Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Business in Sport and Leisure


  Business In Sport and Leisure (BISL) is an umbrella organisation for over 100 companies in the private sector of sport and leisure industry. Members of BISL listed on the London Stock Exchange and in private equity ownership have a combined market value in excess of £40 billion. BISL has a long established working group on liquor licensing and published its first paper on licensing law reform in 2003.

Has the Licensing Act 2003 had an effect on competition within the market?

  BISL is not aware of the Licensing Act 2003 having any impact on competition within the pub market. We do not think that any competition concerns have emerged since 2004 when the OFT and Trade and Industry Select Committee found none.

  However, we would like to note that despite the Licensing Act 2003 initially being envisaged as a deregulatory piece of legislation, its impact has been to increase the administrative burden for operators in the licensed trade, for example through requirements around advertising and applying for variations in licences. The local nature of the Act has resulted in widespread inconsistency of application by licensing authorities with some imposing unwarranted but punitive conditions on licences and others building strong partnerships with the licensed trade.

To what extent have revisions to the framework codes of practice met the Committee's concerns?

  Revisions to the framework codes of practice have adopted most of the recommendations of the Trade and Industry Select Committee, for example on the avoidance of upward only rent reviews, the disclosure of information and the taking of legal and professional advice by prospective tenants. BISL understands that the Pubcos place a premium on ensuring the transparency of their lease agreements. Pubcos clearly explain the agreements that they enter into with tenants, providing for example complete guides to the letting and assignment process and plain English agreements with simple summaries. They also advise prospective tenants to take legal advice and insist that they take financial advice before signing the agreement.

To what extent are the codes applied by the pubcos?

  BISL believes that the recommendations of the Committee's 2004 inquiry have been met, with Pubcos applying the amended codes of practice, on rent reviews, support for tenants, for example through BDMs, disclosure of information and requiring professional advice for prospective tenants. In the current difficult economic climate, several Pubcos, for example Greene King and Enterprise Inns, have seen profits fall as they bolstered their tenants through rent concessions and trading support. As discussed below BISL believes this is indicative of how the present relationship between pub companies and tenants is working well by sharing the costs of the economic downturn.

Is there a need for further regulation of the industry?

  BISL is of the firm opinion that the last thing that the pub industry needs in the current difficult economic times is any more regulation. There are many reasons for the current problems that pubs are facing, not least the effects of the smoking ban, aggressive supermarket discounting and loss-leading, the rising cost of utilities and raw materials, the credit crunch and the resulting downturn in consumer spending and punitive taxation increases, particularly on beer duty. We certainly do not feel that the role that Pubcos play in the industry is driving pubs to fail or the root cause of the estimated 36 pub closures a week. Indeed, we believe that the flexibility that Pubcos have been able to operate over rent concessions and the support services their provide is helping rather than hindering their tenants and lessees.

  BISL is aware of the recent campaign attacking the relationship between Pubcos and tenants, in particular the beer tie. In 2004, the OFT and the Trade and Industry Select Committee found that there was no fundamental case to answer on the beer tie. BISL firmly believes that that situation has not changed and there are no competition concerns.

  There are in fact several significant benefits to the beer tie, for example the initial capital investment required by new lessees is lower and the pain of tough conditions is shared, with tenants more likely to receive support from a landlord with a vested interest (ie a Pubco) than from a bank calling in loans. Under the tie, beer prices increase only once a year rather than at any time as for free traders, with Pubcos operating transparency over the increases. Moreover, Pubcos have a vested interest in growing sales through providing a high level of support. Punch Taverns, for example, provides its lessees with marketing support, training, specialist help, not least the £40m invested in smoking ban adjustments across its estate, and financial help and support, such as rent concessions.

  Rent is a fixed cost whereas beer costs are variable. Tenant and lessee beer prices are higher than for freehouses but the prices are clearly set out in writing in advance and, more importantly, the whole model for a free trader is different. Free traders borrow from a bank to buy their pub whereas the Pubco finds the capital to buy a pub and establishes its beer prices against this cost, whilst investing in the pub through, for example, refurbishment. The beer tie enables Pubcos to keep rents lower than free market rates and there seems little appetite amongst tenants for rents to rise. Enterprise Inns, for example, have noted that only a small percentage of their tenants have opted for their Retail Partnership Agreement, which offsets lower beer prices against a higher rent. Support services and advice are also available from the Pubco. Without the beer tie, rents would rise and investment in support services would decrease.

29 September 2008

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