise of one industry expert, one operational expert and be chaired by an independent member. The experts could be drawn from a list nominated by pubcos and lessees; a large number of ALMR Council members have volunteered their time to sit on such a panel and act as an objective expert on the operational side of the business.

    —  The Tie: as can be seen from the examples provided in Appendix 2, the economic effects of the inclusion of a product tie within the lease agreement distort the fair division of profits between the landlord and lessee. It is the economic effect of the tie, and its place in the agreement as a whole, rather than the fact that there is a product tie in place that causes the main concern to our members.

        We recommend that the Code of Practice be amended to require the landlord to be transparent on the level of profit they derive from the business from all income streams, including profit on sale of wet goods and machines. In an ideal situation, the landlord would be required to create a notional profit and loss account for the outlet, stripping out the economic effect of the tie on the business.

        We understand that the Committee has received several proposals calling for the abolition of the tie by means of legislation. We are concerned that further regulatory intervention in the sector may have unforeseen consequences—as indeed the 1989 Beer Orders did. If the Committee is minded to make a recommendation on the tie, then we would suggest the following:

        We would however recommend that the Committee challenge the pubcos' usual requirement for compulsory supply agreements (the Tie) on long, fully repairing and insuring leases. Lessees would welcome the opportunity to choose to negotiate lease terms that properly reflect the open market and then to be able to enter into separate supply arrangements. We would gladly assist with how the new arrangements be defined and the transition be managed.

    —  Code of Practice: the development of an industry and individual company codes of practice on the issuing of leases was the most significant outcome of the 2004 Trade & Industry Select Committee Inquiry. We believe it would be helpful if the current inquiry were to build on that work to strengthen the Codes' provisions—in addition to the above amendments highlighted above.

        We recommend that the existing Codes of Practice be amended:

        —  to make clear that that they apply to existing as well as new leases

        —  to provide for the removal of all Upward Only Rent Review clauses, from existing as well as new leases, at no cost to the lessee. Although all the main pubcos have clarified that they will not apply these in practice, the fact remains that the clauses remain in existing contracts and could be legally enforced if a new owner wished to. Most landlords are happy to revise the contract to remove these clauses on request; however they charge existing lessees £500 for this. It will be important for the amendments noted above in relation to RPI to be included at the same time to avoid an UORR clause being immediately replaced by an annual uprating.

        —  to provide for lessees to take action against the pubco for non-compliance with the provisions of the code of practice


  Data provided covers all of the UK. Openings during the year refer to new outlets opening for the first time. A change of use or change of ownership would not be reflected in the closure figures.

  Segmented analysis refers to analysis by trading style and Operational analysis refers to analysis by ownership.

Total Pub Analysis
Dec-03Dec-04 Dec-05Dec-06 Dec-07Sep-08

Total Pubs
66,690 66,279 66,177 65,861 64,452 63,052

Openings During Year
928 1,162 1,716 1,035 403
Closures During Year 1,339 1,264 2,032 2,444 1,803
Year on Year Change-411 -102-316-1,409 -1,400
Net Closures Per Week 8 2 6 27 36

Segmentational Analysis
Dec-03Dec-04 Dec-05Dec-06 Dec-07Sep-08

Community Local
42,186 40,456 39,791 37,400 36,258 35,091

Openings During Year
283 326 378 193 82
Closures During Year 1,024 780 1,072 1,215 1,124
Migrations in/out of segment -989-211-1,697 -120-125
Year on Year Change-1,730 -665-2,391-1,142 -1,167
Net Closures Per Week 14 9 13 20 27

Food Led Outlet
9,533 9,930 10,068 11,284 11,268 11,251

Openings During Year
84 84 217 94 64
Closures During Year 58 112 312 181 143
Migrations in/out of segment 3711661,311 7162
Year on Year Change 397 138 1,216-16 -17
Net Closures Per Week -1 1 2 2 2

Town Centre Bar
11,197 11,830 11,905 11,800 11,368 11,176

Openings During Year
275 315 433 229 82
Closures During Year 146 241 399 633 342
Migrations in/out of segment 504 1-139 -28 68
Year on Year Change 633 75-105-432 -192
Net Closures Per Week -2-1-1 8 7

Seated Cafe/Wine Bar
3,774 4,063 4,413 5,377 5,558 5,534

Openings During Year
286 437 688 519 175
Closures During Year 111 131 249 415 194
Migrations in/out of segment 114 44 525 77-5
Year on Year Change 289 350 964 181 -24
Net Closures Per Week -3-6-8-2 0

Operational Style Analysis
Dec-03Dec-04 Dec-05Dec-06 Dec-07Sep-08

Managed Group
6,055 7,083 6,327 5,540 4,962 4,397

Openings During Year
89 85 85 90 32
Closures During Year 60 71 82 107 76
Migrations in/out of segment 999-770-790 -561-521
Year on Year Change 1,028 -756-787-578 -565
Net Closures Per Week -1-0-0 0 1

9,144 9,832 9,900 9,643 9,935 9,811

Openings During Year
29 31 51 58 26
Closures During Year 76 85 114 137 192
Migrations in/out of segment 735 122-194 371 42
Year on Year Change 688 68-257 292 -124
Net Closures Per Week 1 1 1 2 4

Pub Cos
30,027 27,632 27,626 27,985 27,569 27,461

Openings During Year
195 145 121 196 72
Closures During Year 323 301 587 774 622
Migrations in/out of segment -2,267 150 825 162 442
Year on Year Change-2,395 -6 359-416 -108
Net Closures Per Week 2 3 9 11 14

21,464 21,732 22,324 22,693 21,986 21,383

Openings During Year
615 901 1,459 691 273
Closures During Year 880 807 1,249 1,426 913
Migrations in/out of segment 533 498 159 28 37
Year on Year Change 268 592 369-707 -603
Net Closures Per Week 5-2-4 14 16

4   All information on costs derived from Annual ALMR Benchmarking Survey-copy of which already supplied to Committee. Back

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