Pub Companies - Business and Enterprise Committee Contents

Supplementary memorandum from Enterprise Inns

  I am writing further to our attendance at the BEC inquiry oral evidence session on 9 December 2008, to provide further information as requested.

  Specific information was both referred to and requested at the inquiry hearing and this is dealt with in Section 1.

  In addition the Chairman commented that there were other areas which the Committee may have wished to cover, and that we should provide any other information which the Committee may find useful. I have included such matters in Section 2.


1.1  Q208  "moronic MP"

  I have included as Appendix 1 copies of the exchange of letters between myself and Greg Mulholland MP (GM), detailing matters at two Enterprise (ETI) pubs—the Red Lion, Otley and the Three Horsehoes, Otley (not printed here).

  The outline of events was as follows:

Red Lion

  10/3/08—letter from GM "very concerned that ETI are trying to substantially increase the rent"

  18/3/08—response from ETI confirming NO increase in rent

  17/4/08—letter from GM "delighted to learn no increase" and "thankyou for supporting Otley pubs"

  15/8/08—letter from GM "horrified to hear that ETI is willing to inflict a substantial increase in rent ... forcing establishment to close down"

  26/8/08—following detailed briefing by GM "attacking the company", this matter was reported extensively in the Wharfedale & Airedale Observer

  26/8/08—letter from ETI reminding GM of the facts and requesting correction of statements to newspaper—no response

Three Horseshoes

  22/10/08—letter from GM "astonished and horrified ...." at his interpretation of events as detailed

  31/10/08—detailed letter from ETI with factual version of events—no response

  6/11/08—notwithstanding the facts provided by ETI this matter was reported extensively (front page) in the Wharfedale & Airedale Observer, following detailed briefing by GM

  6/11/08—matter raised in parliament by GM (Hansard column 362)

  20/11/08—retraction and apology published by Wharfedale & Airedale Observer

  Given the damaging nature of the unfounded comments and allegations made by Mr Mulholland in relation to the Three Horsehoes, and the absence of any attempt by Mr Mulholland to correct matters, ETI has had no option but to take legal advice in order to protect its reputation.

1.2  Q234 and Q235  Buying out, fraud and contact with the authorities

  On the matter of potentially fraudulent activity, and such information as is provided to the relevant authorities, I would make the following comments:

  Firstly, it is important to put this matter into context. In relation to licensees who choose to breach the terms of their contract and purchase products outside of the tie, I was making the point that there is potential for fraud to arise. I therefore reported to the Committee that "were each of our pubs to buy, outside the tie, one barrel a week, we would lose £7.8 million in income. For the Treasury, (...) were they to be purchased for cash and were they then not to appear in the books of the pub, there would be VAT, income tax and corporation tax fraud amounting to £8 million".

  Over the years we have been contacted by HMR&C on a number of occasions relating to their role in addressing such matters as illegal importing and tax fraud and have cooperated by providing information which enables HMR&C to pursue tax inquiries as they see fit. As part of this cooperation, we agreed to identify the source of supply of purchases made outside the tie, in order that such information might be used to further prosecutions against said wholesalers.

  Buying outside the tie can take on many guises. At one level, legitimate wholesalers supply our pubs with products which the licensee has a contractual obligation to purchase from ETI. When we discover such breaches of contract, we offer the licensee the opportunity to remedy the breach but at the same time make it clear that a second offence may result in termination of the lease. In general, we have no reason to suspect that licensees in these cases are engaged in tax fraud.

  At another level, we discover that some licensees, often in concert with a wholesaler, have fitted special devices designed to bypass, or disrupt, our flow-metering equipment, their objective clearly being a more substantial breach of contract.

  We related two such incidents to the inquiry, in Sheffield and North London, where we had uncovered evidence of material purchasing outside of the tie amounting to some £130,000 worth of beer. We have not yet been able to confirm unequivocally the detail of the suppliers, but we are continuing to pursue this information, and will cooperate with HMR&C by providing disclosure of such information as becomes available.

