Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Enterprise Inns plc


  Enterprise Inns plc ("ETI") broadly supported the recommendations of the Trade and Industry Select Committee (2004) report into the relationship between pub companies and their tenants, not least because ETI either had already met, or was on track to meet the standard to which the vast majority of recommendations aspired. However, ETI did not and does not accept the rationale behind the Committee's recommendation to remove the tie for Amusement With Prize (AWP) machines and the reasons for this are explained in paragraphs 19 & 20 below.

  Current market conditions are challenging for all consumer-facing businesses and the ETI leased and tenanted model is well-placed to respond to these trading challenges and to provide valuable assistance to licensees in appropriate circumstances.

  ETI believes that current market mechanisms ensure that there is vibrant competition across the pub sector, that existing custom and practice, as demonstrated by ETI, is both fair and flexible and that existing regulation is more than adequate.


  ETI was established in September 1991, was listed on the London Stock Exchange in 1995 and has grown its estate, through acquisition, to the current level of 7,782 pubs, located throughout England and Wales. 98% of the pubs in the ETI estate are owned freehold by the company and all ETI pubs are operated exclusively under tenancy or lease agreements.

  ETI remains steadfastly committed to the leased and tenanted business model which provides a low entry cost, low risk opportunity for an entrepreneurial, independent business person to develop a successful business supported by the organisational capabilities and financial stability of a large company.

  ETI has sought continually to improve the quality of its pub estate, through churn and investment. In the last 4 years, the company has invested over £250 million, alongside substantial investment by licensees, in additional facilities, refurbishments and new retail propositions to help them grow their businesses in an increasingly competitive marketplace. The value of the ETI pub estate now stands at £5.8 billion.


  The leisure market has changed significantly over recent years, as a consequence of changing economic conditions, demographics, lifestyles and consumer habits. In addition, the number and range of choices for consumer discretionary expenditure has expanded massively. Furthermore, staying at home has become an increasingly attractive option, with huge improvements in at-home entertainment, the massive expansion of internet usage and the impact of supermarket pricing, particularly on alcohol consumption. Pubs and licensees have had to evolve and improve in order to compete effectively and in some cases to survive in this testing marketplace.

  In the last 12-18 months, pubs have been further affected by the worsening economic climate, compounded by the smoking ban and the burden of regulation and taxation. Exposed to rising input prices, the crisis of confidence amongst financial institutions and the current decline in consumer confidence, the pub industry is inevitably facing severe trading challenges.

  Pubs are closing, permanently, at an unprecedented rate, as the accumulation of external influences causes them to become unviable as businesses. The majority of such closures are occurring within the independent free trade pub and club sector (Source: CGA Strategy). However, current economic conditions are undoubtedly contributing to the increase in business failures of all types, including in leased and tenanted pubs.

  In ETI's experience, there is a strong correlation between business failure and licensee quality, regardless of the economic circumstances. Where pubs in which licensees "failed" have been re-let, the sales performance of these pubs, under new management, has typically improved by 12-15% in the 12 months following re-opening, when compared with the 12 months prior to business failure.


  The evidence presented by ETI to the 2004 inquiry sought to demonstrate that the ETI leased and tenanted business model, openly negotiated and fairly managed, closely aligns the profit objectives and the business risks of both parties.

  The supply tie ensures that ETI has a vested interest in sales of drinks products, which are inextricably linked to pub traffic. Increased pub turnover, as a consequence of increased footfall, leads directly to increased wholesale margin for both ETI and its licensee, whilst rent levels remain constant, at least until the next scheduled rent review. Conversely, declining sales of tied drinks products lead directly to a fall in income for ETI.

  In simple terms, a drop in beer sales introduces an immediate reduction in the "wet rent" paid by the licensee. If circumstances are such that further help is needed, the leased and tenanted model provides a real incentive for ETI to offer additional assistance. Never has this been more obviously and demonstrably evident than in the current trading climate, where ETI is working harder than ever, for less profit, supporting licensees with substantial financial help.

  In the year to September 2008, some 1,600 ETI pubs received direct, non-contractual financial assistance from the company, comprising a combination of non-repayable rent concessions and tied drinks product discounts, on each occasion for an average of four months. Approximately 70% of businesses which receive such support regain financial stability and continue to trade. The balance are either assigned (sold) by the incumbent lessee, or surrendered by mutual agreement to the company, in order to be re-let to new operators.

