Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by the OSO Pub Company

1.   Introduction

  1.1  Founded in 2003, The OSO Pub Company is owned by its three directors—Alison 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 wine wholesalers.

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 falter—brands 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 limited—which 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 cases—and 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 buying power!).

  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 brewers—probably 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 as nightclubs.

  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 Charter.

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 little action.

  9.2  With regard to the Beer Tie—probably easiest and best of all—there 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, etc.)

    9.3.5  Pubcos should have to choose between operating managed houses or leases with ties—they 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 limited market.

  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

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