  Following our dialogue with you at the recent inquiry, we are collating the details of some 250 instances in the last twelve months where we were required to breach and terminate an agreement on account of failure to comply with the terms of the tie. We intend to pass this information onto HMR&C.

  Finally, at the most sinister level of activity, there have been occasions when both ETI staff and licensees have been subject to intimidation and even physical abuse from individuals who have been illegitimately supplying our pubs with products which the licensee has a contractual obligation to buy from ETI. Clearly there may be wider motives at stake here in addition to potential tax evasion, and we report all such incidents to the police as and when they occur.

1.3  Q290  Special buying deals and advantages of the tie

  In the matter of the services and benefits which are available to licensees who are tied to ETI, I have enclosed as Appendix 2 a detailed listing of both tangible and intangible financial benefits which are provided by ETI. This schedule was originally submitted to the TISC 2004 inquiry, but has been updated to take account of the many developments which have been introduced in the years since.

  I would make particular note of the training package "Winning in Local Market Areas" which is provided to all new licensees at no charge and the availability of special terms on a whole range of non-tied goods and services. We negotiate through a third party (Leisure Supply Group) to secure advantageous terms on a huge range of ancillary goods for licensees.

  Whilst we do not have access to the detailed purchases made, nor the details of the individual licensees who made them, we do know that in the last twelve months over 5,000 licensees have taken advantage of these deals, having made over £15 million of purchases and securing an estimated £3.5 million of savings (data provided by Leisure Supply Group).

  I can confirm that Enterprise Inns makes no profit whatsoever on sales of such non-drinks items.

  I would also highlight the substantial investment we have made into our own operational staff over the last few years, through training and development, and the new systems and tools we have developed to enable our field-based regional managers and property managers to spend even more time in front of licensees. We are currently delivering some 30,000 quality business appointments per year through regional managers and a further 8,000 property management reviews at pub level.

  Of course, in this recessionary climate, licensee support goes far beyond the "normal" level of services and value-added benefits described above and in Appendix 2. As we have confirmed in our Interim Management Statement issued on 22 January, additional and direct financial support is currently being provided by ETI to its licensees at a rate of some £16 million per year.

  I have also enclosed, as Appendix 3 (not printed here), an article published in the Morning Advertiser on 21 January reporting the views of Christie & Co regarding the approach that companies such as ETI are taking towards rent during current trading conditions, when compared to institutional landlords.


2.1 Insurance

  An area of activity which has been misreported by detractors of the tie is the matter of buildings and contents insurance, where it has been suggested that pubcos act to the disbenefit of tied licensees.

  The facts of the matter are these. Every year, ETI recharges insurance to licensees based on the claims history of the business, the market for buildings insurance and the cover that is available. In 2008-09 ETI is liable for the first £500k of every claim.

  There are two key commitments that we make to every ETI licensee:

    (i) We guarantee to provide insurance for every single licensee, including those who would simply not get insurance in the market. This includes those pubs which have recently suffered repeated, and sometimes devastating, flood damage.

    (ii) We ensure that every pub pays a premium which is appropriate and we guarantee to match the best rate available in the market for cover of equal quality.

  To put this into context, in the 12 months to the end of September 2008, we received only 46 queries in relation to the costs of insurance cover. Just four pubs subsequently had their insurance charge reduced.

  Whilst on the subject of insurance, I can confirm that the claim made by Mr Jacobs in evidence given to the inquiry that "pubcos have a two year insurance policy which pays up when someone walks out of a pub", is entirely false. ETI incurs all of the cost and suffers the entire loss of income when a pub closes.

2.2 Rent assessment and the tie

  There is an active market for tied-pub rent valuations, which takes account of the individual pub, the specific agreement and the local marketplace and on the whole it works. "Over-renting" a pub is completely counter-productive, leading to an increased likelihood of debt and outright business failure. Furthermore, "over-renting" is likely to result in limited future growth prospects, limited assignment prospects, a lack of reinvestment, disillusioned licensees and ultimately the complete breakdown of our business relationship.

