Memorandum submitted by Punch Taverns
1. KEY MESSAGES
1.1 Punch Taverns ("Punch") has
evolved its business and enhanced the relationship with its Licensees
following the recommendations of the 2004 TISC report. It continues
to be a progressive and responsive Landlord, operating 7,560 licensed
premises, with 7,351 Licensees, or "Customers" as we
call them within our business.
1.2 Since 2004 Punch has continued to play
a significant role in supporting its Licensees through unprecedented
social and legislative change. The cumulative impact of this has
been relentless, both from an operational and a financial perspective.
Punch has played a critical role in supporting Government, ensuring
compliance from Licensees, achieved through the provision of a
comprehensive package of financial and educational support. A
summary of legislation can be found in Appendix 1 (not printed
1.3 The two most significant pieces of legislative
change since the TISC report are the Licensing Act 2003, implemented
during 2005, and the Health Act 2006 which introduced the smoking
ban in enclosed public places in England from 1 July 2007. When
combined with the "credit crunch", tax increases and
aggressive alcohol pricing in the supermarkets, this is adversely
impacting on the "health and wealth" of individual Licensees
and their businesses, never more necessitating the need for a
responsive and supportive landlord, as offered under the tied
1.4 The tied model ensures that, during
difficult trading and economic conditions when beer sales may
decline, the Licensees' "rental" cost reduces as a result
of the variable nature of the "wet" rent paid through
the beer and machine tie. This is not the case under a Free of
Tie model where the Licensees rent remains fixedsee Figure
1.5 This arrangement, where the performance
of beer and AWP machine sales is shared with the pub company,
is why we believe tied Licensees are currently faring better than
their free trade counterparts. Punch Taverns are not experiencing
the same level of closures, proportionate to our estate, as those
being reported by the BBPA of 35 pubs per week.
1.6 The BEC review must acknowledge that
the current challenging trading environment is the primary contributory
factor for any increase in Licensees' financial distress. The
"tied" lease model is not the issue, as has been suggested
by a small number of self selected pressure groups.
1.7 Punch's long term financial structure
and commitment to the pub sector means we continue to be one of
the most professional and progressive pub landlords in the market.
1.7.1 We have invested £290m into our
estate since 2004.
1.7.2 We have a flexible and "Plain
English" accredited agreement, with a cooling off break clause
and no upward only rent review clause.
1.7.3 We have invested in more specialist
"in field" Licensee support roles, including 28 coaching
specialists for BRMs called Operations Managers, 8 Catering Executives,
28 Property Managers and a PR helpline and support.
1.7.4 We have improved our tied beer range
now offering 225 draught beer brands (excluding rotational cask
ales), purchased under contract from 46 different suppliers. This
is an increase of 45 beer brands since 2004 and greater than any
free of tie operator could economically get access to. We also
offer our Licensees a choice of 353 Wines, 200 Spirit brands,
46 Cider brands and 124 soft drink brands.
1.7.5 We have enhanced our range of training
programmes, with over 500 Licensees having recently attended our
new "Profit through Beer" course.
1.7.6 In the last 12 months we have helped
817 Licensees introduce a food offer into their pubs, free of
charge, improving their earnings and profit opportunity.
1.7.7 We have implemented an improved process
for dealing with Licensee complaints, which during the last 12
months have only averaged 17 per four week period, broadly consistent
with previous years.
1.7.8 We make available to our Licensees
the best AWP machines in the market, delivering the highest cash
in box earnings in the pub sector.
1.7.9 Our "Customer Charter" and
code of practice is recognised as one of the most comprehensive
in the industry and we were among the first pub companies to have
our Charter accredited by the British Institute of Innkeeping
1.7.10 Our licensing, smoking and specialist
support packages continue to ensure our Licensees respond and
comply with all new statutory legislation.
1.7.11 Our subsidised Design and Print service,
has been used by 3,030 Licensees, completing 13,915 menu and promotional
support requests in the last 12 months. The service is priced
at cost to Punch, offering Licensees up to 55% discounts to the
1.7.12 Our 8 Regional Trade shows staged once
a year have seen attendances grow from 12% in 2004 to 28% in 2007,
demonstrating the enhanced value and engagement with our Licensees.
1.8 Punch is proud of its business model
and the contribution it makes to the UK pub industry in supporting
individual Licensees, helping them to respond and adapt to legislative
and economic changes. The relationship with our Licensees is one
of interdependencyour success depends upon their success.