  Current economic conditions are exposing the relative weakness and fragility of some small business operators, whilst at the same time reinforcing the positive attributes of the tied lease and tenancy model. In difficult trading times, it is inevitable that some licensees will not be good enough and some businesses will fail. However, far more than with any lending bank or other financial institution, ETI has a vested interest in helping good quality, committed and honest licensees to survive, offering not only valuable business advice but real financial concessions where appropriate.

  Finally, it must be understood that every individual contract between ETI and a tenant or lessee is initially negotiated and agreed by both parties, with complete transparency of every obligation that each party is undertaking. This includes full details of drinks product pricing, amusement machine pricing and share of income and a valuation of the rent payable having due regard for the terms of the lease.

  80% of all ETI pubs are let on long term, assignable agreements in which subsequent operators (assignees) pay a capital sum (premium) to the original lessee (assignor) in order to acquire and enjoy the rights (and obligations) of such agreements.

  In ETI's experience, the vast majority of all tenants and lessees accept and abide by the terms of the contractual agreement they have made, regardless of the trading conditions they face and at ETI we remain convinced that the leased and tenanted business model continues to represent an unparalleled opportunity for entrepreneurial licensees to create a business generating real profit and long term value.


6.   TISC observations and recommendation regarding the detrimental impact of listing and marketing fees. (Para 53 )

    —  ETI has never levied listing or marketing fees on any supplier of any products offered for sale to licensees. The extensive portfolio of drinks available for sale is selected according to customer demand, product quality and logistical considerations.

7.   TISC observations and recommendation regarding product range and consumer choice. (Para 61)

    —  ETI recognises the benefits of providing choice to our licensees, who are able to select from a vast range of drinks products, sourced from local, regional, national and international producers.

    —  Since acquiring former brewery-owned estates, ETI has massively increased the range of drinks available to all pubs, from all brewers, now comprising 11 standard lagers, 18 premium lagers, 59 keg ales, three stouts, 98 premium and standard cask ales, plus 1,391 cask ales from small independent brewers (SIBA), 22 keg ciders and 106 different packaged beers and ciders.

8.   TISC observations and recommendation regarding access to market from small, independent brewers. (Para 66)

    —  ETI recognises the contribution that small, independent brewers can make to the range of beers on offer in local, regional and national markets.

    —  Cask ale continues to represent almost 13% of all beer and lager volumes sold in ETI pubs, almost double the national average and by working closely with the Society of Independent Brewers (SIBA) through their direct delivery scheme, 312 local breweries have supplied almost 1,400 different beers to ETI pubs in the last 12 months.

11.   TISC observations and recommendation regarding repairing obligations and dispute resolution. (Para 90)

    —  ETI has a dedicated resource in place to manage the company's repairing obligations and to conduct a formal programme of property repair inspections to ensure that both parties' obligations are effectively discharged.

    —  ETI has also introduced mechanisms (dilapidations bond and repairs fund) by which outgoing assignors and incoming licensees can ensure that their repairing responsibilities are discharged in full without fear of recourse.

    —  Our existing Code of Practice provides a straightforward escalation mechanism by which tenants may seek to resolve disputes arising from any aspect of their agreement with the company.

    —  In the event that we fail to agree on the important matter of rent, our practice is to refer the dispute to independent experts or arbiters.

    —  In the 24 months to September 2008, out of 2,687 rent reviews completed, just 15 have been referred to independent determination for settlement, of which nine have now been settled.

    —  Arbitration should remain an instrument of "last resort" and we are encouraged that its infrequent occurrence would indicate that our existing escalation mechanisms operate effectively. In the event that arbitration is necessary, we try to ensure that the burden of costs reflects the outcome.

    —  ETI has worked extensively with the British Institute of Innkeeping during 2008 with the objective of producing a low risk, low cost, fast track solution to the independent expert determination of rent and expects to launch this over the coming months.

12, 13 and 14.   TISC observations and recommendations regarding information disclosure upon initial let or assignment (Paras 103, 104, 105 and 106)

    —  ETI provides, and draws to the attention of prospective licensees, extensive information relating to individual outlets before any decision to proceed with a lease is required. We do recognise our responsibility to ensure that tenants take proper notice of all the information provided, including professional advice where appropriate.

    —  A high standard of due diligence is required in respect of the information provided and received during a lease assignment and best practice indicates that the assignor's profit and loss account and a full property survey, should be the minimum requirement for disclosure purposes.