  The rent bid for a particular premises is based on an assessment of the Fair Maintainable Trade for that outlet—encompassing estimates of volume, turnover, gross profit, overhead costs and net profit—and takes due account of the specified terms of the lease or tenancy on offer. This includes the exact terms of the tie.

  I believe that the arguments against the tie, as put to the Committee by a number of detractors, are fuelled substantially by self-interest and do not hold water.

  It is particularly frustrating to know that Vince Power, who we are led to believe is financing the Fair Pint campaign, has recently advertised for assignment two licensed premises which operate under ETI tied leasehold agreements. I have enclosed at Appendix 4 (not printed here) the published sale particulars for the VPMG portfolio of licensed premises. These prove that the ETI leases (Moose Bar and The Camel) enjoyed rents (as a percentage of turnover) which were less than 50% of those charged for the free of tie leases and were being offered for assignment sale at OIRO £500k and £450k respectively.

Tie typeTurnover pa Rent paRent % of T/O Total cost % of T/O
Bloomsbury BallroomFree of tie £1,193k£200k 16.8%
Moose BarETI lease, beer and cider tie £1,103k£92.5k 8.4%12%
Ion BarFree of tiePro rata £650k £100k15%
CamelETI lease, beer cider tie £937k£67k 7.1%14%
Spiga BarFree of tie£1,230k £172.5k14%

  Even after adding the "wet rent", which is effectively the estimated beer discounts that each site would get if it were free-of-tie, the total cost under an ETI lease, as a % of turnover, is still favourable to that of the free-of-tie leases.

  I don't believe that such sale prices and rent levels would indicate a model which acts in any way other than to the benefit of both ETI and its lessee, in this case Mr Vince Power.

  Even Mr Morgan, who has made no secret of his support for the Fair Pint campaign, stated in evidence to the Committee (Q80) that "the existing method (for assessing rent) is eminently fair, if it is operated in a fair, open, and transparent manner". We agree entirely.

2.3  Arbitration

  We referred to arbitration on a number of occasions and it remains our steadfast view that on the grounds of cost and disruption alone, arbitration should only be used as a last resort to settle matters when all other mechanisms have failed.

  We remain reassured by the relatively infrequent use of arbitrations within ETI (just six in the last four years). However in recent cases involving specific advisers (Mr Morgan and Mr Jacobs, acting as experts for our retailers), independent arbitrators awarded rents far greater than Mr Morgan and Mr Jacobs contended should be payable.

  In the case of the Portobello Gold in Notting Hill (leased from ETI by Mr Mike Bell), the rental award of £76,500 made at arbitration is more than 100% higher than the £30,500 offered by Mr Bell, as advised by Mr Morgan, and some 16% higher than the £66,000 which ETI had offered. As a consequence, Mr Bell is now liable for not only his own costs, but also ETI's costs in this entirely unnecessary arbitration.

  In the case of the Frog and Bullrush in Warwickshire, the lessee was paying a rent of £16,040 before the rent review. ETI made an offer of £23,000 but Mr Jacobs, acting as advisor to the lessee, offered £4,328. The award made at arbitration was £25,000, more than 400% higher than that offered by Mr Jacobs. ETI were again entitled to recover costs from the lessee concerned but opted not to do so on the grounds that the lessee had been so misled by her adviser.

  These are rent reviews which should never have gone to arbitration, and would not have done so had the proposals made by Jacobs & Morgan not been so misguided and so far below what any reasonable person would consider to be a fair, and sustainable rent, having due regard to the lease terms.

  We agree that the high cost of arbitration may be prohibitive for some licensees and recognise the need for a low cost, easy access process by which rent review negotiations may be independently resolved. In this respect, we continue to support and assist the British Institute of Innkeeping (BII) in the development of a new, low cost solution.

