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.
SECTION 1
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.
SECTION 2 ADDITIONAL
INFORMATION
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.
Outlet
| Tie type | Turnover pa
| Rent pa | Rent % of T/O
| Total cost % of T/O |
| Bloomsbury Ballroom | Free of tie
| £1,193k | £200k |
16.8% | |
| Moose Bar | ETI lease, beer and cider tie
| £1,103k | £92.5k
| 8.4% | 12% |
| Ion Bar | Free of tie | Pro rata £650k
| £100k | 15% |
|
| Camel | ETI lease, beer cider tie
| £937k | £67k
| 7.1% | 14% |
| Spiga Bar | Free of tie | £1,230k
| £172.5k | 14% |
|
| |
| | | |
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—www.roadtripbar.com) as he does in his free-of-tie
operation (Zigfrids—www.zigfrid.com) 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.
CONCLUSION
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
APPENDIX 2
SUBMISSION BY ENTERPRISE INNS PLC
APPENDIX 11—SPECIAL COMMERCIAL OR FINANCIAL ADVANTAGES
The Company offers a wide selection of tangible financial
benefits, in addition to an extensive range of intangible business
support services.
REGIONAL MANAGER
BUSINESS SUPPORT
SERVICES
— Dedicated Regional Manager.
— 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.
— 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—www.enterpriseinns.com
— 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)
TRAINING AND
RECRUITMENT SERVICES
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.
— Finance levels 1,2 and 3.
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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