Pub Companies - Business and Enterprise Committee Contents

Further supplementary evidence from Punch Taverns Plc

  Further to my letter of 11 December, I am now enclosing a follow up note to some of the questions as requested at the evidence session on 9 December.

  These relate to the following:

    —  Question 280 on leased and managed statistics.

    —  Question 217 on evictions.

    —  Question 258 on telephone costs.

    —  Question 261 on Brulines equipment.

  Please let me have any other questions and also let me have the detail of any of the 12 complaints from Punch licensees that you are able to let us see.

  As I mentioned in my letter, we would be only too pleased to arrange some visits for any members of the Committee so that you can see the pub trade first hand.


  Q280 Mr Binley: "|your statistics suggest that the difference between leased pubs and managed pubs, and I have already made the point about the difference in size of business, that the leased pub is, on average, about 11.5% of the take of the managed pub, but I said that the difference between 2006 and 2007 with regard to take is that take is up in tenanted pubs by 6% and in managed pubs by 10%, but the profitability has shown a 5% increase in the tenanted estate, but a 20% drop in the managed estate|." Now, this suggests to me that either your DMs or your area managers are a total waste of time or you have got some special costs in there that I do not understand or you have had a massive improvement with your tenants in your tenanted estate. My concern is that, if this is used in discussions on rent reviews, then we do need to understand that difference because it is an important piece of evidence.

  Mr Thorley: "|What I would say though is that in terms of the profitability of the leased and tenanted pubs, the number which I do recognise, the 5% increase, reflects the fact that over the course of the last few years we have sold more than 2,500 pubs as part of the evolution of our business."


1.   Take of Leased pub 11.5% of Managed pub

  With reference to our statutory accounts, from which we believe this statistic was calculated, it should be noted that the turnover shown for our Leased estate, does not represent the retail sales of our customers, it merely represents an element of the drink cost of goods inwards to our customers, and other income streams to Punch, for example the rent payable by our customers. (It should also be noted, that the cost of drink sales for our customers, is often made up from a variety of different suppliers, for non beer and sometimes cider, alongside Punch). The turnover for our managed estate, does relate to retail sales over the bar. Therefore the two numbers are not comparable. Attached is a breakdown of our income from our statutory accounts to August 08 (Appendix A), and alongside this, we have shown two typical "average" retail P&L's for our customers (Appendix B). We hope this goes some way to help illustrate the different structure of the two P&L's.



  (53 weeks converted pro-rata to 52)
52 wks
Beer Sales£63,750* *(works out to approx 74% of the example customers COS, with 26% of wet COS sales "free")

Total Sales
£111,174 £113,31253 week prelims average

Beer Margin

Total Gross Profit
£72,950 £74,35353 week prelims average

Rent Payable
Other Costs-£7,645

£63,491 £64,71253 week prelims average


Operating Profit
£60,770 £61,93953 week prelims average


£9k/wkWet Sales £250,000£5k/wk Wet Sales£230,000
Dry Sales £200,000Dry Sales £45,000
Machines £9,000Machines £11,000
Total Sales £459,000 Total Sales£286,000
Wet Margin56% £140,000Wet Margin 56%£128,800
Dry Margin62% £124,000Dry Margin 55%£24,750
Machines33% £3,000Machines 33%£3,667
Total Margin £267,000 Total Margin£157,217
Wages19% £87,210Wages 15%£42,900
Business Rates3.5% £16,065Business Rates 3.5%£10,010
Utilities4.0% £18,360Utilities 4.0%£11,440
Other10.0% £45,900Other 10.0%£28,600
Total Exp37% £167,535 Total Exp33% £92,950
Rent £50,000Rent £32,000
Total Costs £217,535 Total Costs£124,950
Lessee Share £49,465Lessee Share £32,267

  We believe the average profitability of our customers is c£29k, and with an "allowance" taking into account the estimated value of accommodation, would deliver the equivalent "salary" of c£38k. The diagram below illustrates the relative investment risks and returns of the partnership.