2.4 Rent review

  A rent review is most effective when both parties are knowledgeable, open and professional, cooperate fully and exchange information which supports their position.

  At the invitation of BII, we have therefore recently been training licensees in how to undertake a rent review, and anticipate repeating these well attended events in the forthcoming year. I have also attached for the Committee's information at Appendix 5 (not printed here), two highly informative articles advising licensees on the process of rent reviews, written by independent consultant Phil Dixon, CMBII and Barry Gillham, Chairman of Fleurets.

2.5 Indexation

  It has been suggested that indexation of rent on an annual basis is the equivalent of an upward-only rent review. I wish to make it clear that indexation of rent is not a rent review at all—it's what happens to rent between rent reviews.

  If anything, indexation substantially lessens the likelihood of a significant change to the rent at the time of review, the rent having been adjusted to take account of inflation during the period between cyclical reviews (typically every three or five years). Indeed many people actually prefer the "smoothing" effect of indexation between rent reviews.

  All new ETI agreements state that rents will be "adjusted" in line with RPI, whether upwards or downwards, and in the current period of rapidly falling inflation this will serve to limit, or even remove, annual increases for licensees with indexed agreements.

  As with all other matters relating to rent, ETI's policy (as defined in our Code of Practice) supercedes anything in a lease agreement and allows a licensee at any time to invoke a formal review of their rent if they believe that it is inappropriate.

2.6 Rent concessions

  We have detailed the actions taken by ETI in relation to the provision of financial support to licensees through rent concessions and special discounts. It may however help the Committee to understand the process by which such a concession is achieved by reference to an article by a licensee "How to get a concession from your Pubco" which was published in the Publican newspaper in February 2008, a copy of which I have enclosed at Appendix 6 (not printed here).

  I would also reiterate the statement we made in evidence to the inquiry that in providing financial assistance to deserving licensees, whether by adjustment or concession to rent or through additional discounts given, these sums are not refundable to ETI and suggestions to the contrary are entirely false.

2.7 Upwards only rent reviews (UORR)

  As is widely known and was acknowledged by several witnesses in evidence, ETI does not enforce any UORR clauses in any of its agreements. The ETI Code of Practice explicitly supercedes any UORR clause.

  I would take this opportunity to correct the evidence given by Mr Morgan (Q105) who stated that "ETI do not offer to waive UORR at arbitration, but do honour it if asked". This is an untrue statement. ETI explicitly instructs arbitrators to ignore any UORR, as occurred in the arbitration of a rent review with another witness to the inquiry, Mr Clarke.

  I would also rebut the evidence given by Mr Jacobs (Q9) in relation to ETI's stance on UORR, who stated that "ETI substitute the removal of the UORR clause with something else like a wider tie". This is also an entirely untrue statement.

2.8 Retail pricing

  It was suggested in evidence to the inquiry by Mr Daly that pubs which are tied are disadvantaged by their pricing policies over those which are free-of-tie.

  There is no straightforward economic reason why any pub should not be able to charge any price for any product, as is ably demonstrated by Mr Daly who charges identical retail prices in his ETI tied pub (Roadtrip— as he does in his free-of-tie operation (Zigfrids— less than 400 yards away.

  Retail pricing is based on the retail proposition that is being offered and local market competition, taking account of costs. I have enclosed for the Committee's information at Appendix 7 (not printed here), an extract from a piece of research produced by Numis Securities which I referred to in evidence (Q246), and which states that "... tenanted pub drink prices in ETI (are) still below those of most regional brewers and managed pub companies".

2.9  Assignment

  There is an active market (albeit lessened in current trading conditions) for the assignment of leases. Over 50% of all licensees who occupy an ETI pub have paid a capital sum to the previous licensee for the right to do so and thereby take over the remaining term and conditions of a contract with ETI.

