Memorandum submitted by Greene King plc
1. OVERVIEW
Greene King is a vertically integrated brewer
and pub retailer which has been based in Bury St Edmunds, Suffolk
for over 200 years. It operates 870 managed pubs, hotels and restaurants
across the UK with Pub Partners responsible for 1,450 tenanted/leased
businesses in England and Wales and Belhaven responsible for a
further 230 tenanted/leased businesses in Scotland.
Greene King is recognised for the overall quality
of its pub estate through both location and long-term investment.
In particular, it is highly regarded for its licensee support
programmes winning many industry and national training awards
including becoming supreme winner at last years NITA training
awards.
Key to the success of the Greene King "model"
is matching the right licensee to the right business with the
right agreement to benefit both the licensee and Greene King as
the landlord. To this end both the short-term tenancy agreements
(78% of the estate) and long-term lease agreements (22% of estate)
are offered to reflect the licensees' entry investment, security
and value extraction opportunity.
The total Greene King estate has around 60%,
mainly very high quality, community based pubs which are ideal
for new entrants to a self employed business under a tenancy agreement
with a relatively low cost of entry averaging around £25k.
The remaining 40% of the estate has a more destinational operating
style (food, venue, etc) and is more attractive to experienced
specialist operators who expect a longer-term lease agreement
to reflect a higher cost of entry and investment. Even so many
specialist operators prefer to remain with a Greene King tenancy
agreement.
The Greene King tenancy agreement is predominantly
a three-year or five-year term protected under the Landlord &
Tenants Act with annual RPI adjustments. The RPI adjustment is
seen by tenants as preferential as it enables better financial
planning over the term as opposed to a potential "hit"
at review. Tenants are expected to purchase all alcoholic and
mineral drinks from Greene King but benefit from external repairs
and maintenance being undertaken by the company.
The Greene King lease agreement is predominantly
15 or 20 years with five-year rent reviews and annual RPI adjustments.
Lessees are expected to purchase all draught and packaged beers
from Greene King but may independently purchase wines, spirits
and minerals. Lessees take responsibility for the full repair
and maintenance of the property but have the opportunity to assign
the business to gain goodwill cash benefit.
Greene King strongly believes that such a mix
of agreements is essential to attract the right people with the
right skills operating the right pub and providing what their
customers want. Greene King is actively targeting potential licensees,
often with retailing or catering experience and, in particular,
energy and ambition to make a career for themselves in the licensed
trade. For them the low capital entry is extremely attractive.
More experienced operators may be attracted
to the lease model because of the financial benefit on assignment.
The longer lease agreements clearly benefit successful destinational
businesses although they may not be suitable for many community
based `wet-led' pubs for which the higher operational gearing
associated with a lease can quickly become a liability to the
lessee and, more importantly, the expected assignment value may
not being realised. Such businesses are likely to be even more
exposed in today's challenging market.
Greene King has a long tradition of working
closely with its licensees to maximise the potential of each business
for the benefit of both parties. Profit is derived from a subsidised
rent, margin from the sales of drinks and in some cases a share
of machine income. On average the annual gross income from each
pub is around 10% of the asset value. With an average of 3% of
asset value allocated to business overhead and licensee support
it leaves around 7% to cover cost of capital to generate economic
profit for shareholders. In Greene King's view this represents
a reasonable profit in that it reflects the capital risk on the
asset. It is worth noting that many licensees will achieve an
annual return of over 100% on their investment.
In particular, over the last four years Greene
King has seen increases in overhead costs, part of which is additional
financial support to licensees to help them offset the costs of
increasing government legislation. The combination of the financial
"model" and scale of economies ensure that Greene King
can continue to provide industry leading support to its licensees.
Any further legislation or restrictions on income will bring into
question the viability of such support levels and ultimately the
commercial justification of operating pub tenancies/leases.
The Greene King tenancy agreement includes for
a high commitment to the tenant through the difficult first year
in their pub. It includes on-going business reviews with their
Business Development Manager (BDM), support of a Regional Training
Manager, training programmes and business support. In return the
tenant agrees to an "open-book" policy operated by independent
accountants.
During the first year both Greene King and the
tenant have the opportunity to terminate the agreement. On satisfactory
completion of the first year the remainder of the agreement term
is honoured. This has resulted in each business being put on a
sound financial footing and has been instrumental in reducing
business failure in the first and subsequent years.
An integral part of the strong relationships
between Greene King and its licensees is the "Licensees Forum".
