Pub Companies - Business and Enterprise Committee Contents

Memorandum submitted by the Fair Pint Campaign


  1.1  The Fair Pint campaign welcomes the Business and Enterprise Committee's inquiry into Pubcos; further to the original Trade and Industry Committee (T&ISC) inquiry in 2004.

  1.2  Fair Pint believes that there has been no improvement in the financial and estate management relationship between Pubcos and their tenants since the T&ISC inquiry. In fact, the report's objectives could be reissued today virtually without amendment.

  1.3  The Fair Pint campaign is a coalition of supply-tied lessees and other industry professionals who have come together to ensure fairness for the many thousands of tied tenants who are struggling at the hands of their Pubcos. In particular, the campaign has looked to expose the complete lack of regard that Pubcos have paid to the 2004 T&ISC inquiry and to persuade the Government to take regulatory action to enforce its recommendations.

  1.4  The Fair Pint campaign has received massive support and is well aware that the whole of the pub industry is currently experiencing difficult times. Where pubs are genuinely non-viable as businesses it is natural that they will close, as is the case in any industry. However, Fair Pint exists to ensure fairness and that supply-tied tenants can compete with managed and free-of-tie pubs within the industry. We believe that survival in this difficult marketplace should be based on the success of the business as opposed to the terms of the tenancy.

  1.5  The key principle of the tied tenancy model is that tied tenants pay higher wholesale beer prices than other public house operators, but that this is offset by countervailing benefits of a lower than commercial, or free-of-tie, dry rent (rent) and special commercial or financial advantages (SCORFA). The theory is that the net cost of the beer tie to tenants makes them no worse off financially than if they were free-of-tie. This principle was fully acknowledged by the 2004 T&ISC inquiry [paragraph 133]. More importantly, it is a condition of exclusive purchasing agreements under EU competition law.

  1.6  The Fair Pint campaign has serious concerns and doubts whether there is any evidence to support the view that tied tenants are no worse off. Tied tenants are unable to compete with free-of-tie pubs, and many as a consequence are going out of business. The Fair Pint campaign would welcome any recommendations that would ensure that tied tenants are able to compete on a level playing field with managed and free-of-tie pubs. However, Fair Pint believes that the only way that this can be achieved is through the removal of the tie. It is clear that the major Pubcos have shown that they are unable to implement the T&ISC's recommendations as best practice.

  1.7  This submission presents the areas in which the Pubcos have failed to implement the recommendations of the T&ISC. Most importantly, it will show that the countervailing benefits of the tie are insufficient to ensure that tied tenants are not financially worse off than if they were free-of-tie.


  2.1  The 2004 T&ISC inquiry into Pubcos made a number of recommendations that were specifically targeted at achieving transparency and fairness for tied tenants of Pubcos. Fair Pint believes that none of these recommendations have been adequately met by the Pubcos or the British Beer and Pub Association (BBPA).

  2.2  In November 2005, the BBPA revised their Codes of Practice Framework on the Granting and Operation of Tied Tenancies and Leases, with the aim of achieving "even greater consistency and transparency." However, these changes do not reflect the key recommendations of the T&ISC report and have made no difference to the way that tied tenancies operate.

  2.3  In order to get a snapshot of how Pubcos operate, the Fair Pint campaign undertook an online survey linked to the recommendations of the 2004 T&ISC to try to assess the levels of support for the beer tie amongst tied tenants.

AWP machine tie

  2.4  The 2004 inquiry recommended that Pubcos remove the AWP machine tie [paragraph 129]. The BBPA code of practice has failed to endorse this recommendation, and Pubcos have openly ignored the Committee's concerns. 70% of tied tenants that responded to our survey are still currently tied for AWP machines.

