Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Punch Taverns plc


  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 here).

  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 lease model.

  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 fixed—see Figure 1.

Figure 1

  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 ("BII").

    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 market.

    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 interdependency—our success depends upon their success.


  This is evidenced in Appendix 2, showing a summary of each of the recommendations, with our current working practices outlined beneath.

  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).


  3.1  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 non-existent.

  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 be sold.

  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.


  4.1  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 property returns.

    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.


  5.1  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 few years.

  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 printed here).


  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.


  7.1  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 or CCTV.

  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 to Licensees.

  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 targeted.


  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 support.

    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 be removed.

    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:

 Machine standards are better managed centrally than by individual tenants.

 Tenants undoubtedly benefit from the pub company's economy of scale, despite royalties (discounts) being paid to pub companies.

 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.

 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.

 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 12—BRM Checklists for First and Second Interviews

  —Appendix 13—"Our Pubs—Your Passion" Brochure

  —Appendix 14—Business Plan Documentation

  —Appendix 15—"Your Path To Success" Booklet

29 September 2008

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 13 May 2009