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. CODES OF
CONDUCT AND
MEDIATION
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. MACHINE INCOME
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. RENT REVIEWS
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. BEER SUPPLY
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. TRANSPARENCY
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. IMPACT OF
SUPPLY TIE
REMOVAL
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. VALUATION
OF PUBCOS'
ESTATES
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.
APPENDIX
COMPARISON OF
TIED AND
FREE-OF-TIE
PUBS PREPARED
FEBRUARY 2008
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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