    —  The ETI Retailer Pack and the ETI Guide to Assignment, (for both assignors and assignees), clearly detail the actions that all parties (including the Company) should take and the conditions that we expect to be met if we are to grant an initial lease or give our consent to assign.

    —  ETI regularly refuses consent to assign until such time as the incumbent licensee (assignor) has fully complied with the defined repairing responsibilities under their lease agreement, thereby ensuring that a new licensee (assignee) commences occupation in a building which is fit for purpose.

    —  Since 2004, all new ETI agreements include an express clause which enables the Company to refuse consent to assign unless the assignor provides prospective purchasers with a minimum of two years accounts. In all cases on assignment (even of a lease which predates 2004) we interview prospective assignees and, acting reasonably, would withhold our consent to assign if we have any doubts about the ability, preparedness or standard of due diligence of the assignee.

15 and 16.   TISC observations and recommendation regarding the use of independent professional advice. (Paras 110 and 111)

    —  ETI strongly advocates that prospective licensees should seek independent professional advice (financial and legal) before entering into an agreement and we provide new entrants with a list of independent solicitors who are familiar with our agreements.

    —  During 2004, ETI introduced measures to make the requirement to take such advice an enforceable condition of purchasing an ETI agreement through assignment, such that all new licensees at assignment must prove that their business plans have been reviewed and signed off by an independent financial advisor. Since the introduction of this mandatory condition, almost 2,700 assignments have occurred.

    —  ETI will also contribute £250 towards the costs of financial advice, for prospective licensees who progress to completion of an agreement, utilising one of a list of independent firms of accountants.

    —  ETI has developed a new tenancy agreement, in which the continuing utilisation of a qualified trade accountant, to provide effective management information and financial controls, is a mandatory requirement of the agreement.

17 and 18.   TISC observations and recommendation regarding prices paid for drinks supplies. (Paras 124 and 125)

    —  Discounts available in the market are broadly understood across the industry. However, the specific prices paid by ETI to its suppliers should have no bearing on the decision-making process for a tenant or lessee. The critical information required to enable a tenant to produce a business plan is the price, net of discounts, that the tenant is to pay for supplies.

    —  ETI operates a variety of permanent discount schemes on beers purchased from the company and approximately 60% of licensees currently derive some benefit from these schemes, which are contractually protected under their agreement. (This excludes temporary discount concessions granted during a period of financial assistance.)

    —  The proportion of an ETI licensee's turnover accounted for by drinks purchased under the tie has reduced from approximately 61% (2005) to 55% of turnover in 2008. During this period, food sales, as a proportion of total sales, have grown from 17% to 21%. Profit from sales of food, as a proportion of total profit, has increased from 22% to 26%.

19 and 20.   TISC observations and recommendations regarding the tie for amusement with prizes (AWP) machines and the allocation of machines share between tenant and landlord. (Paras 129 and 132)

    —  The Select Committee concluded, correctly in our view, that "the machine tie improves tenants' takings from AWPs" and industry research clearly demonstrates that there are benefits in terms of absolute and shared income, security and transparency, derived from ETI's involvement in the management and administration of machines. (Average takings in free-of-tie machines are 26% lower than in tied machines—source: National AWP supplier)

    —  However the Select Committee subsequently made its recommendation to remove the tie for amusement machines based on the statement that "free-of-tie tenants make more money... from machines than tied tenants do...". As free-of-tie tenants receive 100% of takings, whilst ETI tied tenants receive, on average, 50% of takings under their contract, this finding is self-evident, but does not provide a valid rationale for the removal of the machine tie, nor does it consider the consequences of doing so.

    —  ETI operates a variety of machine tie agreements, ranging from entirely free-of-tie to sharing approximately 50% of the net takings. These alternatives are made clear to prospective licensees and can therefore be fully accounted for in their evaluation of the earnings potential from machines, its contribution to house business profit and its relationship to the total rent charged for the business.

    —  Under existing tied machine sharing arrangements, the impact of the decline in income from amusement machines in pubs over recent years, exacerbated by the proliferation of other forms of accessible gaming (notably in betting offices, on TV and via the internet) has been shared equally between ETI and its licensees.

