Pub Companies - Business and Enterprise Committee Contents

Supplementary submission by the Fair Pint Campaign

  Further to the Fair Pint campaign's oral evidence session at the Business and Enterprise Committee's Inquiry, the campaign would like to submit the following evidence.

  The Committee requested various statistics on the number of licensees that have gone out of business and the breakdown between urban and rural pubs. Unfortunately, the only people that hold this information are the pubcos themselves and it is impossible to access.


  1.1  The Committee asked the Fair Pint campaign whether the BBPA or BII would be appropriate bodies to monitor pubco codes of conduct and act as mediators. The BII, by its own admission, is not able to help licensees if they have a problem with their pubco. Their website states that the "BII is not a trade body or union, and therefore we do not represent licensees against their employer." Similarly, it also states that they "do not advise licensees on rent reviews."

  1.2  Quite apart from the fact that they openly state they are unable to help licensees, the BII also displays a lack of understanding of the relationship between pubcos and their tenants, in referring to the pubcos as `employers' of their tenants. If this were the case, pubcos would be restricted by employment law and would have to ensure that their tenants earned at least the minimum wage. This is simply not the case, as evidenced by Morgan Stanley research, which estimates that last year licensee profits were under £20,000 in 17% of Enterprise's pubs and 28% of Punch's. In 2001, £20,000 was recognised as the minimum level to make running a pub worthwhile. This represents £3.30 an hour each for a couple (ie less than 60% of the National Minimum Wage).

  1.3  In addition, it should be noted that the major pubcos are all corporate members of the BII. However, more importantly, the BII receive a kick back from the pubcos for every licensee that is given BII training.

  1.4  The BBPA claims that it "is the leading organisation representing the UK beer and pub sector. Our members account for 98% of beer brewed in the UK and own more than half of Britain's 58,000 pubs." In reality it is merely the trade association for pubcos and brewers. In fact, Simon Townsend, Chief Operating Officer for Enterprise Inns, is currently the Chairman of the Communications Group of the BBPA. The BBPA represents the interests of those that own the vast majority of the pubs in the country, but actually run very few. None of the BBPA's members are individual tenants.

  1.5  Since neither the BBPA, BII nor RICS have been prepared to endorse the Trade and Industry Select Committee (TISC) recommendations, it makes them entirely unsuitable to act as mediators between the pubcos and lessees.


  2.1  The Trade and Industry Committee recommended the removal of the restriction imposed by pubcos relating to AWP machines. It has been estimated that this costs the tenant an average of at least £1,250 per machine per annum. For an estate of just one pubco with 7,500 pubs, with the assumption that they have just one machine per pub, the pubco is effectively taking £9.4 million of money that the Committee believed rightfully belongs to the tenant.


3.1  Impact of the wet rent

  Figures issued by Enterprise reveal that the average tied tenant is worse off financially than a free-of-tie tenant by at least £6,000 per annum. There is no reason to believe that the same does not apply to Punch Taverns. The total loss of income for the 15,000 tenants of Punch and Enterprise may be in the region of £90 million, in addition to the £9.4 million relating to AWP machines.

3.2  Impact of current market conditions

  According to the press in the last 12 months, turnover has fallen across the board by an average of 10% per annum, and costs, including labour and the impact of the new National Minimum Wage, have risen by between 7% and 10%, creating a 50% drop in profit attributable to the tenant. Enterprise have indicated that in the last twelve months there were 915 rent reviews, which resulted in an increase in rent averaging 2.2%, in addition to the annual RPI increases. So rent has increased, meaning that Enterprise's projected profit has increased by 2.2%, which does not reconcile with what is generally happening in the market place.

3.3  Impact of annual RPI increases

  The pubcos that have maintained and enforced annual increases in rent on an RPI basis have cost tenants a 16.1% increase in rent over the last four years, giving an average increase of £4,500 or the equivalent of £1,125 per annum per pub. For an estate of 7,500 pubs that is an increase of £8.4 million per annum or £33 million extracted by each of the two major pubcos over the four years. Given that trading profit has dropped, rent should have reduced and not increased.

3.4  Impact of ignoring transparency recommendations

  Transparency, including the adoption of national accounting principles, fairness, prudence, and diligence, have already been recommended but never adopted by pubcos, valuers, arbitrators or RICS. In addition, it was recommended that an addendum setting out how profit and rent has been assessed and that this information should also be included in a National Register. Pubcos, valuers and arbitrators have resisted this. A National Register is essential to ensure transparency and fairness in rent valuation. The Land Registry seems the obvious choice, as it is centrally owned and devoid of personal interest.


