Memorandum submitted by the Fair Pint
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
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
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. TO WHAT
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
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.
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
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.
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.
2.11 In our own Fair Pint survey, 91% of
tenants felt that their Pubco charged them an unreasonable and
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
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
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
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.
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. TO WHAT
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. IS THERE
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 productreal
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
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
37 Morgan Stanley Research, Leased Pubcos: Avoid, 9
September 2008, p 7. Back
Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008,
p 6. Back
Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008,
p 9. Back
Morgan Stanley Research, Leased Pubcos: Avoid, 9 September 2008,
p 5. Back