Pub Companies - Business and Enterprise Committee Contents


Memorandum submitted by Admiral Taverns

1.  BACKGROUND TO ADMIRAL TAVERNS

  1.1  Admiral Taverns was formed in December 2003 and currently operates over 2,200 pubs across England and Wales. The business has grown primarily through the acquisition of pubs from other companies in the sector and only operates leased and tenanted pubs. Although the business has only been trading for four years, the management team have been recruited from a wide range of other pub companies and has a huge experience in the leased and tenanted sector.

  1.2  Admiral's income derives from three primary sources:

    —  the rent received from tenants and lessees; and

    —  margin generated on the sale of drinks to licensees; and

    —  share of the machine income.

  1.3  Admiral offers licensees a full range of flexible agreements from short term tenancies to long term leases. This range of agreements offers the licensee different low-cost options to start up in business. Part of Admiral's strategy is to offer the widest range of agreements and to be flexible with certain elements of the agreements to ensure that it is properly suited to the licensee and the style of property.

  1.4  Admiral offers a wide range of additional services to its licensees including business support, licensing management, capital investment, marketing and promotional support, food development and property services.

2.  ASSISTANCE TO LICENSEES IN CURRENT MARKET CONDITIONS

  2.1  The key underlying principle of the leased and tenanted pub sector is that both the licensee and pub company want the business to succeed. Growth of the business profitability will generally lead to more income to both parties. However, where trade does decline both parties will share some of the pain and look to minimise this impact.

  2.2  This principle is particularly important during the current economic climate. There is little doubt that some pubs are being negatively impacted by the current trading conditions but the pub company is able to buffer the licensee from the full impact of the reduction in trade. This would not be the case if the properties were being leased from a standard property owner. It is noted that Admiral leases a number of sites from commercial landlords and there is no prospect of it receiving any support or rent reductions over this period.

  2.3  Although Admiral has seen many businesses continue to develop and increase trade, Admiral recognises that the trading conditions for the pub sector are very tough at the current time, with a reduction in trade for some licensees from the smoking ban, increased competition from supermarkets selling alcohol at below cost, increased operating costs and additional compliance costs with legislation.

  2.4  Admiral is therefore continuing to provide additional support for its licensees to maintain their businesses even though this support is not required under the lease or tenancy agreement. This type of support has always been provided to licensees who were struggling to maintain their income but the level of support through rent concessions and additional off-invoice discount schemes has now increased to over £2.5 million per annum across over 250 licensees. Additionally across the estate, the company has provided support through capital investment, additional marketing and promotional support and maintaining existing insurance recharges across the whole estate despite increases in premiums in the property market, and to our business, from the 2007 floods.

  2.5  Further to the above support, Admiral has confirmed that it will absorb, in the short term, the exceptional price increases announced by a number of brewers over the last couple of months and will not be increasing these prices to licensees for the balance of 2008. Admiral has also been trialling discount schemes which provide exceptional prices to licensees without any amendments to the terms of the agreement or rent levels. These discounts allow the licensee to earn significant discounts over and above their existing discount scheme for achieving target volumes or pass the majority of the margin on certain products to the licensee.

3.  CODE OF CONDUCT

  3.1  Following the Trade and Industry Select Committee ("TISC") review of 2004, one of the major recommendations was for British Beer and Pub Association ("BBPA") Code of Conduct issued in 1997 to be updated and that the industry should accept and comply with this code.

  3.2  The Committee will be aware that the BBPA has updated the code and the industry has followed this with updated individual company codes. Admiral has also compiled its own Code of Practice, incorporating the standards set out by the BBPA but also going further than the BBPA code in a number of areas. Noted below are some of the specific areas recommended for inclusion by TISC and how they are covered by Admiral's Code of Practice.

Rent reviews and rent setting

  3.3  Although the Admiral estate has a lower proportion of long term leases than some other pub companies, the rent review is considered to be a pivotal part of the relationship with the licensees.

  3.4  The aim of the rent review is to ensure that the new rent agreed is fair and equitable for the property. It is a fundamental part of setting the rent that the licensee is able to make a reasonable income from their business.

  3.5  However, Admiral does not wait for the rent review date to reduce rents to fair and sustainable levels. Where a public house trading potential (and therefore the income of the licensee) has been affected, we will look to support that licensee through a package of measures as set out above.

  3.6  Admiral's average annual rent charged to licensees is about £15,000, well below the average of other pub companies. This lower level does reflect the lower trading potential from the properties but also reflects the opportunity being given to licensees to earn a reasonable income from the property.

