Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by Marston's Pub Company plc


  1.1  The British Beer and Pub Association (BBPA) Submission provides separately details of the structure of the market and the type of tenancies and leases that are generally available.

  1.2  Our agreements are highly flexible and are written in Plain English (carrying the Crystal Mark), a unique approach to clarity in this sector. Our 1,722 tenanted and leased pubs are spread across England and Wales but with a concentration in the midlands and the north of England as a consequence of historical development.

  1.3  Approximately half our estate is leased on long-term agreements, with the remainder let on a variety of short-term agreements of up to five years in length. We do not have a preference for one style of agreement over another; rather it depends upon the nature of the pub. Each agreement is thus tailored to the specific requirements of our retailers.

  1.4  As with other similar agreements, leases provide the opportunity for longer term investment and retailers can benefit from an increase in the value of the lease as a result of their efforts, realising the goodwill or equity generated by assigning the lease. The retailer is responsible for repairs and redecoration of the premises. Tenanted agreements on the other hand are shorter, non-assignable and do not carry goodwill. The repair obligations are usually less onerous for the retailer.

  1.5  Any tenanted/lease agreement is a commercial agreement that is signed by the operator at the start—from a tenanted perspective they are not forced to enter the agreement and the fundamentals of the agreement are not amended once the retailer is in place. We expect and encourage retailers to undertake careful due diligence as described in 4.10 below.

  1.6  Tenanted pubs represent a cost-effective way of setting up business. The terms of a tenancy are understandably different from those enjoyed by a freetrader, who may have invested £500,000 or more buying their business.

  The costs, operating flexibility and limitations (such as the operation of the tie) compare very favourably with other franchise operations common to food and drink retailing in the UK.


  2.1  The BBPA have provided BEC with a summary of the current trading climate. It is worth reinforcing their submission with our view as tenanted operators with a very good understanding of the pressures currently affecting our retailers.

  2.2  The smoking bans introduced in England and Wales have severely affected trade in many pubs, especially those without the facility to provide an attractive outside area for smokers and/or with a limited capacity to offer food. MPC invested approximately £10m to help our retailers prepare outside trading areas.

  2.3  UK on-trade beer volumes are estimated to have fallen by at least 10% in the last 12 months. This is the highest rate of decline on record. Weak consumer confidence and increased pressure on discretionary expenditure is having a direct impact on trade and profitability, as are rising costs, utilities, wholesale prices, wages, legislation compliance and increased taxation.

  2.4  Pricing is a key issue for all pubs, with significantly increased competition from the off-trade (supermarket, off-licences). The exceptional increase in duty in March 2008 has exacerbated the price differential. The often quoted loss-leading 50p per pint of strong lager sold in supermarkets is unfortunately a reality. Off-trade outlets can sell below cost, abrogating any responsibility for supervised consumption.

  2.5  Income from fruit machines (AWP) is in long-term and accelerating decline. This is an important source of income for many retailers.

  2.6  We have seen an increase in the number of pubs failing as a result of the combination of these factors. As a consequence, we have a greater number of pubs where the retailers are receiving assistance with rent, and higher discounts. We are spending over £2 million this year in rent and discount support—more than twice the level of 2007. We also have more pubs closed (either temporarily or permanently) than we have previously experienced. A number of these may be sold de-licensed, never to re-open again as pubs.

  2.7  Because of the most difficult trading conditions for many years we are working very closely with our retailers. It is in our interest to have stability in our tenanted estate. We continue to provide a high level of support in terms of marketing, business development advice as well as practical financial assistance.


  This is not an exhaustive list. Specific details, including examples, references and documentation or website access will be made available to Committee Members upon request.

3.1  Rent concessions

  3.2  Price trials in South Wales and Stoke with higher discounts given to tenants/lessees.

  3.3  Free legal helpline to cover areas of concern such as licensing and employment law.

  3.4  Comprehensive training, including free training on finance and marketing to 360 pubs.

  3.5  On-line payroll bureau facility offered to all our tenants (1700+) at significantly reduced cost.

  3.6  Significant investment in a wide range of on-line services, including promotions, wine lists, food menus.

  3.7  Smoking preparation, including capex, project management, planning permissions, etc.

  3.8  Free website for pub accommodation.

  3.9  Sympathetic view taken for early surrenders where this is the only course of action.

  3.10  "Pub Doctor" intensive business development consultancy.