2. PUNCH TAVERNS
THE 2004 TISC REPORT
This is evidenced in Appendix 2, showing a summary
of each of the recommendations, with our current working practices
Although we have not released the AWP tie, we
have complied with the recommendation to be more transparent on
the treatment of AWP income. Machine income is clearly shown in
our rental model summary shared with Licensees at the time of
a rent review or lease renewal. This is evidenced in Appendix
3 (not printed here).
3. THE CHOICE,
THE 2004 TISC REPORT
3.1 Despite the perception of considerable
merger activity in the pub sector recently, the industry is more
fragmented and significantly more diverse today than it was at
the time of the Beer Orders (the "Orders") or the last
TISC review. At the time of the Orders, the Big 6 "National
Brewers" owned over 34,000 pubs. Today, the top 10 pub companies
own just over 28,000 pubs. (See Appendix 4) (not printed here).
3.2 Over the last four years competition
between pub companies has intensified and as a result Licensee
choice has improved. There are now seven pub companies which each
operate over 2,000 pubs compared to four at the time of the TISC
enquiry in 2004. The regional brewers have increased their presence
and Admiral Taverns has emerged as a major player.
3.3 Since 2004 there are now 7% more leased
pubs available nationwide. This increase has resulted in greater
availability and competition in the market and pub companies are
more responsive in offering assisted entry for Licensees. This
includes support initiatives such as Punch's fixtures and fittings
("F&F") rental scheme and deposit build up scheme.
This has improved accessibility for Licensees into the pub industry.
This is particularly important at the moment, as the traditional
source of finance for small businesses from banks is currently
3.4 Although the majority of our Licensees
are tied to purchase beer from us, this is becoming less relevant
to many of them as the market continues to diversify away from
beer-led pubs. Our agreement has no minimum purchasing requirements
on beer products, total freedom of brand choice and our user clause
allows a wide range of retail offers including restaurants, bars,
coffee shops and gastro food venues, where beer may or may not
3.5 Our evidence is that the beer tie is
not prohibitive to new applicants in the market place. Despite
the smoking ban, the credit crunch and the general downturn in
consumer confidence, we continue to attract in excess of 400 applicants
a month. In the past 18 months we have concluded one of the biggest
letting programmes, offering more than 600 previously managed
businesses for lease, and successfully appointed new Licensees
to all of them. We conclude from this that our model remains attractive
and competitive in the market place.
4. PUNCH CONTINUES
4.1 The quantity and quality of our support
package to Licensees is detailed in Appendix 5. It can be summarised
under the following 4 key headings:
4.1.1 Support and training, to improve our
Licensees skills and overall business capability.
4.1.2 Marketing support, to help enable our
Licensees to compete in their market place.
4.1.3 Specialist help, often provided to
help Licensees adapt to changing consumer trends and legislative
changes, such as licensing and the smoking ban. A recent survey
of Licensees indicated that they would welcome even more assistance
from Punch on how to best handle the compliance issues resulting
from legislation. We will be responding to this.
4.1.4 Financial and business support. This
is targeted at Licensees who are in financial difficulty and need
advice and help in turning their business around. In the last
12 months we have spent c £16 million in supporting Licensees
with rent concessions, marketing and retail promotions.
4.2 This comprehensive range of support
is further enhanced by other recognised benefits associated with
the tied lease model:
4.2.1 Uniquely, the vast majority of leased
pubs include accommodation. Under standard commercial arrangements,
Landlords often remove this to let separately, enhancing their
4.2.2 Tied leased pubs have a very low cost
of entry. In particular, the value of stock is low compared to
other retail businesses. This is further enhanced by assisted
entry for some Licensees, a highly cash generative business model
and favourable credit terms and fortnightly rental payments.
4.2.3 Despite the tied nature of the agreement,
margins earned by leased operators are still favourable when compared
to other retail businesses. This can be further enhanced by capital
appreciation through a Licensee selling on the business. The average
premium on assignments over the last 12 months has been £71k.
5. THE PUNCH
5.1 Since the 2004 TISC report we now provide
flexibility to our Licensees on all of our new agreements by way
of a cooling off period. In the first 90 days the Licensee can
give 28 days notice of their intention to leave. This provides
the Licensee with a 118 day window where they can `walk away'
without any financial penalty. Our short term agreement, with
a 6 month break clause, also provides greater flexibility and
choice to new entrants.