  3.7  Admiral uses the "profits method" in assessing rents for each site, a standard method used across the industry. This involves assessing the fair maintainable trade and operating costs that would be achieved by a hypothetical competent operator and then calculating a rent based upon this divisible balance. The percentage of the divisible balance calculated as rent is worked out on a site by site basis but generally ranges from 35% to 55% depending upon the individual circumstances of the operation and comparable evidence for other nearby operations.

  3.8  Over the four years since Admiral began trading, there have been less than 200 rent reviews and only two of these have been referred to an outside party to set the rent. On both occasions, the rent was agreed by mutual consent prior to the independent expert completing their assessment.

  3.9  The company also looks to work in an open manner with licensees and will share its profit and loss assessment. Admiral also encourages the licensee to share their actual trading as this will assist in setting a fair and sustainable rent for the site.

  3.10  Admiral always recommends that licensees take independent advice prior to agreeing the level of rent and where possible will try and reduce the costs of the review process. A number of the agreements within the Admiral business require an independent arbiter to be appointed where the rent cannot be agreed. The cost of this process can be very expensive (over £10,000) and therefore it is recognised that this can deter some licensees from using this to finalise the rent. Admiral has stated that it will waive this provision within all of its agreements and allow the licensee to choose that the rent be set by an independent expert, a process which will be significantly less expensive. Admiral also understands that the British Institute of Innkeeping ("BII") is looking to set up an independent expert referral service, which will help to speed up and further reduce the costs of the rent review and we welcome this initiative.

  3.11  Given the importance of the rent review process, Admiral is currently working with the BII to present in detail the rent review process to licensees from within and outside its estate.

  3.12  As stated in its Code of Practice, Admiral will use the above approach on all rent reviews. This means that despite the actual wording of the lease agreement, Admiral will waive any `upward only' clauses on future rent reviews and will set the rent to the correct, fair sustainable rent. This could result in the rent being assessed at a level below the initial rent for the site.

Role of the Business Development Manager ("BDM")

  3.13  The BDM is the main point of contact and the key relationship with the licensee. As such Admiral recognises that this is an essential role in the development of our and our licensees' income.

  3.14  A number of our BDMs have been licensees previously and therefore have an in depth knowledge of the required skills and support required by licensees. Admiral has deliberately kept the ratio of pubs to BDMs below the industry norm, with an average of 40 pubs per BDM. Admiral believes that this enables the BDM to better understand the specific pub operation and offer the best support to the licensee.

  3.15  Admiral maintains the knowledge and business skills of the BDMs through a continuous programme of training including food development, marketing skills, product awareness and knowledge, briefings on new legislation and general finance understanding.

Complaint and dispute procedure

  3.16  Complaints and disputes are treated extremely seriously within the business. It does represent a potential breakdown in the relationship between the BDM and the licensee. The complaints handling process is fully set out in our Code of Practice and all complaints received at head office are monitored to ensure that they are fully responded to. The process includes the ability to escalate the dispute to the Managing Director.

  3.17  If the Managing Director is unable to resolve the dispute, an independent adjudicator will be involved to resolve the matter. The Admiral website also includes links to a number of trade bodies who will be able to assist licensees if they wish to use independent support during this process.

Disclosure and availability of information

  3.18  It is an important part of the relationship between a licensee and pub company that both parties understand their expectations from the property before entering a long term agreement. Admiral will therefore share prior trading experience from the property and expected levels of trade. Admiral also expects the licensee to share their business plan to ensure that there is no misunderstanding with regard to the future operation.

  3.19  Admiral has generally favoured allowing licensees to take a six month agreement when they first take on a new property. This allows the licensee to understand the business and confirm that the potential from the property is in line with their expectations. Where the property does not meet the licensee's expectations, it allows the licensee to leave the business without having incurred additional costs and financing required when entering a long term agreement including stamp duty, legal fees and fixtures and fittings purchase.

Legal and professional support

  3.20  Importance is given within the company to the need for all new and existing licensees entering new agreements to take independent advice. This is emphasised in the Code of Practice and is also set out to licensees in all relevant documentation prior to a new agreement being signed. This is further emphasised by our BDMs in meetings with potential licensees. Admiral has recently introduced a requirement for any new licensees to take professional advice prior to entering a new agreement or specifically confirming that they have considered this option and do not wish to take independent advice.

4.  TRADE AND INDUSTRY SELECT COMMITTEE INQUIRY 2004 CONCLUSIONS

No one pub company is dominant

  4.1  The TISC enquiry concluded that there was no one pub company which had a dominant position in the wholesale market for beer. Given that this assessment was on the basis that the largest pub company had 8,739 pubs in 2004 and the largest pub company currently has only 8,400 pubs, Admiral believes that this conclusion must continue to be the valid. The percentage held by one company would be further reduced if the market was considered larger than just full on-licences.