  2.5  It is well-known that Pubcos usually take half of the money from AWP machines when they are emptied. However, this is not accounted for in the profit assessment calculation or as a deduction for the rental value of the pub. In addition, in order to become a nominated supplier by the Pubco, AWP suppliers have to pay a royalty payment to the Pubco. This payment is then passed on by the AWP supplier to the tenant in the form of higher rents for the machines than those for free-of-tie pubs. In this way, Pubcos are able to take three slices of money from their tenants' AWP income.

Rent calculation

  2.6  The 2004 inquiry also recommended that Upward Only Rent Reviews (UORRs) should be removed from leases as soon as possible [paragraph 151]. Whilst the revised BBPA code of practice has taken up this recommendation and states that there should be no UORR clauses in new leases, 29% of respondees to our survey stated that they still had UORR clauses in their lease agreement.

  2.7  Unfortunately, where UORR clauses have been removed, it seems that in many cases a new clause has been included which sets a floor rent of the initial rental value. This practice has been set out in the revised BBPA code of practice, and goes against the T&ISC recommendation that the profit assessment method of calculating rent should be carried out in accordance with national accounting standards and with knowledge, prudence and diligence [paragraph 144]. If the profit assessment were to be implemented correctly, the divisible balance of 50%, which is recognised and accepted industry-wide, would be used to calculate the rent level. Applying a lease floor level removes the profit assessment basis of rent calculation. In a period of hardship for the pub trade, as we are experiencing currently, the individual licensees are bearing the weight of the burden when the profit assessment is not being applied correctly. The profit assessment needs to be implemented fairly and diligently so that both parties have an equal incentive to grow the pub business, meaning that it operates as a partnership for the benefit of both parties and not as it does at the moment.

  2.8  The Pubcos have openly subverted the recommendations of the T&ISC through the introduction of annual increases in rent, linked with the Retail Price Index (RPI). The majority of respondents to our survey state that their rent is tied to RPI. However, as previously stated, profit is the established and accepted base for rent construction. Profits in any business do not vary with RPI; therefore RPI increases in rent are contrary to best practice and undermine the principles of transparency and fairness. Currently RPI increases on an annual and compounding basis would lead to rental levels that would increase by approximately 26% over five years on a "divisible balance" basis. That would indicate that the total profitability of the business would have to increase automatically by 52% over five years. We consider that to be neither credible nor achievable.

  2.9  Recent Morgan Stanley research has found that of the 1,500 rent reviews that Punch has completed since 2006, under 100 have seen rents drop, and of the 900 renewals completed since 2006, only 40 have seen lower rents.[37] The report also states that Punch and Enterprise are over-renting their pubs, and emphasised that Admiral Taverns had had to rebase the rents of a number of recently acquired pubs from Punch and Enterprise as it believed that they were over-rented in relation to their underlying profitability.

  2.10  In a recent Morgan Stanley survey of 31 leased Enterprise and Punch pubs in London, 87% believed that their rent was around 20% too high. In addition, not one said that they would take on another tenancy.[38]

  2.11  In our own Fair Pint survey, 91% of tenants felt that their Pubco charged them an unreasonable and unsustainable rent.


  2.12  The Pubcos have done nothing to promote transparency in their relationship with their tenants, through the provision of detailed profit assessments and information on how lease conditions are interpreted. This was a key recommendation of the 2004 T&ISC inquiry [paragraph 145].

  2.13  In fact, 94% of respondees to our survey stated that their Pubco does not provide them with a transparent and comprehensive breakdown of how they calculate their rent, and 97% stated that their Pubco does not provide them with a full detailed calculation of what the Pubco expects the tenant's expenses to be in the rent valuation.

  2.14  Similarly, T&ISC recommended that Pubcos 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 onto their tenants [paragraph 125]. However, 98% of respondees to our survey stated that their Pubco does not advise them on the average discount they receive from the brewer.