  3.11  Free help with a wide range of compliance matters, eg fire risk assessments, DDA.

  3.12  Subsidised membership of trade bodies.

  3.13  Facility to buy food from Marston's PLC suppliers on Group terms.

Trade & Industry Select Committee Inquiry 2004


  4.1  The "tie" is a long established and well understood commercial practice in the pub industry. Retailers are usually "tied" to their landlord for the provision of specified draught and packaged beers, and cider. Wines, spirits, minerals and fruit juices are generally not "tied" (although there are some "full tie" agreements which also "tie" wines and spirits).

  4.2  Historically, the tie enabled brewers to secure distribution for beers brewed by them in pubs owned by them. A large proportion of beers brewed by, for example, Fullers, Shepherd Neame, Thwaites, Greene King, Marston's and other regional brewers, are sold through "tied" estate. In Marston's, around 40% of our beer brewed is sold through Marston's owned pubs, and in smaller brewers this figure would be greater. If the tie did not exist many regional brewers' businesses would be threatened.

  4.3  Our view is that removal of the tie would benefit the lowest cost producers (national lager brewers) at the expense of higher cost producers (regional, local and family brewers).

  Removal of the tie could therefore lead to reduced choice to consumers.

  4.4  The existence of "the tie" enables brewers and pub operators to set rents below free market rents, and to provide support services and advice to tenants. If the "tie" were removed, rents would certainly increase and investment in support services would reduce.

  4.5  The "tie" has been investigated many times in the past, most recently in 2004 (Trade and Industry Select Committee Inquiry).

  4.6  Both Office of Fair Trading and the Trade and Industry Select Committee have clearly stated there is no fundamental case to answer.

  4.7  The Chief Executive of the Office of Fair Trading, John Fingleton, has recently stated: "The relationship between pubcos and their tied tenants has been examined in depth in the past, under both European and UK competition laws. The conclusion has been that tied lease and tenancy agreements do not raise competition concerns".

  4.8  The Trade and Industry Select Committee report into pub companies in 2004 stated: "We were not convinced that the division of the wholesaling and property functions of pubcos, ie the removal of the beer tie, as advocated by many witnesses, would necessarily benefit tenants. We felt it likely that in the absence of the tie pubcos would exercise their contractual right to raise property rents to compensate for the loss of income from beer sales|.(and) if brewers were free to supply all public houses on a wholesale basis it is possible that major brewing companies could achieve a dominant market position to the detriment of individual public house operators."

  4.9  Pub companies have adopted the recommendations of the Trade and Industry Select Committee and have amended Codes of Practice in line with recommendations—including the avoidance of upward only rent reviews.

  4.10  Marston's lease agreements are totally transparent, freely entered into by both parties. Contracts are openly and willingly signed up to and clearly state the terms, conditions and expectations. All Marston's agreements carry the `Plain English' mark for clarity. Marston's also advises prospective tenants to take independent legal and financial advice before entering into an agreement—which has a cooling off period of three months.

  4.11  The problems in the pub market have not been caused by, nor are they being made worse by the tie. Pubs are suffering due to a combination of factors surrounding the economic downturn, the prices squeeze and specific legislation affecting pubs. Aggressive discounting and loss-leading on alcohol by supermarkets is encouraging people to drink at home rather than in the pub, and the recent duty increase of 9% has contributed to this price differential.

  4.12  In our view government legislation and taxation are contributing to problems in the pub sector: the effect of government policy has been to the detriment of the promotion of safe, sensible and social consumption of alcohol.


5.1  BBPA Code of Practice Framework

  The principal recommendation from the Inquiry was that BBPA should as a matter of urgency revise its Code of Practice Framework to cover areas such as rent reviews, the role of business development managers, complaint and dispute procedures, disclosure and the availability of information, and the taking of legal and professional advice by prospective tenants.

