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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