The supply tie

  2.15  Pubcos, as a result of their size and the beer tie, are able to demand substantial discounts from the brewers. This is currently estimated at £200-220 per Brewers barrel (36 gallons). This is not dissimilar to the discount levels that supermarkets are able to demand. However, supermarkets pass on their savings to the consumer, while the Pubcos pass only a small fraction of that discount to their tenants. Therein lies the problem. In the open market a non-tied tenant can achieve in some areas, even for a relatively small barrelage, a discount of £100-£180 per Brewers barrel. That discount for a 200 barrel free-of-tie pub can be at least £20,000 per annum. However, a tied pub of a similar size, will not receive anything like the same sort of discounts (usually about 0-£40), and does not receive a countervailing reduction in rent.

  2.16  Prices charged to the consumer are related directly to those charged by the supplier to the retailer. There has been a significant shift between the off-sales and on-sales, the gap having widened exponentially over the last fifteen years from a 2.5 to one ratio to 4.5 to one ratio. It has always been recognised that pubs charge a higher price than charged as off-sales, since the pub does supply shelter, ambience and service. However, there is no logical reason for the vastly different rates of growth in retail on-trade and off-trade price, other than as a result of the basic cost differential for the same or similar product.

  2.17  The buying power of the Pubcos has also meant that the large brewery companies have had to cut their margins to the limit. Typically the discount to the Pubcos of £200-£220 per barrel leaves the brewer with a minimal return. Removing the tie would enable both the lessees and the brewers to work on a more profitable basis by excluding a "middle man" property company that neither brews nor sells beer.

  2.18  "In many ways, the "tie" looks increasingly archaic. Arguably, it is exacerbating the volume declines in tied pubs, who are unable to reduce price without taking a significant hit to their cash margins. It is also not in the Pubcos' interest to push back too hard on list price increases, because they get a proportion of the price increase as additional discount. Some even argue that Pubcos like it when brewers put up prices."[39]

  2.19  The rise in wholesale prices by the brewers tends to reflect the increased level of discounts demanded by Pubcos. In other words it would appear that the actions of the Pubcos increase the price to the pub consumer.

Free-of-tie vs tie

  2.20  Pubcos make much of the training that they offer, as a countervailing benefit of being tied. However, 84% of respondees to our survey said that they had never received free support to attend courses to improve their business knowledge and performance.

  2.21  Similarly, Pubcos laud the help that their business development managers (BDMs) offer their tenants. However, tenants do not reciprocate this feeling. In our survey, 52% of tenants indicated that they `hardly ever' or `never' see their BDM, whilst 84% felt that their BDM does not offer them genuine assistance.

  2.22  Of the supply tied tenants that responded to our survey, 100% believed that they would be better off if they were free-of-tie. This was supported by figures from The Publican magazine's 2008 Market Report which showed that 72% of tenants would pay more rent to be free-of-tie.

  2.23  Morgan Stanley estimated that last year licensee profits were under £20,000 in 17% of Enterprise's pubs and 28% of Punch's. £20,000 is generally recognised as the minimum level to make running a pub worthwhile, and represents £3.30 an hour each for a couple (that is less than 60% of the National Minimum Wage). For this reason, more and more lessees are exiting the industry. Through the monitoring of the number of pubs available on Enterprise and Punch's websites since the start of the year, it is possible to see that there is an increased level of "churn", with pubs available for lease now accounting for 14-16% of their estates. Despite this, the same report states that there is evidence that pub companies have been taking an increasingly bigger share of the pie than their lessees.[40]

  2.24  It is clear that the costs of the tie do not balance the "benefits". Some critics argue that it is ultimately the tenants' fault if they are having problems, as they freely entered into agreements with their Pubco, and if they didn't like the conditions at the time, they should not have signed it in the first place. However, the Pubco/ tenant relationship is meant to be a partnership. The T&ISC inquiry recognised that in reality this was not true when it stated that the tenant is in the weaker bargaining position and that Pubcos should recognise that they have a responsibility to ensure they do not exploit their position of economic strength. Critically, the report also said that all tenants should be treated fairly, and rents should be reasonable and sustainable [paragraph 158].