  The BBPA revised its Code of Practice framework in November 2005 and the British Institute of Innkeeping (BII) subsequently set up a subsidiary, BII Benchmarking and Accreditation Services (BIIBAS), to review and accredit individual pub companies' Codes of Practice. Marston's Pub Company was amongst the first operators in the industry to have its Code of Practice approved by the BII. This Code of Practice sets out clearly how we aim to do business; how our charges and the tie work; how we calculate rents; and the support we offer and what we expect in return. It also describes what tenants should do if they are dissatisfied with us.

  Since we published the Code (every tenant has received one and it is freely published on our website, we have had only two cases referred to us by the BII, where a tenant felt we had not abided by our own Code. In both cases the BII found in our favour.

5.2  Products

  "In the absence of the legislative option we recommend that pubcos allow their tenants more flexibility in their choice of the products they sell."

  Over the past three years Marston's Pub Company (MPC) has extended its range of products across all categories. We offer all of the top lagers in the country, a significantly extended range of non-beers, including our recently re-launched wine range and our new soft drinks range. Our rotating guest ale programme offers over 30 different beers from the five breweries which we own, as well as a number of beers sourced from other national and local brewers. For those houses who need an even wider range of wines, we do have an arrangement whereby a specialist third party can deal directly with them, catering for their own specific needs.

5.3  Arbitration

  Calls for pubco/tenant agreements to have "an inexpensive and efficient system of arbitration with fully independent arbitrations or experts to resolve disputes without imposing legal costs on the other side."

  Since 2004 Marston's Pub Company has only had two cases of arbitration. Our BII accredited Code of Practise details a clear process in the event of dispute. For many years we have used an independent Rent Panel to help with rent setting and to ensure that our rents are fair and in line with the market. We have also added in an extra "parachute" stage whereby we co-fund an independent expert to help resolve any disputes before they actually reach the expensive, formal arbitration process without prejudicing our tenants' rights.

5.4  Assignments

  Pubcos should insist tenants assigning leases give prospective tenants the same level of information the pubco gives. Incoming tenants "should not sign agreements until they are aware of an incumbent's profit-and loss accounts."

  Our policy has always been to make sure that the assignee is made fully aware by the assignor of the fullest possible information from the pub's profit-and-loss accounts. We therefore strongly recommend that all assignees take independent professional, legal and financial advice when entering into a business agreement/contract with the assignor. It is essential the incoming tenant makes sure he or she has all of the information from the assignor. We do not know everything that goes through a pub's books due to the nature of non-tied items such as food sales. Therefore, MPC insists the assignee asks for this information and has it checked before taking the lease on.

5.5  Advice

  "We believe that many of the disputes that arise between pubcos and their tenants would be eliminated if pubcos insisted as a condition of acceptance that tenants obtained all necessary professional advice."

  This is already built in to our tenancy and lease agreements. We insist that new assignees take full professional, legal and financial advice before taking on a pub. In addition, we insist that all new retailers take up a subsidised Stock Taking service for at least their first year, to address one of the key reasons for pub business failure. We also include a cooling-off period for three months in our agreements, which allows tenants an early break of agreement if they are unhappy with the pub or our trading relationship. We offer a wide range of professional training courses to tenants and insist that they take our subsidised five-day entry level business and pub management course.

5.6  Discounts

  "We believe pubcos should advise their tenants of the average discount they receive, how this compares to the free-market discounts available, and how much of this discount pubcos are passing on to their tenants."

  Our retailers receive full information on exactly what products are on offer to them and what discounts they will receive. Our Intranet provides our customers with details of all discounts that they receive. For those customers who earn discounts related to achievement versus target, we update them on a weekly basis of their individual performance following a redesign of our invoice. Our customer services team also advise retailers if they are nearing a discount threshold at the point of order, giving them every opportunity to earn. We do not provide information on free trade discounts but our discount schemes have been considerably simplified. It would be commercially unacceptable to reveal our buying-in terms on our factored products, as the matter is commercially sensitive.

5.7    AWP Machines

  "We recommend the AWP machine tie be removed. If the AWP machine tie is not to be removed quickly, there is no reason pubcos could not introduce more transparency about their contractual relationships with their AWP operators."