2.   Take is up 6% in the Leased Estate, and 10% in the Managed Estate, whilst profitability in the Leased Estate has grown by 5% with a drop in the Managed estate of -20%

  The leased estate has changed in profile quite dramatically when comparing the year to August 08 with the year to August 07. Within our estate, between the two years, we disposed of 973 smaller pubs, and transferred 583 larger pubs from our managed estate. With a published "like for like" profit decline of -3.4% (shown in our preliminary results presentation on our website), the entire growth in average per pub profit growth has come from the changing shape of our estate. On average our customers now have larger pubs, with larger profits than those pubs/customers we were in partnership with last year. It should also be noted, that the 5% profit growth shown above, relates to a 53 week year compared to a 52 week year, the equivalent is 52 week comparison is 4% growth.

Leased Pub Numbers
FY02 IPOFY03 FY04FY05FY06 FY07FY08 Cumulative

Start of Year
4,160 4,2494,302 4,5157,3348,227 7,8467,561 4,160
Pubmaster 3,115 3,115
InnSpired 1,064 1,064
Avebury 409 409
Other Acquisitions187 28380106 968519 856
Lease conversions 74 56320657
Disposals(45) (70)(376)(686) (551)(933)(40) (2,701)
End of Year4,302 4,5157,334 8,2277,846 7,5617,5607,560

  The managed estate has similarly undergone a significant change in composition between the two years. At the start of FY07 there were 1,410 managed pubs. During the course of FY07 and FY08, 94 pubs were acquired, 583 were transferred to lease and 57 were sold leaving a closing estate of 864 pubs.

  On average 870 pubs were operated during FY08 compared to 1,191 pubs in FY07, a reduction of 27%. The pubs operated in FY08 are generally larger with average sales 10% higher than the FY07 estate, as you have noted. This does not, however, mean that they were growing sales. Indeed on a like for like (same pub) basis sales were down 3.3%.

  The average operating profit per pub was 17% lower in FY08. This has similarly been impacted by the change in the make up of the estate. The retained estate is more biased towards food, 38% of sales related to food in FY08 compared to 33% in FY07. It also contains a higher proportion of leasehold pubs, average rent payable was £45k per pub in FY08 and only £38k in FY07. Both these factors result in lower profit conversion in the retained estate.


  With respect to the answer given to Q217 "how many tenants have you evicted in the last three years?" At the time, we were unable to provide the answer. We have now reviewed our records and can confirm that between 1 January 2008 and the 12 December 2008, the number is 109.


  With respect to the answer given to Q258 "You operate premium-rate telephone lines for tenants which means effectively that they have to pay for their particular concerns, queries and discussions with you. What is your comment? How much do you make from it?"

  We would like to clarify the answer as follows:

  Answer: This is not correct. We currently operate a 0844 number that costs 4p per minute (national landline rate) to call. Obviously, as with all numbers this cost can vary dependent on the operator of the line or mobile used by the caller. Punch do not make any money on this phone line and any volume based, retrospective discount (up to 0.9p per minute) our provider may provide, would go towards the cost of us providing a national landline rate for our customers. However, we do not receive this discount if our provider's volumes are not met within a full calendar year,

  Question: Well, we have been told that.

  Answer: We did have an 0870 number which was more expensive to call, but changed this six months ago to the 0844 number (as above) so that we could reduce the costs for our Customers. The volume based, retrospective discount that we negotiated with our supplier is aimed at keeping our operating costs as low as possible whilst providing an effective support facility for our Customers.


  Question: Could we have a technical note on that [Brulines equipment distinguishing the flow of beer vs pipe cleaning water] rather than spend time on it now?

  Answer: Please see the attached two files containing a line cleaning overview and examples of the process.

December 2008

Line cleaning process within the Brulines draught dispense information


  1.  Line cleaning is a practice where water and detergent are drawn through the beer lines to thoroughly clean them.

  2.  It is standard accepted industry best practice to clean all beer lines once a week.

  3.  By far the most common method of line cleaning is for the process to be done in a single session outside the normal trading hours of a pub utilising the line cleaning water ring-main.

  4.  During this process the licensee will draw the water used during line cleaning through the equipment provided by the brewery for this purpose. This equipment which allows all lines to be cleaned simultaneously is generally a hose which has a number of keg connectors inserted along its length (this equipment is generally referred to as the line cleaning ring-main).