    —  Had ETI accepted the 2004 Committee's recommendation, removed the machine tie and replaced the company's "lost" income with a supplemental fixed charge, it is clear that ETI licensees would now be worse-off, having exchanged a declining source of income for a fixed cost. No mechanism currently exists by which any such supplemental fixed charge might be reviewed to reflect changing circumstances.

    —  During 2007, ETI introduced new share terms on AWPs, whereby the company carries all of the costs associated with the provision and operation AWP machines. These terms have proved to be very effective in removing the risk of high-cost, low income machines to licensees and there are already 1,696 pubs with machines operating on these terms.

21.   TISC observations and recommendation regarding rent valuation (Paras 144 and 145)

    —  ETI is obliged to assess the value of rent having due regard to the terms of the lease. This is not an accountancy exercise, but a valuation of Fair Maintainable Trade, constructed according to guidelines laid down by the Royal Institution of Chartered Surveyors and taking account of local market conditions and prospects.

    —  The assumptions used in the construction of rent calculations are disclosed to licensees, together with an estimated and summarized profit and loss account which supports the rent assessment. This should never remove the responsibility for tenants to produce their own detailed assessment and business plan and ETI's Code of Practice clearly details the rights and responsibilities of both the company and licensees in relation to the provision of information.

    —  However ETI disagrees with the recommendation that a detailed profit assessment should form an addendum to a lease (on the basis that it would supposedly improve transparency). It is those assumptions which support the assessment of rent at the date of review which are pertinent, not those used at the time of an earlier assessment, whether such review is contractual or as a result of a Code of Practice request. It is also common business sense that any prospective licensee should take responsibility for the proper preparation of a meaningful business plan supporting the rent that he is agreeing to pay for the pub that he has chosen.

    —  ETI believes that its approach to the assessment and negotiation of rent is open, transparent and fair, as reflected by the extremely small number of rent reviews that are referred to independent experts for determination, or remain overdue for settlement. Unsustainable rents are completely counter-productive, resulting only in dissatisfaction, instability, increasing the risk of business failure and greater cost to ETI.

22.   TISC observations and recommendation regarding upwards only rent review (UORR) clauses. (Para 151)

    —  ETI confirmed to the 2004 inquiry that it does not enforce any upwards only rent review clauses in any agreements in which such clauses were present and had not done so since 1997.

    —  Furthermore, all ETI agreements developed since 1997 do not contain an UORR clause, but provide that the rent will be assessed at market value upon review, whether that is above or below the passing rent.

    —  Since 2004, ETI has conducted 4,690 rent reviews 3,718 of which contained an express UORR clause which was completely disregarded. The average annual growth in rent arising from rent reviews throughout this period was below inflation at approximately 2.5%, including 162 reviews which resulted in a permanent rent reduction.

23 and 24.   TISC observations and recommendation regarding sustainable rents and concessions. (Paras 158 and 162)

    —  Through its fair rent policy and Code of Practice, ETI always seeks to ensure that rents are reasonable and sustainable, that its assessment of Fair Maintainable Trade is balanced and that tenants are treated fairly.

    —  ETI acknowledges the subjectivity of both parties in the determination of Fair Maintainable Trade and a consequential assessment of rent, but would contend that the wealth of competition and comparable evidence available to the market ensures that ETI's approach to rent is fair and sustainable.

    —  ETI's Code of Practice entitles any tenant, at any time, to request a review of rent should circumstances materially change. In the 12 months to September 2008, ETI has received and completed its evaluation of 37 requests for a Code of Practice review. Eight of these were declined and 29 have resulted in a permanent reduction in rent.

    —  In appropriate circumstances, ETI will offer non-refundable rent concessions or temporary trading discounts to support licensees who are experiencing short-term financial difficulty. Unsurprisingly, ETI will only provide such support where a licensee can demonstrate full compliance with all the terms of their agreement, the maintenance of excellent retail standards and the preparation and disclosure of detailed financial information which demonstrates sound business controls.

    —  In the 18 months to September 2008, approximately 1,800 pubs have received direct, non-refundable financial assistance in the form of discounts and/or rent concessions, at a cost to the company of approximately £12 million to help them during current trading circumstances.

25.   TISC observations and recommendation regarding licensee training. (Para 165)

    —  ETI strongly advocates the importance of training to prospective and existing licensees and, recognising that cost is a potential barrier, provides a wide range of flexible, low-cost and accessible training solutions, together with a money-back guarantee in the event that delegates believe that the course has failed to deliver its value-adding objectives.