  The AWP tie remains a fundamental part of our relationship with retailers. We believe that this tie adds value to its tenants' business due to the provision of better machines that are more appealing to customers, have better service and, therefore, generate higher revenue for the tenant. MPC continues to supply extra support to tenants, to ensure that they make the most out of the AWP machines. Our service covers all the legal, licensing and other legislative requirements with operating AWP's. Our dedicated team analyses the performance of each machine on a regular basis to ensure that the machine operators regularly update the machine offering in each pub. Where appropriate, we also give advice on the best location for AWP's and relevant laws. The relationship between the AWP supplier, MPC and the tenant is transparent. Each tenant can see the rent payable on the machine and there are no hidden rebates.

5.8  Rent Valuation

  Calls for "clear guidelines for the rent valuation process". The profit assessment method of calculating rent should be carried out in accordance with national accounting standard. Pubcos must tell tenants how the rent was calculated."

  We have a rent valuation process, which is executed with knowledge, prudence and due diligence. We aim to have an open relationship with our retailers and understand their true turnover and costs so that we can best evaluate their rent. Rent is evaluated by our professionally qualified Regional Estate Managers (REM's). Using their profit-and-loss account, the retailer is taken through the business model with the REM to determine a fair rent that takes into account achievable turnover and costs. In the case of a dispute an independent valuer will visit the site, to decide whether it is fair or should be adjusted. The figure reached is then presented back to the retailer, who can accept or reject the offer. As said earlier, we have had two cases requiring arbitration in the last five years.

5.9  Upwards Only

  Upward-only rent reviews should be removed "as soon as is practicable".

  We agree. Our new lease agreements do not have an upward-only rent clause and older legacy agreements will be removed over time. In these instances we always take a fair view towards the evaluation of rent. Rents do go down in certain circumstances.

5.10  Exploitation

  Pubcos should "recognise that they have a responsibility to ensure they do not exploit their position of economic strength."

  This continues to be a fundamental part of our business. We pride ourselves on the fact that, our business is built on transparency, openness and fairness.

5.11  Rent Help

  Recommends rent concessions "where tenants experience financial difficulty through no fault of their own, for example due to demographic changes" or because the pub is closed for repairs.

  We already do this. If a retailer has financial difficulties through no fault of their own, we will look at each case on its merits and award reductions or alleviate rent until the difficulty is resolved. A recent example of this includes the significant amount of assistance provided to retailers during the flooding in 2007. This even encompassed business interruption insurance.

5.12  Training

  Pubcos should consider paying course fees, or giving grants, to tenants who attend courses such as those run by the BII so they can employ cover staff while they are training.

  Training is fundamental to our business and we have always subsidised our training courses to our customers making them highly affordable. For those courses which we do charge, we are highly competitive and have not changed our prices for over four years and have no plans to do so.

  We have significantly extended the range of training available to cover an increasing range of highly relevant topics and we now provide training on a local basis across over 20 different geographical locations, making training more accessible. The majority of new training events are free of charge, and we invest a considerable amount of effort, to encourage our retailers to take the opportunity to attend.

  We have extended our training in pubs to help new starters, pre-refurbishment reopening or kitchen training. All of these events are either free or heavily subsidised.

  In extreme cases, where we are unable to offer local training, we contribute to the retailer's expenses.

5.13  BDMs

  "We recommend that the industry should review the support offered to tenants to ensure the application of best practice in the provision of support to individual businesses."

  We have introduced a minimum call cycle of one visit per eight weeks. The call includes review forms for business development and retail standards, which require sign off from both the BDM and the retailer, to ensure we are jointly identifying and agreeing business development actions and following them up. In addition to this, we are in the second year of developing our BDM's by training them via the BII Profitable Business Portfolio Certificate and Diploma. This will ensure our BDM's have a minimum level of skill through an industry accredited qualification. We believe we are the only pub company offering this type of development programme for our BDM's. In addition, we have an industry-leading ratio of BDM's to pubs, meaning we are able to dedicate more time to helping our customers than other pubcos.

5.14  Support

  "Pubcos should ensure a higher level of sales support and service is provided to tenants than they might achieve on their own." The terms of these and details of consequences should form part of tenants'

  In addition to our network of BDMs, we have an extensive team of support staff, including, surveyors, beer-quality technicians, machine support, food development support, marketing, and customer services, all geared towards supporting our retailers. Because we run over 500 managed pubs we have wide access to purchasing power and expertise which we apply to our tenanted business.