This is a group of 10 licensees who have been independently elected
by their peers on a regional basis. They regularly meet with the
Pub Partners' Managing Director to discuss business issues and
future plans. In addition, they act as a conduit for the escalation
of any specific issues within their region. Further more, there
is a direct line policy for any licensees to contact the Managing
Director should they have a specific grievance which is not being
reconciled at a local level.
From a Greene King perspective it is important
to put the current business climate into perspective:
— over half of Greene King licensees
are showing sales growth;
— the biggest impact on even the most
successful pubs is the significant increase in business overheads—duty,
rates, utilities, staff etc;
— there has recently been a higher
than normal number of licensees giving notice, but in the last
three months the number of new lets has exceeded these;
— there is continued proactive support
for licensees to help them through current trading difficulties;
— "wet-led" businesses are
being specifically supported with proactive added-value promotional
activity allowing them to maintain their margins whilst offering
their customers "cheaper" beers in highly competitive
markets; and
— Greene King has not entered into
any arbitration as part of the rent review process.
2. GREENE KING
CODE OF
PRACTICE
Greene King was the first to introduce a Code
of Practice in 1998 to ensure clear and transparent responsibilities
for both parties as part of both tenancy and lease agreements.
Since then the code has been updated as new agreements have been
introduced. The company recognises a formal Code of Practice as
vital to the reputable process of operating a Pubco and to ensure
an open and honest relationship with its licensees. The Code of
Practice has been updated three times to reflect changes to agreements
with the latest version being launched in October 2008 (see appendix
5)
Following the Select Committee's 2004 report
Greene King reviewed its Code of Practice and is confident that
it more that meets the recommendations. In particular:
2.1 Pubco's should allow their tenants more
flexibility in their choice of the products they sell
As brewers of traditional cask ales Greene King
has a range of 20 own-brewed cask ales including Greene King IPA,
Abbot Ale, Ruddles and Old Speckled Hen, as well a programme of
12 changing seasonal ales. A rolling programme of guest ales is
also available every month. Alongside these there is a wide-range
of market leading and specialist factored beer, lager, cider and
stout draught and packaged brands on offer. New products are continually
introduced to respond to market trends and customer demands. For
example subsidised McEwans lager, Ruddles British bitter and a
value range of wines have been introduced.
2.2 Pubco's should insist that tenants obtain
all necessary professional advice as a condition of acceptance
A "Royal Welcome" has been introduced
which is a standard "Proposal for Offer" meeting which
covers all contractual obligations for both parties. BDMs have
a consistent approach with standard meeting agendas/contracts
(See appendix 1) (not printed here) and formal training.
Greene King insists that incumbent licensees take both legal and
financial advice from a professional third party before taking
an agreement. This is further supported by a comprehensive new
licensee pack which outlines in detail all aspects of the business
relationship with Greene King.
2.3 Pubco's should advise their tenants of
the average discount they receive and how this compares to the
free market discounts available
Each agreement is individual and based on both
the business opportunity available and the skills of the tenant.
Greene King provides a published trade price list and will provide
details of discounts in writing if applicable as part of an agreement.
Licensees interested in acquiring a free house are referred to
Greene King's Free Trade team whose discount package would relate
to the level of financial support required— independent
operators mainly only benefit from growth on their overall investment
(see Appendix 2) (not printed here). Greene King does not
publish its negotiated discounts as it is commercially sensitive
information. The tenants' business plan is based on the published
Greene King trade price and they can compare retail prices with
their market to ensure that they can compete and deliver sufficient
sales and profit. Greene King then sense checks this and uses
the information in future business reviews.
2.4 We recommend that the AWP machine tie
be removed
Since 2004 many pubs have repositioned to food
and hence no longer have machines. In the remaining community
based pubs the "tie" has been retained and additional
manpower has been committed to increase focus in this area. Greene
King believes the tenant is financially better off as a direct
result of this commitment to proactive machine management and
its use of its purchasing power in negotiations with the best
machine suppliers. If the AWP "tie" had been removed
in 2005 machine income would have been converted to rent with
licensees now paying in full for at least a 10% decline over the
last three years. Retaining the "tie" has seen both
parties sharing machine declines with Greene King continuing to
have a vested interest in this joint income stream. Greene King
does not include machine income in rent calculations.
2.5 Pubco's should provide a comprehensive
breakdown of how rent is calculated
Greene King follows the RICS recommended guidelines
linked to net divisible profit based on fair maintainable trade
for the potential of each business. All potential licensees must
provide a detailed business plan which is compared to Greene King's
estimated P&L model to ensure licensees viability. It is used
to challenge prospective licensees' income and overhead assumptions
but as margins and variables are down to the licensee it can only
be used as a guide. There is a distinct danger of potential mis-representation
if a `guaranteed income' was indicated. The licensees' business
plan (including P&L) is central to on-going business reviews
between the licensee and Greene King's BDM where performance against
licensee projections can be continually reviewed.
