Pub Companies - Business and Enterprise Committee Contents


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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