  In a quite disturbing example of misinformation, it was suggested to the inquiry by Mr Jacobs (Q31, 32, 33) and Mr Daly (Q33) that ETI does not provide a previous tenant's profit and loss account to an incoming tenant at assignment. It is critically important that the Committee understands that ETI does not have access to a tenant's profit and loss account at assignment, nor at any other time (unless a tenant chooses to share the detail with ETI).

  An assignment transaction takes place between an outgoing tenant and an ingoing tenant, as was the case with Mr Daly. An ingoing party is able to, and indeed should, take independent advice and conduct due diligence to satisfy themselves as to the accuracy of the information with which they are provided. ETI does however reserve the right to refuse consent to assign should an ingoing tenant feel that they are not being provided with the information they require from an outgoing tenant.

  Contrary to the evidence provided to the inquiry (Q33) at no time did Mr Daly advise ETI that he could not get the information he required prior to completing his purchase of an ETI lease from an outgoing party. I would be happy to provide, for your further information, a copy of the business plan prepared by Mr Daly prior to his taking on the lease at the Road Trip if this would assist the Committee's understanding that Mr Daly knew exactly what he was taking on.

2.10  Cooling off period

  All new ETI tenancy agreements allow for six months' notice to be given by the licensee at any time during the term of their agreement.

  However it is important to make clear that where an agreement is acquired through assignment (as occurs in over 50% of the licensees in ETI pubs) there is no cooling off period for the incoming licensee, since their transaction has been completed with the outgoing licensee, and not with ETI.

2.11  Regional Manager accompaniments

  As I stated in evidence to the inquiry, I would urge Committee members to meet with our ETI Regional Managers and/or Divisional teams in order to understand at first hand the issues with which they are dealing on a daily basis. I am delighted that to-date, I have had positive responses to this suggestion from the Chairman, Mark Oaten, Brian Binley, Julie Kirkbride and Anne Moffatt, to which end we are making arrangements to suit their particular availability. Should any other Committee members wish to take up this offer, I know you are in direct contact with Simon Townsend to make suitable arrangements.


  These are times of great challenge for the UK economy and for consumer facing businesses in particular. Licensees across the pub industry, whether in free houses or leased and tenanted pubs, are battling with substantial cost increases, led not least by alcohol duty increases materially above the rate of inflation.

  May I commend to the Committee two recently published works—the BBPA "Wake Up for Westminster" document and the Report into Community Pubs by the All Party Parliamentary Beer Group, which followed an extensive investigation over a two year period. The APPBG report makes many relevant conclusions as to the range and nature of the issues facing the pub industry and a number of substantive recommendations, including:

    — Better sponsorship for pubs across Government.

    — The need to address the irresponsible promotion of low price alcohol in supermarkets.

    — The need to increase stakes and prizes for AWPs in pubs—and reduce gaming machine duty.

    — A simpler planning process to aid diversification for pubs.

    — Licensing to be made simpler and cheaper.

    — Proper enforcement of existing legislation before any further creep in regulations.

    — Easier access to funded training to enable diversification.

    — Rate relief and rateable values to reflect pubs' contribution to communities.

  Whilst the current trading environment is undoubtedly bringing significant financial pressure to bear on both licensees and pub companies such as ETI, I would remind the Committee that the conclusions of the 2004 TISC inquiry, along with those of every other review of the tie, were that "the tie usually balances the costs and benefits available to tenants and the existence of the tie provides demonstrable benefits to both tenants and customers alike".

  Despite the well orchestrated and over publicised antics of the Fair Pint campaign and others, it remains my view that the leased and tenanted model is well placed to respond to current trading challenges and that the beer tie firmly and beneficially aligns the interests of ETI with its licensees.

  I hope that this letter and its enclosures provide the committee with the required information. Should you have any further queries or require clarification on any matter, please do not hesitate to contact me.

2 February 2009




  The Company offers a wide selection of tangible financial benefits, in addition to an extensive range of intangible business support services.


    —  Dedicated Regional Manager.

    —  Regulatory advice.

    —  Business planning support to guide retailers in:

    —  Developing the retail proposition for their local market place.