  4.1  The impact of how the supply tie operates against the interest of both the consumer and the tenant is highlighted by the recent decision by Enterprise Inns to remove Carlsberg from their list of supplies. Whilst they have since gone back on this decision, it shows the power that pubcos are able to hold over both the tenants and the brewers. The decision to remove the Carlsberg brand from their pubs would have had a substantial impact on the revenue and profitability of many pubs (approximately 20% sell Carlsberg), particularly those in which Carlsberg is the biggest seller. Enterprise's decision would have led to many customers going elsewhere in order to buy Carlsberg, but their rent would of course not have been reduced to reflect this circumstance.

  4.2  For a pub that changes its brands, without consideration for its customers, a drop of volume can follow, making a substantial impact on profitability of as much as 25%. The Enterprise action would have been anti-competitive and onerous on tenants. This is a classic example which supports the request for removal of the supply tie.


  5.1  In a recent statement published in The Sun, Ted Tuppen CEO of Enterprise Inns said: "The British pub is so much a part of the fabric of this country, and it's vital that steps are taken to protect it." Fair Pint is of that same opinion. The problem is that the British pub is at risk because of the existence of the supply ties and the failure to have transparency in the creation of rent and Enterprise Inns' misuse of the supply tie and avoidance of transparency.

  5.2  Mr Tuppen went on to say: "We are purveyors of a legal contract. We believe we are entirely transparent and we will support those who are genuinely in need of it." One of the underlying principles of a contract is that it should not be anti-competitive and that is the reason why the tied tenant should not be worse off financially than if they were free of tie. Given that RICS, the BBPA and the pubcos do not support that criteria, and do not supply profit assessments that satisfy national accounting standards, it cannot be possible to prove that the tied tenant is not worse off than if they were free of tie.

  5.3  Enterprise Inns have also stated that 75% of their pubs have increased earnings for their tenants during a period when sales have fallen and costs increased. The Fair Pint campaign would be very interested to see evidence for this scenario which can only be achieved by comparing profit and loss accounts for the last three years, assembled by the company auditors using actual profit and loss accounts from tenants. It is known that Enterprise tenants are required to submit accounts to them, so it should not prove a difficult exercise to undertake. From that information it would allow the Committee to test the pubco claim that the tied tenant is not worse off than if they were free-of-tie.


  6.1  Pubcos will always argue that their rental cost is fair and that they believe that they are entirely transparent. The problem is that the pubcos cannot ensure that the tied tenant is not worse off than if they were free of tie, because the cost to the pubco would deny them the ability to service their vast debt. Whilst they claim fairness and transparency, they have never provided factual evidence to support this stance. The recent case of Dodds v S&NPE highlights the issue. There were £10,600 of discounts not accounted for and, as the Appeal Court Judge stated, the omission was a serious irregularity which would cause substantial injustice to the tenant.

  6.2  Although pubcos may argue that jobs may be lost in their head office and that shareholders and lenders interest may be damaged if the tie is removed, it has to be reiterated that had the pubcos gone down the path of adopting the Trade and Industry Select Committee's (TISC) recommendations four years ago the problems being experienced today would have been smaller. The failure to adopt the TISC recommendations should be firmly laid at the Directors of those companies.

  6.3  By contrast, removal of the tie will ensure the survival of many jobs and pubs that are currently under serious threat. The appendix, prepared in February 2008, shows an estimation of the breakdown of costs and profit margins for the tied model compared with the free-of-tie model. In addition, customers will have more choice, as licensees will be able to offer products that their pubco does not list (note the Carlsberg situation above). In the Fair Pint survey, 77% of respondents stated that there are products that they would like to offer but are unable to as a result of the tie.


  7.1  Evidence indicates that the Pubco asset valuations are not based on the retail pub profitability but is increased by a proportion of other income streams not available in the open market.[41] The inclusion of other income streams has the effect of inflating property values by 40%.

  7.2  Enterprise Inns has stated that its estate has increased in value by 1% to an average of £755,000 over the past year. On that basis they say their estate of 7,763 pubs is worth £5.9 billion. Similarly, Punch Taverns have valued their estate at £6.4 billion, which is a marginal decrease of 3.6%. Punch claim their pubs are worth £758,000 each, strangely similar to Enterprise, but then they do have the same auditors.

  7.3  It is very hard to reconcile these figures with the recent pub valuations from Fleurets.[42] Fleurets' figures suggest that the average price for a freehold pub has fallen by 20% from 2007 to 2008. If we were to apply Fleurets' average decline in value, it would suggest that Enterprise's estate would be worth £4.16 billion, against a debt of £3.8 billion, and that Punch's estate is worth £5.17 billion, against a debt of £4.53billion.

  7.4  This really gets to the root of the issue. Before the Beer Orders, the brewers ultimately had the best interests of pubs at heart. That, however, cannot be said for the pubcos. The simple fact is that under the current industry downturn, pubcos are unable to be flexible in their rental levels, as to do so would almost certainly break their banking covenants.



December 2008

41   Punch Securitisation Document, Page 124, "Punch Securitisation ptf_oct03.pdf" Back

42   Fleurets, Market Intelligence: Survey of Prices, December 2008. Back

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