2.6 We call upon those Pubco's which have
not already done so to remove upward only rent clauses as soon
as practical
The upward only rent clauses have been removed
from all Greene King new agreements and it is not imposed on historical
agreements. In response to the current economic climate, Greene
King has generated considerable savings for its licensees through
the freezing of numerous RPI rent increases.
2.7 Rent concessions in cases where tenants
are experiencing financial difficulty through no fault of their
own is good practice
Greene King works closely with its tenants and
through this strong relationship can readily identify potential
financial problems at an early stage. Such concessions have always
been an integral part of the Greene King business in helping tenants
through challenging times. To counter-act the current market downturn
Greene King has increased the level of rent concessions to support
its tenants.
2.8 Ensure the application of best practice
in the provision of Business Development Manager support to individual
licensees
BDMs at Greene King have a close professional
working relationship with their tenants. There has been significant
investment in both industry leading management systems and training
to ensure consistency of skills and transparency of decision making
information to both BDMs and licensee. Local Recruitment and Training
Managers have also been introduced in part to mentor and support
licensees through their first year.
The BDMs induction programme was recognised
at the NITA Awards for 2006 and Greene King has also been recognised
by the ALMR and Morning Advertiser for its high level of
support in this area. In addition an independent NOP survey confirmed
that 83% of Greene King tenants in their first year considered
support to be fair to excellent.
2.9 Pubco's should consider providing support
to their tenants to attend training courses
Greene King has a comprehensive industry leading
training programme covering all aspects of the business with pub
training centres across the estate supported by dedicated Recruitment
Training Managers and Tenant Trainers. Tenant Trainers are experienced
licensees who primarily support new entrants with in-pub training
before they move into their business. This is further reinforced
with access to a comprehensive range of on-line training modules
for both licensees and their staff through the Pub Partners website.
Key to the Greene King training programme is
the compulsory "Go for Growth" programme for new entrants
and tenants whose pubs are planned for capital investment. The
course reviews tenants business plans and sets out measurable
objectives which are then reviewed with their BDMs post occupancy/development.
The Greene King Training programme has received
many NITA awards:
— Best Licensee Induction Programme
2004 & 2005 for Probationary Year (2006-Highly Commended);
— Best Development Programme 2005;
— Best BDM Development Programme—2006;
— Best Development Programme 2007 for
"Go for Growth" training programme; and
— BII Supreme Award 2007.
Greene King believes, that as self employed
operators, licensees should commit to training themselves and
their staff as part of developing their business. This is fully
explained before a licensee enters a pub and licensees commit
to an ingoing training fund. Greene King's role is to provide
value-for-money leading training delivered by independent experts
in business consultancy and training that makes a measurable difference
to licensees in their business. In most cases training is subsidised
and specifically developed for Greene King and is not available
to external sources.
2.10 Pubco's should ensure that a higher level
of sales support and technical service is provided to tenants
than they might achieve on their own
Greene King has traditionally provided its tenants
with a wide-range of industry leading support which was recognised
when it achieved the highest industry accolade of Pub Company
of the Year (100+ pubs) for an unprecedented three times in a
row (2001-03). Greene King licensees continue to benefit from
an unrivalled support programme which is not available to a free
trade operator. This includes:
— Greene King was the first pub operator
to launch exclusive web-based licensee facility which allows licensees
to run their business more effectively 24 hours a day. The website
covers legal advice, the management of staff, service and standards
guidelines, health and safety, training, detailed sales reports,
marketing and promotional support. On-line ordering of drinks
and third-party supplied goods is also available.
— Significant discounts are available
to licensees on food, utilities, equipment and many other products
through the "Share & Save" initiative passing on
the benefits of an integrated business with discounts negotiated
by Greene King Retail. In 2007 licensees spent nearly £3
million in the scheme. For example, one supplier, National Energy
Broker is currently reporting licensee savings of between 25%
and 30%.
— Marketing programmes are aligned
to licensees ensuring all areas of trade development and repositioning
are supported through a wide range of individualised posters,
banners and foot-fall mechanics. Marketing and promotional support
is available to licensees through a dedicated website. The launch
of the recent "Cheap Round" promotion, where a discounted
drinks activity with professional merchandising was provided demonstrates
the flexibility of the Greene King approach, whilst directly supporting
licensees with relevant trade building promotional activity.
— Through Gerald Eve, Greene King provides
a free independent business rate review service for licensees.