  Our monthly Bar Runner promotions magazine and our intranet site provide regular product promotions and heavily subsidised promotional mechanisms to help drive turnover.

  With our programme of capital investment, we provide a project manager to ensure that works are completed on time. The manager works closely with the retailer to ensure that their operation is geared towards maximising the new opportunity.

  Our scale does allow us to organise a network of suppliers, to help support our retailers without any obligation either way. The level of take up is evidence that this is a real benefit to all parties. This applies across all types of service, be it utilities, food, or the provision of covered smoking areas in over 1,000 of our pubs prior to the ban.

  We have invested heavily in technology to support our retailers; examples include the new CRM (customer relationship management) system which helps us chase the progress of contractors in our estate and also the launch of the online payroll system which enables our retailers to produce payslips at a fraction of the cost they would normally pay.

5.15  Balance

  For some tenants, the cost of the tie is not equal to the benefits. This leads some tenants to get into financial difficulties. "In such cases pubcos could do more to redress the imbalance."

  Our tenancies and leases continue to provide a way for an entrepreneurial retailer to take on a pub business at relatively low cost compared with buying a free house. We are flexible and will release the tie, in whole or in part, depending upon individual negotiation with the tenant or lessee.

  As described above, the variety and level of support that we offer our retailers has never been greater. We continue to work closely with our tenants, to ensure that they can enjoy a long term, sustainable business.


  Here we address the specific questions highlighted in the BEC announcement of the Select Committee Inquiry:

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

  6.1  The Licensing Act 2003 has increased competition enabling pubs to compete with other late-night venues but overall on-trade consumption has fallen. Although the majority of outlets acquired the right to trade for an hour or two longer at the weekends, trade has simply shifted to later rather than grown overall. Costs, conversely, have increased as a direct result.

  6.2  The Licensing Act cost circa £2,000 per pub to be implemented. This was a particular burden on smaller houses. In addition, compliance and capital investment, such as CCTV and sound-control measures have increased the burden. The on-going administration of licensing is now a specialist function which we sub-contract to a firm of licensing solicitors. Reviews and pub closures are now harder to avoid as a result of the onerous bureaucratic conditions (eg bankruptcy, IVA, deaths) within the Act.

  6.3  In common with our competitors, we are seeing more competition from the off-trade which has benefited from the ability to sell alcohol during all permitted opening hours following the introduction of the 2003 Act. "Pre-loading" with cheap supermarket alcohol before visiting pubs later is an increasingly common phenomenon and brings with it difficult issues of anti-social behaviour.

  6.4  None of our pubs have "24 hour drinking". Our latest licence is 3 a.m.; we have 1% of our pubs with such late licences.

  6.5  Power to residents and local authorities has increased as a direct result of the Licensing Act 2003. Smaller pubs are less well placed to handle the consequences of this and are being disproportionately affected in comparison to larger, managed pubs.

  6.6  The Regulatory Impact Assessment identified savings worth millions of pounds. We have no evidence of savings as a result of the Act, either within our business, that of our tenants or in the local authorities with whom we deal. Indeed, the reverse is true; costs have increased as a direct consequence of the Act.

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

  6.7  Our response is set out above (5.1). Our BII-accredited Code was written within the framework of the BBPA Code of Practice that directly followed from the TISC recommendations.

To what extent are the Codes applied by the pubco's?

  6.8  We have had only two issues referred to us by the BII (see #5.1).

  6.9  All tenants receive a copy of our Code of Practice; all staff are trained in it; the responsibility for maintaining the Code and monitoring its effectiveness is the Managing Director's and it is a core part of how we do business with our tenants.

Is there a need for further regulation of the industry

  The brewing and on-trade sector is already very highly regulated. Further legislation would impose further compliance costs on both us and our licensees. We do not believe that any further regulation is necessary. Plenty of powers exist already to control the industry's activities.

  Ultimately there is no evidence that we make unusual or `super-profits' from the operation of tenanted and leased pubs: our return on capital (reported in our annual results for the year ended September 2007) was 8.5%.

29 September 2008

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