Memorandum submitted by the OSO Pub Company
1.1 Founded in 2003, The OSO Pub Company
is owned by its three directorsAlison Oxford, Mike Smith
and Nigel Oxford. All three have past and varied experience in
the food industry in particular in the Catering, Hospitality and
Supply sectors. (Brief CVs for the founders are contained in the
supplementary appendix A).
1.2 The company presently leases and operates
just one pub, the Three Compasses, in Hornsey, North London and
has done so since December 2003. Avebury Taverns Limited originally
granted the 25-year lease, however, in 2005 Avebury Taverns Limited
was acquired by Punch Taverns plc who are now our landlords.
1.3 We believe we are competent and responsible
operators evidenced by the numerous awards that have been won
by the Three Compasses including: UK's Best Community Pub 2006
& 2008, London's Best Tenanted/Leased Pub, Best Newcomer awards
and Punch Shine Awards for both Community and Customer Experience.
1.4 Our time running the Three Compasses
correlates quite closely with the period between the original
2004Trade and Industry Committee report on Pubcos and the new
Business and Enterprise Committee inquiry. In this submission
we try to relate our experiences of running a "Tied-Lease"
Pub to the previous conclusions and the new questions raised by
BEC inquiry revisiting the role of Pubcos.
2. "No one Pubco holds a dominant position
in the market"
2.1 From an end-consumer point of view or
"market", this would seem to be true. There are still
some 55,000+ pubs in the UK with approximately half controlled
by three or four large Pubcos. Many of these are operated by individuals
or companies such as ourselves so distinction and choice are (on
the surface at least) still available to the end-consumer.
2.2 In the market for freehold public houses
(ie the "bricks and mortar") then the Pubcos have a
much more dominant position. The freehold prices of public houses
have greatly increased as Pubcos utilize their super-normal profits
to increase their property estates and out-bid smaller rivals.
Business Development Managers (BDMs) are targeted to find economically
viable properties to purchase and "bounties" are offered
to anyone who can suggest a suitable property. Their grip is further
tightened when properties considered to be unviable are sold off
with restrictive covenants forbidding the future sale of alcohol
at those premises.
2.3 In the wholesale beer market the Pubcos
are again dominant primarily due to the beer tie. Fifty percent
of the UK market is unavailable to non-Pubco wholesalers and that
same 50% has none of the usual commercial powers to resist price
rises and range changes or to influence service levels imposed
by the Pubcos. Our Pubco has recently told us that a brewery has
raised its prices for a second time this year and no longer produces
an 18 gallon cask of its product and we must use the less economic
9 gallon cask. Our source at the brewery tells us that neither
of these "facts" is true.
2.4 A worrying development is the increase
in "all product ties" now appearing in new leases, giving
Pubcos ties supply of spirits, wines, soft drinks, etc. Coupled
with this is the recent move by at least one Pubco to acquire
a 50% interest in one of the major independent beer, spirit and
3. "Small brewers may be disadvantaged
by the requirements set by Pubcos"
3.1 In our experience this is certainly
the case. We have met a lot of resistance to our use of the SIBA
direct delivery scheme that we started when still a tenant of
Avebury Taverns and which is not generally available to Punch
tenants. Punch restricts the choice of beers available to us through
the SIBA scheme by not allowing these small brewers to include
their seasonal beers. Some beers from other small breweries are
available through Punch's own "Finest Cask" scheme but
only on a three-month rotational basis and only when we meet stringent
requirements for minimum orders and long lead times.
3.2 Even brands from the big brewers can
be difficult to obtain if their price negotiations falterbrands
can be changed or withdrawn with no regard to the effect on the
tied retailers' business or their customers' preferences.
3.3 Both the big brewers and the smaller
brewers are limited in their marketing and promotional activities
by the Pubcos. Representatives and salesmen from the brewers are
barred from talking directly to the tied retailers and promotional
materials usually made available to the retailer for free by the
brewers are collected centrally by the Pubcos and then sold to
tied retailers. We have numerous examples of representatives refusing
to discuss business developments, changes to our range, etc because
they have been "warned off" by the Pubco.
4. "The cost of "beer ties"
are usually balanced by the benefits available to tenants"
4.1 Not in our experience. As previously
mentioned, our lease was originally with Avebury Taverns one of
the smaller Pubcos with about 700 outlets. We consciously avoided
the larger Pubcos and were aware of the drawbacks of a tied lease.
However, we believed at the time that these could be, at least
partly, compensated by other considerations. For example, we obtained
our lease without paying a premium, we were granted a staged increase
in rental payments in the early days of the lease and Avebury
contributed towards some of the refurbishment costs. This meant
that our start up costs were lower with a tied lease than say
a freehold or a free of tie lease. (Although freehold and free
of tie lease pubs were few and far between in 2003 so the options
were fairly limitedwhich is still the case today). We were
probably lucky in that we chose a small Pubco so could negotiate
at director level, the Three Compasses was in a dilapidated state
and was probably considered to be non-viable and Avebury (unbeknown
to us) was preparing itself for market and needed some "showcase"
operators. We believe these factors enabled us to obtain a better
deal than is probably normal.
4.2 When Punch took over in 2005 the first
effect was to increase our beer prices by an average of 10%much
more in some casesand not what we expected considering
they had over ten times more outlets. (The letter informing us
of the new prices explained how we would benefit from their greater
4.3 Apart from our initial start up, we
cannot appreciate any benefits from a beer tie that means we pay
anything between 25% and 125% more for our beer. Punch offer training
courses but at a price, which is comparable to and in some cases
greater than the prices in the open market. We have to pay for
items (even down to drip mats) that would otherwise be free from
the brewers. We have had little or no input from our various BDMs
that would assist or improve our business. We are restricted in
our dealings with Brewery representatives (we were recently told
we could not take advantage of free training offered by our spirits
representative until Punch realised we are not tied for spirits).