The service includes the initial agency review and the management
of submissions. From its introduction five years ago Greene King
licensees have benefited by over £5.5 million in the reduction
of business rates.
— The specialist Property Management
team advises on all aspects of property management. They are supported
by the "Starline Plus" helpdesk facility, which coordinates
maintenance and repairs and acts as a one-stop shop for all licensees
enquiries. The floods of 2007 showed the effectiveness of the
team with every affected pub being visited on the day of the flood,
organising temporary water/services to maintain facilities wherever
possible and pubs refurbished and re-opened at pace.
— Whilst licensees are responsible
for internal services, Greene King provides a Maintenance Service
Agreement at a weekly cost of £20 which covers any major
breakdown of equipment and services such as electrical, boilers,
cellar cooling, filters etc. The licensee has the advantage of
a one-stop shop for all repairs, confidence that Greene King will
ensure quality equipment and work is guaranteed as well as reassurance
of not having a big cash flow "hit" for replacement.
— An on-going investment programme
enables licensees to access funds to help them improve or reposition
their business at a lower cost than through banks and other financial
houses. Last year alone £18.7 million capital was invested
in the estate and a further £4 million on repair and maintenance.
The property team manages all aspects of the project from conception
to completion including planning, licensing, design and project
management—hugely time consuming and expensive for independent
free house operators. In addition, licensees have no responsibility
for arranging borrowing for the project.
— Greene King's industry leading training
(as above) is only available to Greene King's licensees.
— A dedicated licensing team provides
both legal and management advice and support on all aspects of
individual and premises licensing. This has not only proved vital
in protecting licensees' businesses but also maximising the opportunities
available. Greene King undertakes applications for variations
on behalf of licensees on a cost only basis significantly below
market levels.
3. THE LICENSING
ACT 2003 AND
THE EFFECT
ON COMPETITION
Whilst Greene King was a supporter of The Licensing
Act 2003, the extensive red tape and increases in the overall
cost base for both Pubco's and licensees with no apparent resulting
increase in sales, has been a disappointing outcome. Since its
introduction, Greene King now employs an additional full-time
licensing team of seven people as well as retaining a number of
solicitors and a barrister.
As well as the ongoing costs, Greene King met
the cost of over £2 million for the initial conversion in
2005. Further costs have also been occurred on the back of the
Smoking Ban where variations for extending external hours were
required in many areas and local authority restrictions needed
to be challenged.
The flexibility that the licensing reform promised
has not come to fruition. Many Local Authorities have brought
in draconian conditions and impact zones diluting any potential
opportunity and in many cases reducing trading hours. However,
though stringent due diligence on the part of Greene King's operations
and licensing teams and its licensees, no premises licences have
been lost and only six reviews have been conducted, all resulting
in a positive outcome for Greene King's licensees. In addition,
BDMs have a key role in providing advice and using local contacts
to help solve licensing problems before they escalate—saving
licensee time and incurred costs.
Whilst most operators in the on-trade have faced
similar challenges, thereby not really impacting on competition
levels, the resulting impact from the off-trade has been immense
particularly around the additional freedom that the off-trade
has been granted under the 2003 Licensing Act. Whilst Greene King
and its licensees continue to provide a controlled environment
for the consumption of alcohol, a combination of increased alcohol
availability and discounted prices in the off-trade is more than
counter-balancing the on-trades' efforts. Similarly, government,
health lobby and media campaigns continue to operate a broad brush
approach to the industry as opposed to focusing on the main problem
areas—these are not tenanted and leased pubs that operate
in the community and food area of the market in Greene King's
view.
4. THE NEED
FOR MORE
LEGISLATION OF
THE INDUSTRY—RECOMMENDATIONS
Greene King firmly believes that any further
legislation imposed on the on-trade will simply push the British
pub into even more serious decline. The raft of legislation introduced
over the last five years has already created undue red tape, additional
costs and stress to individual licensees and has in some part
been integral to the financial pressures they feel today. The
level of support and financial aid provided by Pubco's has been
significantly escalated to meet the challenges licensees have
faced.
Greene King believes it has a long tradition
of operating a good quality estate, attracting good quality licensees
and providing them with an opportunity to develop their own business
and make a profit. It makes good commercial sense to ensure that
relationships with licensees are open, honest and transparent
to ensure each pub has a sound business base. Further legislation
will simply introduce more controls which will prevent such a
relationship.
Although outside the scope of the current BERR
Select Committee review, much has been said about the fairness
of the alcohol "tie" within the traditional Pubco tenancy/lease
models and the need for legislation to remove this. Such legislation
would put at risk the opportunity to provide a low cost entry
point for a wide range of people to run a self-employed business.