  5.  To identify when water and line cleaning fluid is used to clean the lines, Brulines install a flow meter in the line cleaning water ring-main. Unlike the flow meters installed in the individual beer lines which are calibrated to exact volumes of beer dispensed, the meter on the ring main is not calibrated, its purpose is to detect movement not volumes.

  6.  There are two other methods of line cleaning that Brulines may have to identify in a public house. These are used on cask beers or when the water ring main is not operational.

    (a) The licensee may clean the lines by drawing water from another source, most commonly a bucket or other container. If a licensee is cleaning with detergent this will most commonly be on one or a number of specific lines (normally cask) and will generally be done outside trading hours.

    (b) The licensee may also occasionally draw water through the lines during trading hours, this method does not normally involve the use of a detergent, it is generally done on cask lines and is not normally a full clean. It is called a "flush through" and is the process whereby the licensee will draw through a volume of water (normally one or two buckets) between change of casks.

  7.  During the line cleaning process it is normal for three liquid types to be drawn through the Brulines beer flow meter and the volume detected by that meter. The Brulines meter does not differentiate between the liquid types. It will record the total volume of liquid dispensed through each individual meter in each hour time period.

  8.  The different liquids drawn through the beer meter on a standard clean include water, beer and detergent. A standard beer clean on a beer line would include the following volumes of liquid.

Beer held in the line Water (also recorded through ring main) Line cleaning solutionWater (also recorded through ring main) BeerTotal

34 4163 30

  9.  As the flow meter does not distinguish the difference between beer, water or line cleaning detergent, all volumes recorded in the hour of an identified clean are removed. This will mean the benefit of any doubt on the exact volumes of beer or water used in the clean are counted in the benefit of the licensee.


  10.  The dispense volumes from each Brulines installation are downloaded by Brulines each week, the Brulines in-house software then scans all the volumes which have passed through the line cleaning flow meter and the beer meters. It either automatically identifies certain volumes as cleaning or highlights these events for manual review.

  11.  The Data Auditor then evaluates all items raised for manual review and identifies all volumes that would be considered line cleaning. The auditor always takes a cautious view during this review to ensure that any decision is always in the benefit of the licensee in respect of liquid identified as water in the line cleaning process. If any volumes are suspected as line cleaning they are identified as water, all water volumes are transferred from the beer table to the water stack table.

  12.  It is a feature of the Brulines data, that none of the data is lost in the line cleaning process. The liquid flows identified as line cleaning remain as dispense volumes and are transferred to another data table called "the water stack table". This means whilst they are not reported upon in any beer dispense reports, they are retained so there is a clear audit trail to the original data downloaded from the system.

  13.  The events identified by the Brulines system are as follows:

    (a) If there is any volume detected on the water line in excess of 5 pints in any hour outside normal trading hours (midnight to midday), this volume and any dispense volumes on any beer lines are automatically removed from the beer volume tables and stored in the water stack tables.

    (b) If there is any volume detected on the water line in excess of 5 pints in any hour during normal trading hours (midday to midnight), this data is flagged for manual review by the auditor. If the auditor considers these volumes to be line cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables.

    (c) If there is any volume detected on any beer keg lines in excess of 15 pints in any hour, outside normal trading hours (midnight to midday), this data is flagged for manual review by the auditor. If the auditor considers these volumes to be line cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables.

    (d) If there is any volume detected on any beer cask lines in excess of 10 pints in any hour, regardless of the trading hours, this data is flagged for manual review by the auditor. If the auditor decides any of these volumes are cleaning, they are highlighted and removed from the beer volume tables and transferred to the water stack tables.

  14.  Examples of this data and how it is applied to the beer tables and the water stack tables are enclosed on the attached appendix (not printed here).

  15.  The final check is that following line clean the auditor reviews each site every day for unusual volume flows or suspected dispense in excess of delivered beer volumes. Any such activity will be investigated. If there are any volume movements that look like they may be line cleaning activity then these volumes are transferred to be stored in the water stack table.

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