House of Commons - Business and Enterprise Committee

Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by the Federation of Small Businesses

INTRODUCTION

1. In towns and villages across the UK small businesses and local shops face closure. Our high streets face extinction. 42% of English towns and villages no longer have a shop of any kind.[16] As many as 27 pubs are closing every week.[17]

When the FSB submitted evidence to the then Trade and Industry Select Committee in 2004 we had 3,135 publican members, today this number is down to 1,473. It is worth noting that the FSB as an organisation has in the same time grown with around 35.000 members. This shattering trend must be halted and the first step to achieving that, the FSB believes, is to abolish the Pubco tie.

Pubs are not just a part of the local community, in many places they are the local community. They generate employment, growth of the local economy and an opportunity for people to meet and make communities stronger. They are in many ways the glue that binds our local communities together. One FSB members put his frustration in words by saying:

2. BACKGROUND

3. The concern with Pubcos and their relationship with publicans is not a new issue for the FSB. In 2004, the FSB played an instrumental role in the then Trade and Industry Select Committee inquiry into the relationship between Pubcos and their tenants.

It is evident that the situation for publicans, despite the 2004 recommendations, by and large remains the same. Therefore the FSB welcomes the re-launch of the Pubco Inquiry by the Business and Enterprise Select Committee.

In advance of submitting written evidence, the FSB conducted a poll asking our members what they thought of the current situation and whether they felt their situation in relation to their Pubco had improved since 2004.

99% of the 156 members that responded said it had not, and that they were in exactly the same situation then and now.

KEY ISSUES

The issues that remain of specific concern for the FSB are the beer tie and its effects on tenants; rents and the way they are calculated; Pubco margins and the discrepancy in price from wholesalers; the level of support Pubcos offer their tenants and last but not least the beer tie as business model for the pub trade. Each of these issues is outlined below with comments and quotes from the respondents to our poll.

The exclusive purchasing obligations enforced by Pubcos on their tenants remain of great concern to the FSB. In our poll 96% of respondents supported a complete removal of the tie as they felt that would make the market fairer. One respondent said that:

The way the rents are calculated is still perceived as unfair by respondents, despite the 2004 recommendation of a code of practice. The discrepancy between the wholesale beer prices charged by Pubcos and the rents they charged their tenants is evident to see. One member said:

One suggestion was that all rents should be set by arbitration and be dependent on how well the business is going.

So far Pubcos have failed to acknowledge and adjust for local, regional and national trends in volumes when calculating the rents and this has led to excessive turnover projections. In addition Pubcos generally ignore the recommended use of accounting standards resulting in profits being exaggerated, and excessive rents demanded. One FSB Member remarked:

The Pubcos' margins with regard to the prices paid by Pubcos to breweries and those they charge to their tenants is another major area of concern. The perception is that the tied market remains unfair because tied publicans have no choice to make their own decision and to maximise their own profit. It is not unusual that tied landlords pay up to double the price for beer and cider than they would if they were buying on a free market. Another member continued:

Another member said:

The chart below, which further illustrates the problem, was submitted to the FSB as part of the poll. The FSB member is a leaseholder free of tie on wines and spirits who has for the last 10 months been charged by Punch as column A. Due to his present financial difficulties Punch had agreed to charge what they call their "wholesale price" (column B). Included are two other suppliers, as reference, which he is unable to use as he is tied on Beer, Cider and soft drinks.[25]

A
Punch £ B
Punch £ C
Booker £ D
Waverley TBS £

11gallon keg Lease Wholesale Wholesaler A Wholesaler B

Guinness 123.59 115.21 94.79 91.90

Dry Blackthorn Cider 112.46 67.89 67.37

Fosters Lager 115.21 100.01 77.99 75.25

Kronenbourg Lager 132.03 114.21 89.19 93.17

The disproportion between the wholesale price and what Pubcos change is clear. Even with the discount from Punch the tenant in the above example could have paid up to £23.31 less for a keg of Guinness, had he been able to buy it from a supplier of his choice. Another FSB member said:

In those cases where tenants are struggling there still seem to be little help at hand. The recommendations that were made following the 2004 Pubco inquiry, which stated that the business support that Pubcos offer licensees far outweighs the restriction of the tie, seem wholly inadequate. Respondents to the poll said almost exclusively that the business support they receive is only tinkering on the edges and does not help them in any meaningful way. One member said:

Another Member said that it is clear that:

The beer tie clearly poses a burden on licensees and the FSB questions whether this is an appropriate business model for the pub trade. Four years have passed since the last inquiry and our members still feel a great sense of unfairness. One respondent, who felt very privileged to be running a free house, said that personally she would never enter into a business relationship with a Pubco because of their approach and attitude towards their tenants.

Other respondents said:

CONCLUSION

The above evidence had led the FSB to believe that the only viable solution resulting in a fairer deal for pub tenants is a complete removal of the tie. This has the significant support of 94% of respondents to our poll. One respondent said:

The amount of pub closures speaks for itself, 27 pubs per week are closing down and FSB members give testimony upon testimony how difficult it is to survive in the pub business today. One FSB member said:

The FSB believes that if the ties were eradicated this would create a level playing field to enable pub landlords to compete with those who are not tied. As it is in the current situation it is impossible for tied tenants to compete with the free houses. One respondent said:

It has been suggested that an alternative to abolishing the tie would be for tenants to leave their pubs altogether. If more tenants refused to take on a tied lease, the Pubcos would eventually have to sell their pubs. As it would be impossible for Punch Taverns, for example, to service a £4bn loan with no pubs let.

The message is simple. The relationship between Pubcos and landlords is not sustainable and the tie has to go one way or another. One respondent to our poll put it in a simple sentence;

KEEP TRADE LOCAL

The FSB is currently running a campaign called Keep Trade Local which seeks to stem the tide of small business closures. The Keep Trade Local campaign is however not only for small retailers, it also incorporates post offices, pharmacies, pubs and all the other independent trades and businesses, that together represent the rich fabric of our society and the bed rock of a stable economy. One FSB member said:

SUMMARY OF FSB'S RECOMMENDATIONS

— Complete removal of the tie. There is enough proof that the tie does not work as an efficient business model for the pub trade.

— Annual indexed rent increases to be stopped and the practice of upward only rent reviews terminated.

— Introduce a greater transparency in the rent review process and make paragraphs 144 and 145 in the 2004 Trade and Industry Report enforceable by statute as the FSB believes the voluntary code has not worked.

29 September 2008