Memorandum submitted by Marston's Pub
(MPC) AND THE
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
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
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 startfrom
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. CURRENT TRADING
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
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 supportmore
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
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
3. OUR 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
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
4. THE TIE
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
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
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 recommendationsincluding 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 agreementwhich 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
Since we published the Code (every tenant has
received one and it is freely published on our website www.marstonspubcompany.co.uk),
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.
"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
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.
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.
"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.
"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
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.
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
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.
"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.
"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.
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
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.
6. BEC COMMITTEE
2008 TERMS OF
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
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,
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
Is there a need for further regulation of the
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