We have none of the usual levers to control service levels or
changes to our product range. All Pubco invoices are paid by direct
debit even when incorrect and credits can take months to be arranged.
We received very little help through the recent licensing changes
or the introduction of the smoking ban and such help as was available
had to be paid for. Gaming machine suppliers have been changed
arbitrarily even though we had carefully selected the type of
machine we wished to install.
4.4 Is our rent below the market rate and
so justifying the extra cost of the beer? After four years of
annual RPI increases, our present rent is approximately £42,000
per year. Our conservative estimate of the extra we pay for our
beer supply is approximately £46,000 per year. Has our basic
rent really been set at less than 50% of the market rate? As a
small, independent operator it is difficult for us to absolutely
sure but we believe we are probably paying anywhere between £15,000
and £25,000 more than the market rate. Our first rent review
is due in December 2008 and will probably be an "interesting"
experience. As an aside, Punch is already well behind the timetable
it sets for itself for rent reviews in the "Punch Retail
Charter" (based on the code of practice guidelines produced
by the British Beer and Pub Association).
5. "Splitting the wholesaling and property
functions of the Pubcos, by removing the beer tie, could lead
to the national brewers having a virtual monopoly on the wholesaling
of beer, as before the Beer Orders"
5.1 No it would not. Since the Beer Orders
we effectively swapped the large brewery controlled estates for
large property company estates with an anti-competitive beer tie
now in place across more outlets than was previously the case.
5.2 With no tie at all or a very limited
tie, we would be releasing some 30,000 outlets that would be free
to change suppliers and operate all the usual commercial controls
to ensure a competitive market. Times have changed since the Beer
Orders and there are a number of "Brewery-free" Wholesalers
operating in the market place as well as organisations such as
the SIBA Direct Delivery scheme which did not exist before.
5.3 Conversely, at present most of the large
Pubcos, if not all, outsource their distribution to the Breweries
anyway so the situation is virtually the same as before the Beer
Orders except that the profits go to the Pubcos not the brewersprobably
the reason that the UK no longer has a brewer that can operate
on an international scale.
6. "Has the Licensing Act 2003 had an
effect on competition within the market?"
6.1 Again, from an end-consumer's point
view the answer is probably yes. There is a greater range of opening
hours and to some extent pubs can compete with other outlets such
6.2 In the operating and supply sectors
the competitive effect has been minimal. It could be argued that
longer hours have increased costs as similar levels of trade have
been spread over a longer period. Giving licensing powers to local
authorities and the corresponding increase in bureaucracy has
definitely increased costs.
7. "To what extent have revisions to
the framework codes of practice met the Committee's concerns?"
7.1 The Punch Retail Charter (referred
to at point 4.4 above) probably meets most of the committee's
concerns and similar publications exist for other Pubcos. However,
in practice many of the DTI Select Committee's recommendations
have not been applied.
7.2 The Pubcos seem to have paid lip service
to the Select Committee's desire to see less control over non-core
products such as gaming machines and are in fact extending their
control in to areas such as: Telecoms Masts, ATM cash machines,
dispense equipment and extension of the tie into spirits, soft
drinks, wines, etc. Upward only rent increases and automatic annual
RPI rent increases still exist in new leases although many now
use terms such as "Market Rents" or "Market Values".
Gaming Machine ties are specifically referred to in the Punch
8. "To what extent are the codes applied
by the Pubcos"
8.1 See point 7 above.
9. "Is there a need for further regulation
of the industry"
9.1 Perhaps regulation or legislation is
required to enforce the recommendations of the previous Committee.
After four years there are plenty of glossy brochures but very
9.2 With regard to the Beer Tieprobably
easiest and best of allthere should not be a Beer Tie.
The wine, spirits and soft drinks industries all manage to grow
and improve without a tie and the same is true for many, if not
all, other aspects of the licensed trade.
9.3 If the Beer Tie is to continue it should
at least be regulated to avoid potential abuse:
9.3.1 Greater access should be available
to suppliers to maintain continuous market development and improvement.
9.3.2 Profits should be at normal levels
and the benefits of being part of a tie should be shared amongst
all participants in that tie.
9.3.3 Tied retailers need some "powers"
to enable them to better manage service levels and price increases.
9.3.4 Ties for other aspects of the business
should not be allowed (eg gaming machines, other product lines,
9.3.5 Pubcos should have to choose between
operating managed houses or leases with tiesthey should
not be able to do both.
10. Some other observations
10.1 Most Pubco Leases claim that the Beer
Tie is not contrary to EU competition laws since the rents charged
are below the market rate as compensation for this. That the rents
are below market rates has never been proved. However, even if
this was to be the case, it is questionable that the EU expected
the Pubcos to be compensated for the lower rents by making supernormal
profits on all other aspects of their businesses whilst damaging
the competitiveness and profitability of the other parts of the
supply chain and leaving consumers with higher prices and a more
10.2 Some large Pubcos have moved in to
operating their own Managed Estates bringing them into direct
competition with the tied retailers and using the enhanced bargaining
power they get from that same tie to reduce their own supply costs.
10.3 Nearly all new Pubco leases attract
a premium and many properties require substantial refurbishment.
The argument that a tied lease is a lower cost way into the market
is rapidly diminishing.
10.4 Pubcos argue that fewer tied lease
pubs are closing compared to the freehold/free house sector. Certainly
fewer close since the Pubcos appoint temporary or relief operators
to keep the pub open whilst a new tenant is sought. The "churn"
in lease premiums probably more than compensates for any lost
rents and management cost. The real comparison should be the number
of operators (ie tenants) who fail and have to leave the business.
29 September 2008