  3.1  The Pubco Codes of Practice primarily adopt those of the BBPA, together with considerable rhetoric regarding their relationship with the tenant. None of the key recommendations ensure transparency or endorse fair and ethical practices in Pubcos' relationship with their tenants. The most important principle "that the tied tenant should not be financially worse off as a consequence of the tie" is not adopted or accepted by the Pubcos. This is proven on examination of their own profit assessment and rent computation.

  3.2  "One-to-one" relationships at Pubcos' base level are regularly adversarial with the lessee, to the detriment of industry-wide good estate management.


  4.1  The Pubcos, and the BBPA, have not adopted the T&ISC recommendations. It is self-evident that ignoring these recommendations denies the tied tenant the right to not be in a worse financial position than if they were free-of-tie. Therefore further regulation is necessary to ensure that the recommendations of the 2004 T&ISC inquiry are implemented.

  4.2  Historically brewers required a supply tie for pubs that they owned in order to support their volumes of production, which was primarily a short-lived product—real ales. The change in product base to one which has a much longer shelf-life, coupled with improvements in distribution, has removed that supply tie necessity.

  4.3  None of the examinations over the last two decades by the Monopolies and Mergers Commission, the Office of Fair Trading or the T&ISC have achieved the objective of ensuring that the tied tenant is not worse off financially than if they were free-of-tie, as is required under EU competition law. Even if legislation were to be passed to make sure that the rent computations were appropriately adjusted, Pubcos would use legal loopholes to extract those extra few thousand pounds per pub they need to shore up their debt and asset values. Removal of the supply tie is the only satisfactory remedy for tenants.

  4.4  There is no economic reason why wholesaling and property functions should not be separate. If the Pubco model had adopted the T&ISC recommendations it would have meant that the tied tenants would have been given the benefit of the full, open market wholesale discount, and the Pubcos as wholesalers could have maintained a wholesale trade and enjoyed the difference between the £220 discount that they are able to demand from the brewers and the £140 market discount.

  4.5  Unfortunately the Pubcos' business model ensures that the tied tenant is worse off financially. The T&ISC industry-wide inquiry found that unacceptable in 2004 and it is even more unacceptable in 2008.

  4.6  Fair Pint therefore believes that the Government must introduce legislation to remove all vestiges of Pubco control over their tenants relative to:

    —  all AWP machine suppliers and income;

    —  all Upward Only Rent Review clauses, including reference to annual increases in relation to any form of index;

    —  supply tie of anything at all (food, all forms of liquor or operating cost), excluding brewers with less than 500 pubs; and

    —  involvement in any rating assessment.

  4.7  Statutory guidance must also be introduced to ensure enforcement around the Trade and Industry Committee's recommendations on transparency in the rent review process [paragraphs 144 and 145].

  4.8  Many people have argued that the removal of the supply tie would mean that the Pubcos would simply replace the income lost from the beer tie with an equivalent increase in rent. However, this argument fails to grasp that the enforcement of the T&ISC's recommendations would not allow this to happen. The profit assessment of the rental value would have to be calculated transparently and accurately to the satisfaction of both parties. A divisible balance of 50%, which is recognised and accepted industry-wide, would then be used to calculate the rent level.

  4.9  Even where a pub's current rent has been correctly valued, the maximum the rent could increase by in a free-of-tie situation would be half the cost of the tie, with the other half going to the lessee as additional profit. It is undeniable that the Pubcos would lose out in a free-of-tie situation, but then they have been bleeding their tenants dry for years and will ultimately destroy the industry that we all love, for short-term gain. So many tenants have spent their life savings improving Pubcos' assets, only to forfeit their pub because their tenancy agreement is non-viable as a result of the Pubcos' unreasonable assessments and terms.

  The Fair Pint campaign would be very willing to provide further information on any points that require further clarification, and would be delighted to give oral evidence to the Committee.

September 2008

37   Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 7. Back

38   Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 6. Back

39   Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 9. Back

40   Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008, p 5. Back

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