5.2 Irrespective of the termination provisions
under our agreements, we take a sympathetic approach to allowing
Licensees to surrender their agreements in genuine cases of hardship
or ill health, if after a period of time they are unable to sell
their business and realise a premium.
5.3 Irrespective of the existence of an
upward only rent review clause on our old legacy agreement, the
company does not enforce this, and adopts a sensible and supportive
approach to redressing the balance of rent where it jeopardises
the sustainability of a fair maintainable trade for our Licensee.
5.4 With respect to the purchasing tie on
our agreements, despite acquiring a large number of fully tied
agreements through the acquisition of other companies, 90% of
our agreements now offer freedom of purchase on wines and spirits
which have been in significant growth for Licensees over the last
5.5 Punch now offers 225 draught beer brands
(excluding rotational cask ales), purchased under contract from
46 different suppliers. This is an increase of 45 beer brands
since 2004. The largest brewery supplier to our estate is Coors
Brewers who brew 29.75% of beer sold. Regional and smaller brewers
now enjoy a 98% share of Cask Ale brands provided by Punch, despite
the continued decline in the UK ale market. (See Appendix 6) (not
6. AS RECOMMENDED
TISC REPORT, WE
6.1 Since 2004 we have moved away from one
annual customer satisfaction survey to monthly telephone research.
We have found that this enables us to respond more quickly to
Licensees who are unhappy with a particular area of support or
a Punch employee's performance.
6.2 A recent survey conducted during August
and September 2008 asked 20% of our Licensees at random, on a
scale of 1 to 5 (with 5 being very likely), whether they would
recommend their Business Relationship Manager to another Licensee.
The overall score was an impressive 3.9, with remarkable consistency
across our Regions. (See Appendix 7) (not printed here).
6.3 We have simplified our surveys to make
them less onerous for Licensees, benchmarking our performance
to a much higher level. Simple questions include: "Would
you recommend Punch Taverns as a business partner, and would you
recommend your BRM to another Licensee?"
6.4 We also review all complaints received
from Licensees, as a valuable source of feedback. The number of
complaints received, and more importantly how we deal with them
has been a key focus area over the last 18 months as a result
of our "great customer experience programme".
6.5 In our TISC submission of 2004 we evidenced
that our Licensee complaints had reduced to 15 per month. Figures
for our last two years show these remaining stable at 14 per month
during our financial year 2007, and 17 per month over the last
12 month period. We believe this to be material evidence that
we continue to listen and promote a positive relationship with
our Licensees, even at a time when this relationship is undoubtedly
subject to greater stress.
7. SPECIFIC QUESTIONS
THE BEC FOLLOW
7.1 Has the Licensing Act 2003 had an effect
on competition within the market?
7.1.1 Punch Taverns took on a major role
in funding, implementing and educating our Licensees and Employees
with regard to the Licensing Act 2003. We incurred upfront costs
of circa £15m in support of our Licensees. This expenditure
has delivered little if any return to Punch Taverns or our Licensees.
7.1.2 In terms of the impact on competition
we have seen little change in the trading hours being operated
by our Licensees. We secured on average five additional hours
per week per pub, however we believe the actual additional hours
used to be around 20 minutes per pub per week (a figure substantiated
by the BBPA).
7.1.3 There is little evidence that consumers
want to drink much later than midnight. In recent months, the
use of the pub at weekends is being adversely impacted by a new
emerging "stay at home drinking experience" fuelled
by the smoking ban and cheap alcohol deals in the supermarkets.
7.1.4 Any additional trade realised has been
off set by increased Punch staff costs to administer the premises
license and Designated Premises Supervisor ("DPS") changes.
The Licensees have to pay for extra late night staff costs, the
ongoing annual costs of the Licensing Act and costs associated
with any special operational conditions imposed such as Door Supervisors
7.2 To what extent have revisions to the
framework codes of practice met the Committee's concerns?
7.2.1 The Punch Charter reflects the spirit
of the BBPA code of practice guidelines for the industry and has
been benchmarked and accredited independently by the BII as a
clear statement of intent for lessees and tenants. We are confident
that we have addressed the TISC Committee's concerns. (See Appendix
8 for the Punch Customer Charter) (not printed here).