    —  The range of accessible training solutions available through ETI continues to grow and attendance levels are stable. Our money-back guarantee applies to every training course and to date there have been no applications for the reimbursement of course fees.

    —  In 2006, ETI introduced the mandatory condition that all applicants for ETI pubs who do not have existing qualifications or a track record of successful operation in licensed premises, must attend the 5 day Business Foundation Programme, covering health and hygiene, employment law, basic financial management, marketing, merchandising and cellar management. In the last 12 months, over 600 delegates have attended the programme.

26.   TISC observations and recommendation regarding the role and performance of business development managers (BDMs). (Para 171)

    —  ETI believes it has been able to attract, train and retain a highly professional and experienced team of managers, who seek to uphold the values and standards expected of them, whatever situation they face.

    —  ETI has invested significant sums in the training and development of its operational management teams and continues to do so. This includes the National Industry Training Awards (NITA) award-winning Associate Regional Manager programme, where candidates undertake a rigorous six month (minimum) training schedule before the prospect of taking up an operational role arises. Furthermore, the Association of Licensed Multiple Retailers (ALMR) has recently named an ETI Regional Manager as its 2008 Operations Manager of the Year. Five other ETI Regional Managers had also been considered in the final evaluation stages of the competition.

27.   TISC observations and recommendations regarding tenant support and complaints procedures. (Para 177)

    —  The provision of high levels of service represents good business practice and is an important differentiator for ETI versus its competitors. Unlike many business franchise agreements, ETI does not force licensees to utilise any specific services and does not charge additional franchise fees for any of the services provided.

    —  The efficient and effective handling of complaints also represents good business practice and the company operates an escalation procedure which helps to ensure that complaints can be resolved to the satisfaction of both parties. These principles are detailed and enshrined within our existing Code of Practice.

    —  Howsoever received by the company, all written complaints and the company's responses to them are reviewed by a Board Director.

28, 29 and 30.   TISC observations on the balance between the costs and the benefits of the tie. (Paras 188, 198 and 199)

    —  ETI concurs with the Select Committee's assessment that the tie usually balances the costs and benefits available to tenants and that the existence of the tie provides demonstrable benefits to both tenants and customers alike. In drawing this conclusion, the Select Committee's observations are consistent with those of each of the 8 previous reviews conducted by various regulatory bodies since 1969.

    —  ETI acknowledges and has to contend with, the main argument it faces from detractors of the tie, who may selectively highlight the difference in prices charged for tied products (when compared with those available in the free market) whilst taking little or no account of the many other tangible and intangible benefits which the Company offers.

    —  ETI also has to contend with the disingenuous interpretation, by campaigners such as Fair Pint, of elements of the TISC (2004) inquiry in relation to the tie. This includes the promotion of the entirely false notion that TISC (2004) concluded that "the tied tenant should be financially no worse off than the free of tie tenant", thereby completely ignoring the many other benefits which the TISC (2004) review recognised were provided by the pub companies.

    —  ETI is continually developing the range of services and support mechanisms available to licensees, but does not expect every licensee to place equivalent (or even any) value on every individual element of support offered.

    —  As described in the introductory paragraphs to this submission, the strength of the tenanted and leasehold model and the positive contribution of the tie towards the alignment of interests between ETI and its licensees has never been more obviously and demonstrably evident than during the current period of weak consumer demand and challenging trading conditions.

31.   TISC observations and recommendation regarding Codes of Practice. (Paras 203 and 204)

    —  ETI supported the recommendation that a comprehensive industry-wide code of conduct should be developed by the industry's trade associations, drawing on all the best practices of landlords and licensees and is aware that such an exercise was completed by the British Beer and Pub Association (BBPA) on behalf of its members. However, it is important to note that approximately 12% of UK tenanted and leased pubs are owned by companies and individuals who are not members of BBPA and therefore not subject to its framework code.

    —  The ETI Code of Practice is an essential part of the proposition we make to prospective licensees and is regularly reviewed and updated to ensure that the Company is competitive and remains at the forefront of best practice.

    —  ETI was a prime mover in the establishment of the British Institute of Innkeeping Benchmarking and Accreditation Service (BIIBAS) and was the first company to submit its Code of Practice for accreditation, which was subsequently received. BIIBAS has confirmed that, since its accreditation, there has been no occasion on which there has been cause to contact ETI regarding a complaint that a breach has occurred.

29 September 2008

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 13 May 2009