Companies, like Greene King, have a long and
successful history of operating such agreements and its status
as a brewer gives it a clear vested interest in the success of
its pubs. The tied model ensures that licensees have the knowledge
that a reasonable rent is charged for the business and both landlord
and tenants share the benefits of growth through margin and, as
is being demonstrated in today's challenging environment, also
share the loss when sales are declining. More importantly for
Greene King licensees support, both financial and otherwise, is
and will continue to be provided to help them through difficult
times and to grow their business in the long-term.
Without the "tie" Pubco's would simply
increase the rent to cover loss of margin income and there would
be no incentive to provide any form of support for licensees to
effectively run their pubs. More importantly, licensees would
be responsible for the increasing cost of repairs and maintenance
to the property. The loss of "tie" would further accelerate
pub closures with the weight of legislation falling more heavily
on smaller pubs, particularly community and village pubs, making
them even more vulnerable in today's market.
APPENDICES
CASE STUDY
A
Andy Brookes, The Laughing Fish at Isfield
Andy Brookes took a tenancy seven years ago
with Greene King and it was his first self employed business venture.
He was open to either a tenancy or a lease but could not afford
a freehold option. He is now grateful he chose the tenancy route
which has provided him with substantial capital investment (£50k)
in cellar works and service areas as well as extensive external
repairs and redecoration by Greene King with no impact on his
rent.
Two further refurbishment schemes have had a
rental impact but this has been at a much lower cost than personal
borrowing and has ensured that the business has benefited from
additional sales and a bright business future.
He is equally happy that he chose the tenancy
route because it allows him an easy way out of the business should
he choose that, rather than a full repairing lease with difficult
assignability.
Speaking about his experience, Andy says "I
would recommend the tied tenancy model to any new licensee coming
into the industry who requires the level of support Greene King
offers. The training is excellent as is the business development
manager support. The Share & Save scheme saves me at least
£1,500 each year and the online ordering facility provides
me with more flexibility to run my business more effectively.
New licensees should take full advantage of all the support Greene
King provides them".
He added, "In my experience having a well
known brewer as well as pub operator and distribution under one
roof provides me with excellent support. All my cellar work was
done by their team and I never have a problem with beer orders
and deliveries which is very important to me".
"The trade price I pay is higher than available
on the open market, and of course I'd like cheaper beer, but I
also understand and accept that this is part of the deal that
I signed up to when I joined Greene King. The tenancy agreement,
I believe, provides new licensees with a known rent for a business
opportunity which includes a whole raft of business support".
Andy concludes that "I am delighted with
the opportunity that I have been given and am now looking to the
future. With my experience I feel confident to look at taking
on a Lease Agreement and perhaps eventually investing in a Free
House".
CASE STUDY
B
Vernon Blackmore, The Anchor at Woodbridge
Vernon took on the Anchor tenancy five months
ago. He was looking for a central location in a busy market town.
A freehold was not an option for him due to a combination of capital
restraints and the shortage of freehold quality sites in such
locations.
Since taking on the tenancy, Greene King has
provided expert advice in terms of developing his business and
they are assisting him in improving the layout of the premises
and external areas.
Vernon said, "The training has been excellent,
good value and, even though I previously ran self employed businesses,
I have still learnt an awful lot more and would definitely recommend
it to all new licensees. Having been in business before I look
to increase profit through increase sales, their Go for Growth
programme for new licensees taught me to focus as much on the
cost base to improve profitability".
"The business development manager support
has been superb giving expert advice when I need it, I only have
to make one phone call and the problem is always sorted out straight
away, leaving me with less to worry about and more time to concentrate
on my business".
Vernon added "I think the product range
provides everything I need for my business and even though I understand
that the price is a little higher than on the open market I've
accepted that as part of the deal".
"Greene King's cellar service has been
excellent with a real can do attitude. On two occasions I have
had to call them out and without their prompt service my sales
would have suffered. I am also a user of their Share & Save
scheme especially the banking service which was a lot cheaper
than I was quoted elsewhere".
"In particular, I am looking to improve
the trading areas and I have benefited from a lot of free Greene
King expertise and specialist advice that has allowed me to get
the scheme I am looking for within my budget".
Vernon concluded "I would definitely recommend
a tenancy to anybody looking to run a pub, having carefully looking
at the location, property and the deal on offer. My particular
dealings with Greene King have always been very honourable and
after five months at the pub the expected return on my business
has risen 35% higher than my original forecast. This has been
down to a lot of hard work on my part but Greene King's support
has undoubtedly made my journey a lot smoother"
29 September 2008
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