7.2.2 We have recently updated and reissued
our Charter to all Employees and Licensees following organisational
changes. new legislation and improved services now available.
Punch will continue to evolve and promote our Charter as our commitment
7.3 To what extent are the codes applied
by the pub companies?
7.3.1 As evidenced throughout this submission,
supporting our Licensees is at the very heart of what we do and
we continue to operate in line with the TISC recommendations in
an open and transparent way. We acknowledge that we do not always
get it right, but what is important is that our Licensees are
now much more aware of what they should expect and how to complain
if we don't deliver. This ensures there is nowhere to hide for
poor performing Employees.
7.3.2 Licensees are treated in a much more
personal and sympathetic way with a clearly set down company complaints
procedure. This is illustrated by a Regional Operations Director
now having to telephone the Licensee within 24 hours to acknowledge
and listen to that individual's complaint.
7.3.3 Our Charter is a working document for
Punch Employees and our Licensees, setting out detailed explanations
of key touch points and events in the life cycle of our relationship.
The Charter has not fundamentally changed since the 2004 TISC
review, but has been updated to reflect the inevitable day to
day business changes.
7.4 Is there a need for further regulation
of the industry?
7.4.1 On the contrary, there is a real need
for less regulation rather than more. The cumulative impact of
more and more red tape is seriously damaging the many thousands
of small businesses that make up our industry. Existing legislation
already represents an onerous burden on pub businesses and their
operators. The pub industry does not need any further regulation,
nor can it absorb any additional costs associated with complying
with existing statutes.
7.4.2 There is a requirement on Government
and their statutory representatives to ensure that existing regulations
are interpreted and applied consistently, targeting major offenders
and not targeting well managed businesses that inadvertently breach
immaterial or minor conditions.
7.4.3 Any changes in legislation should be
consistent with the Better Regulation Executive (BRE) guidelines.
We are strongly of the view that recent legislation has been introduced
with total disregard for the five principles of good regulation,
being: transparent, accountable, proportionate, consistent and
8. SPECIFIC AREAS
We want to briefly address some of the public
criticism levied by a small number of self selected pressure groups
in the lead up to this review.
8.1 The tie puts tenants at a competitive
disadvantage compared to free trade operators.
8.1.1 What is important is the actual beer
price paid by the Licensee, not the discount or tie. This determines
the level of gross profit realised by the Licensee, which then
determines the level of rent, being a reflection of the fair maintainable
profit for the business. This ensures that the Licensee is not
disadvantaged in the market place against free trade operators.
If the beer price is higher then the GP is lower, and consequently
the level of rent is lower.
8.1.2 Unfortunately, some Licensees extract
and compare the different beer pricing structures in the market,
failing to understand the relationship between pricing, rent and
operational risk. In assessing a fair rent, a valuer will take
into consideration the agreement terms, the market's attitude
to risk, the funding and the demand for the specific business
in question. All these things determine what a potential tenant
will offer to pay in rent, as we operate in a free market.
8.1.3 Appendix 9 (not printed here)
shows a comparison between up front cash and annual costs on a
freehold purchase verses a tied lease. This shows that to purchase
a freehold worth £650k, an individual would need a minimum
of £236k up front cash, as opposed to £26.6k to take
a tied lease.
The ongoing annual costs payable would be £48k
on a freehold basis against £38.6k on a tied lease. These
are fundamentally different risk profiles where the individual
will expect different returns and paybacks.
8.1.4 It is not appropriate or equitable
to suggest that a tied tenant should be no worse off than if they
had purchased a freehold or taken a free of tie agreement. The
two situations are materially different propositions, with different
risk and profit profiles.
A more detailed version of this analysis was independently
validated by Deutsche bank in their analysis of the pub sector
("The Bear Pit" 31 October 2003).
8.1.5 We do recognise that markets and retail
pricing can significantly change. Consequently, where a tied Licensee
can evidence that they are being materially disadvantaged within
their local market place due to substantial retail discounting,
then pub companies will be keen to assist with special promotional
8.1.6 Punch has a marketing and pricing mechanic
called "Bartop". We know that merely offering Licensees
greater discounts does not always result in the discount being
passed on to the consumer to grow sales. This is why we include
an "in-pub retail package" that helps improve the overall
consumer experience, to drive increased sales and additional profit
to the Licensee.
