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.
MARKET INFORMATION
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 Inns | 7,775 pubs
|
| Punch Taverns | 7,604 pubs |
| Admiral Taverns | 2,300 pubs
|
| S&N Pub Enterprise | 2,200 pubs
|
| Other pubcos | less than 2,500 combined
(County Estate, Wellington
Trust Inns, London Town)
|
| |
PUB CLOSURES
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.
BEER PRICING
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.
ISSUES OF
CONCERN TO
OPERATORS
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
APPENDIX 1—CGA PUB OPENING AND CLOSING DATA
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-03 | Dec-04
| Dec-05 | Dec-06
| Dec-07 | Sep-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-03 | Dec-04
| Dec-05 | Dec-06
| Dec-07 | Sep-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 |
| 371 | 166 | 1,311
| 71 | 62 |
| 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-03 | Dec-04
| Dec-05 | Dec-06
| Dec-07 | Sep-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 |
Regionals | 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 |
Independents | 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
|