More flexibility in choice of products

  4.2  The TISC recommended that pub companies allow their tenants flexibility on the choice of products. This has been a fundamental policy of Admiral which sources its beers from the open market and has no exclusive purchasing arrangements. No brewer is excluded from the estate as long as they are able to demonstrate certain quality standards and sufficient demand.

  4.3  In addition, the Direct Delivery Scheme operated by the Society of Independent Brewers reduces the barriers to entry for local beers from smaller brewers and enables these products to be made available to tenants, giving them an unprecedented range of products.

  4.4  In a small number of exceptional and site specific circumstances, Admiral has released licensees from the beer tie in return for an increased rent. Admiral has noticed that the majority of these sites have entered exclusive agreements with one brewer to source only beers from their product range, eliminating the ability for other brewers to supply the site or local brewers to compete.

Removal of the tie would not benefit licensees

  4.5  The TISC inquiry concluded that licensees would not be better off with the removal of the beer tie and this would likely benefit the international brewers. Despite changes in ownership of some of the brewers, Admiral strongly believes that this conclusion is still correct. Admiral would also need to review all rents to compensate for the loss of wholesale margin and the relationship with existing and future licensees would change with less importance being placed on tenant's businesses and any downturn in trade would be borne exclusively by the tenant.

More transparency about contractual relationships with nominated AWP suppliers

  4.6  Admiral is convinced that through proper management and control of the machines within its sites, the total income generated from machines is significantly enhanced. To achieve this, Admiral employ a dedicated machine management team to ensure that specialist advice is available to licensees, a wide selection of machines are offered and the best machines are available across the business. This ensures that our licensees receive an excellent service with minimal down time, machines are properly positioned providing the optimum offering to a wider audience and therefore increase footfall and profitability.

  4.7  Admiral has 26 nominated suppliers in its estate for licensees to choose from. These suppliers have met strict selection criteria and deliver high quality service to our licensees. By using these suppliers, Admiral ensures that its machines are operated legally, with permits and licences obtained, are insured and no lengthy contracts need to be signed by licensees.

  4.8  Admiral asks all licensees to enter a separate agreement with regard to the machines in their sites which specifies that only approved and nominated AWP suppliers may supply machines to each site. The share arrangements are clearly set out in this agreement.

  4.9  Although this machine income is shared between the licensee and Admiral, this share arrangement is included in the assessment of the rent through the rent calculation and rents are therefore reduced by an element of the machine income.

5.  LICENSING ACT 2003

Increased costs

  5.1  The Licensing Act 2003 ("Act") has significantly increased the cost and resources required for the administration of the pub licences.

  5.2  This began with the requirements for plans and additional information which resulted in pub companies being required to bring in external support to assist in a process that in many cases simply secured grandfather rights for its licensees in respect of existing trading hours with no added benefit.

  5.3  This is further increased by the costs involved in annual renewals and the costs involved in changes to designated premises supervisors.

Additional hours of trading

  5.4  The Act has enabled pubs to open longer and to compete with other elements of the leisure market. The majority of these additional hours have been on Friday and Saturday where Admiral has seen an average increase of one to two hours.

  5.5  Admiral has not seen the well publicised 24 hour drinking across its estate or across the public house market. One Admiral property has been granted a 24-hour licence. However, in this case and in the majority of the other pubs with a 24 hour licence, these additional permitted hours are not being used.

  5.6  These additional hours have resulted in certain public houses being able to retain their customers longer rather than lose them to town centre sites which historically had longer opening hours.

  5.7  However, evidence is available to demonstrate that since the longer opening hours started, customers have used this to drink more at home until later (preloading) before visiting the pub.

Reduced trading potential

  5.8  The Act has given more scope for local authorities to impose trading restrictions on premises. Although Admiral recognises that this is a positive measure in many ways to ensure that premises maintain the appropriate disciplines at site, there has been a significant increase in restrictions imposed on the use of outside areas. Following the smoking ban, there has been an increase in the importance of these areas to maintain trade against stiff competition from the off-trade and restrictions on their use has limited this ability to compete in more community based sites.

6.  NEED FOR FURTHER REGULATION OF THE INDUSTRY

  6.1  Admiral does not believe that there is a need for additional regulation within the leased and tenanted pub industry. The conclusions of the TISC enquiry in 2004 are still valid in the current market and the recommendations have been generally adopted by the industry.

  6.2  Given the relationship between a pub company and licensee, the pub companies have responded to poorer trading conditions with a significant package of support which they are not contracted to provide under their agreements. This support is not being seen within the commercial property market or other landlord/tenant relationships and therefore changes to the current arrangements could lead to a less flexible approach from the pub companies, higher rents and additional pressures on licensees.

29 September 2008





 
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