Pub Companies - Business and Enterprise Committee Contents

Further Supplementary memorandum submitted by Enterprise Inns

  I am writing in response to your letter of 2 February 2009, specifically to address the two points you raised on behalf of the Chairman. With regard to the six submissions you forwarded on behalf of Enterprise (ETI) lessees, our assessments are being prepared and will be returned to you once complete.

  In relation to the answer given by Simon Townsend to Q218 by Julie Kirkbride, I can confirm that, in providing financial assistance to deserving licensees, such sums are not under any circumstances refunded to ETI.

  In demonstrating further how such financial assistance is provided, I am prepared to disclose to the Committee the following information, which is commercially sensitive and therefore strictly confidential.

There are two mechanisms by which ETI provides temporary financial assistance:

    (i) discounts of *** per barrel off invoice on all purchases of beers and ciders during the period of the financial support which is typically at least three months; and

    (ii) rent concessions (a temporary reduction in the monthly rent payable) for a predetermined period which is typically at least three months.

  At the time of writing this letter, 382 lessees are receiving additional discounts plus a rent concession, 219 lessees are receiving additional discounts only and 57 lessees are receiving rent concession only.

  In the majority of cases, we do require a temporary extension to the tie to include wines, spirits and minerals on the basis that this then provides ETI with even greater clarity on the trading performance and sales mix of each business during the period in which financial assistance is provided. In every case where a temporary extension to the tie is required, any additional cost incurred by the licensee is massively outweighed by the benefits of discounts received on beer and cider purchases and in rent concessions. If this were not the case, no licensee would take up the offer of support and we would not insist on the full tie extension.

  At the time of our preliminary results announcement last November, we confirmed that in the twelve months to 30 September 2008 a total of 1,453 lessees had received temporary financial assistance in this way. As confirmed in our Interim Management Statement issued on 22 January, the current run-rate of additional and direct financial support being provided by ETI to its licensees is £1.4 million per month.

  Furthermore, we have recently announced a Price Freeze on a number of major draught beers until at least 4 July 2009, at a cost to ETI of £0.7 million per month. Based on the number of current stockists of these beers, 93% of ETI licensees will benefit from this Price Freeze activity which means that the purchase cost (excluding duty) of these beers to ETI licensees has not increased since February 2008.

  During the same period (ie since February 2008), duty has increased by a staggering 17%, with a further increase due to be applied this spring through the Chancellor's duty-escalator. We remain hugely concerned at the detrimental impact that such poorly targeted and ill-conceived measures continue to have on pubs and pub-going.

  In relation to the answer given by Simon Townsend to Q270 by Michael Clapham, I can confirm that ETI only obtains access to a lessee's profit and loss account if the lessee chooses to share such information with ETI. This can occur at any time if the lessee so desires, and is particularly helpful in providing supportive evidence during a rent review negotiation.

  There are certain circumstances under which such disclosure is obtained by ETI as a mandatory pre-condition. These are:

    (i) the provision of temporary financial assistance referred to above; and

    (ii) an out-of-cycle rent review requested under ETI's Code of Practice.

  In both cases, we require full disclosure of recent trading accounts (last two years if available), stock results and VAT returns aswell as evidence of current overhead costs being incurred.

  The basis for this pre-condition is that we need to have a full understanding of the complete trading position of a business in order to determine what actions are appropriate.

  As a consequence of reviewing this information we are, in many cases, able to advise licensees on how to reduce costs or improve efficiencies and stock yields leading to a material improvement in their financial position and a long-term enhancement in the financial controls being applied. In some cases, such a review may conclude that all appropriate measures are being taken by the lessee and that temporary financial support or a long-term reduction in rent through a Code of Practice review is the correct action for ETI to take.

  Surprisingly, there are many occasions on which we have been asked to provide financial assistance, or consider a Code of Practice rent review, only to have our request for disclosure rejected by the licensee. This may indicate unwillingness, on the part of the licensee, to disclose the true profitability of their business. Alternatively, it may indicate a fundamental lack of financial controls necessary to run a business.

  In the new ETI Retail Partnership Tenancy agreement launched in the latter part of 2008, it is a mandatory condition that licensees employ the services of a qualified trade accountant and provide full disclosure of profit and loss accounts to ETI on at least a quarterly basis.

  I made reference in my letter of 1 February to the process of assignment of a lease between outgoing assignor and incoming assignee. On such an occasion, we expect an incoming assignee to take full responsibility for the extent of their due diligence prior to purchasing the lease from the assignor, and require evidence that less experienced licensees have taken independent legal and financial advice before we will give our consent for the assignment to proceed.

  I hope that I have provided the confirmation and clarity that is sought. Should you have any further queries or require clarification on any matter, please do not hesitate to contact me.

12 February 2009

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