    —  Target marketing activity at appropriate consumers for their retail offer.

      —  Utilising consumer research and local demographic information (Experian) to highlight target groups.

    —  Analysing appropriate cost structures to maximize profit Regional Manager retail toolkit.

    —  Pub quality assessment and retail standards audit.

    —  Cost scheduling.

    —  Marketing and promotional advice.

    —  Strategic business plan for every pub Accountancy support packages.

      —  Preferential rates for trade accountants such as Milestones to provide comprehensive accounting and overhead control packages

    —  Buying Group Discounts—increased discounts on capital equipment, frozen/fresh foods, bar sundry equipment, utilities.

    —  Wine menu printing service Free PR service.

    —  Joint capital development projects.

    —  Specific financial support geared to individual pub and retailer requirements to address challenging market conditions.

Marketing Support Services

    —  Brand marketing support.

    —  Free catering advice/support—menu planning and printing.

    —  Pub Marketing support (mail shots to encourage consumers into pubs, 2-for-1 meal deals in national media).

    —  Provision of free Point of Sale materialfrom brand owners.

    —  Access to subsidized quality banners, posters and other printed advertising material.

    —  Provision of a free website to access appropriate support and advice to get the most from your pub—

    —  Marketing and advertising launch packages (new business/capital developments).

    —  Special offers/deals on drinks and other products/services.

    —  Consumer research information—demographics, competitor analysis.

Property Services

    —  Free advice on property matters from qualified property professionals.

    —  Free access to Enterprise contractor and consultant database.

    —  Free access to 24hours 7 days per week property helpdesk service for HACCP'S/Health and Safety issues.

    —  Free advice on statutory legislation.

    —  Free advice on party wall and boundary disputes.

    —  Free interior design advice.

    —  Free advice on risk management and property insurance.

    —  Cellar Cooling maintenance:

      —  Option to take advantage of specially negotiated rates (85% of estate have voluntarily signed up to a cellar cooling maintenance programme. As part of this offer replacement units are free of charge on a 10 year rolling replacement programme which would cost between £2,500—£4,000 on the open market).

    —  Health and Safety Statutory Compliance Service:

      —  Option to take advantage of services covering electrical wiring, PAT, fire alarm and emergency lighting testing, Gas appliance testing and lifting equipment appliance testing and H&S on. site training and access to templates, training modules for staff and advice on all matters relating to H&S at agreed rate of £1000 per annum, generating savings to ETI retailers of £1,000 per annum.)

    —  Heating and Boiler Maintenance:

      —  Option to take advantage of specially negotiated rates. (As part of this offer, replacement units are free of charge on a 15 year rolling replacement programme which would cost between £4,000 and £10,000 on the open market)


  All Training is either free or subsidised and includes

    —  Mandatory Business foundation course for all new pub retailers.

    —  WILMA—winning in your local market area—free to all new retailers.

    —  Cellar Quality BII.

    —  Finance levels 1,2 and 3.

    —  Statutory Training:

      —  First Aid.

      —  HACCPS.

    Continual development of new support courses—currently under development and testing FRED—food retail education and development.

    —  Lease assignment service. Free.

    —  Extensive new licensee support—free membership to trade organisations.

Financial and Insurance Services

    —  Contents insurance package.

    —  Guaranteed contents/building insurance regardless of location and history.

    —  Rating service—No charge to licensees (would cost in the region of £600 for 5 year period).

    —  Financial assistance with cost of ingoing/deposit buildings.

Leisure Machines Services

    —  Operators comply with exacting standards of performance.

    —  Rigorous testing of gaming product ensuring any new machines maximise income potential.

    —  We work directly with UK and foreign manufacturers and software developers to stimulate product initiatives.

    —  Ensure that all permits and licenses are in place.

    —  Licensees do not have to enter into supply agreement with an Operator for a given term.

    —  The company ensures that any anti fraud security upgrades delivered by the Operator.

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