8.1.7 The most important factor remains,
that any prospective operator must carry out thorough due diligence
and complete a business plan, with a forecast Profit and Loss
account, ahead of entering any contractual agreement, whether
it be leasehold or freehold. As acknowledged in the 2004 TISC
report, this process is required and fully supported by the major
leased pub companies.
8.1.8 It must also be remembered that Licensees
enter into a tied lease freely and of their own accord. They are
strongly advised to seek professional advice in a number of areas
during the application process.
8.2 The pub companies have not responded
to the last TISC report recommending that the AWP machine tie
8.2.1 We continue to advocate that suppliers
and Licensees benefit from the tie on AWP machines. Appendix 10
(not printed here) contains an extract from "What
Amusement Machine? " This independent Machines Advice
Bulletin outlines why, in their view, releasing the machine tie
would prove counterproductive for all parties.
8.2.2 In summary, there are five positive
things about the machine tie that benefits the tenant:
18.104.22.168 Machine standards are
better managed centrally than by individual tenants.
22.214.171.124 Tenants undoubtedly benefit
from the pub company's economy of scale, despite royalties (discounts)
being paid to pub companies.
126.96.36.199 Pub companies routinely
test all new machines and only high earning models are allowed
to go on to the rent list. There is a correlation between high
earning machines and higher rents because they deliver higher
earning cash in box.
188.8.131.52 Pub companies' machine
departments monitor machine incomes, on a site by site basis,
and initiate machine changes when incomes start to decline. This
ensures all parties optimise their income at any point in time.
184.108.40.206 The current arrangement,
as with the beer tie, shares risk. If the machine income is consolidated
into just rent, the tenant may not always have the ability to
pay this as machine income is notoriously volatile.
8.2.3 Pub companies also ensure that AWPs
are legitimately managed through approved suppliers, and are properly
licensed with VAT being payable from cash receipts. It is also
worth noting that in the last two years the number of agreements
no longer tied for AWP machines has increased from 1,976 to 2,441,
now representing 32% of our estate.
8.2.4 Our approach to managing AWP machines
is set out in Appendix 11 (not printed here).
9.1 The British pub has been one of the
most enduring business models in the world, aided and supported
by the tied model. It has survived for hundreds of years, remaining
at the heart of many local communities. This is particularly important,
where in recent years, other local facilities such as the post
office or village shop may not have survived.
9.2 In the current challenging economic
trends of declining pub users, fuelled by the credit crunch, aggressive
supermarket alcohol pricing and the smoking ban, we need the Government's
support in reducing taxation and costs associated with recent
legislative changes within the industry.
9.3 The Business and Enterprise Committee
should acknowledge that this challenging external environment
is putting additional stress on small businesses, pub operators
included. This is a major contributory factor to the loss of so
many smaller and rural pubs.
9.4 No business model is immune from economic
downturns, or changing consumer trends. Licensee naivety and poor
judgement should not be construed as exploitation by the pub companies.
Regrettably despite our best endeavours some Licensee's businesses
do fail. We believe however that the tied model compares favourably
with virtually any other business sector, as a result of the high
levels of support offered by pub companies such as Punch Taverns.
9.5 Punch continually strives to enhance
both its business model and its field operations managers. It
has a financial structure that provides certainty for the future,
provides higher levels of investment than anyone else, more training
and a package of goods and services that would not otherwise be
available to the individual operator. The tie on beer and machines
is an integral part of facilitating this.
9.6 We believe that current market forces
will dictate that pub companies continue to offer their Licensees
a fair maintainable profit share going forward. With the increased
availability of leased opportunities and freeholds and with quality
operators at a premium, those uncompetitive or unattractive pub
companies will certainly be disadvantaged in the market place,
as existing and potential Licensees vote with their feet.
9.7 Running a pub remains one of the most
attractive opportunities for individuals wanting to run their
own business and we pride ourselves with the openness with which
we conduct our business, taking our responsibilities seriously.
9.8 We are proud of the very large number
of successful partnerships that we have with our Licensees, where
we have helped them to create successful careers in self-employment
in our industry.
Note: Further Appendices in Section 2 include
(not printed here):
Appendix 12BRM Checklists for
First and Second Interviews
Appendix 13"Our PubsYour
Appendix 14Business Plan Documentation
Appendix 15"Your Path
To Success" Booklet
29 September 2008