Supplementary evidence submitted by the
Fair Pint Campaign
1. The Fair Pint Campaign is calling for
a complete end of the tie without exception.
2. In our oral evidence, the Fair Pint Campaign
called for an end to the tie, with the exception of local breweries
who owned fewer than 500 pubs. We proposed this exception so that
small brewers who own pubs and have an interest in promoting their
products through the pubs they own would not be caught by any
3. Since the oral evidence session, Fair
Pint believes the harm that the tie is causing the pub trade is
more established. There is emerging evidence to show that tied
pubs in general, and not just those owned by the largest pubcos,
are suffering more than managed estates or free houses.
4. We believe that the tie causes market
distortions which are not in the interests of consumers, tenants,
brewers or the industry in general. We are concerned that such
market distortions which could occurif exceptions for estates
of fewer than 500 pubs were allowedwould outweigh any possible
5. Allowing an exception of estates of fewer
than 500 pubs could create a loophole which might enable the current
system to continue. The securitization structure of the both Punch
and Enterprise divides the companies' estates into groups of about
2,000 pubs. Recent restructuring by Punch has created a division
of 1,000 pubs split into two regions. We believe that if an exception
were made for estates of fewer than 500 pubs, the pubcos would
be split down into smaller groups. If they were to establish a
joint venture with a brewery they could operate their businesses
in exactly the same way as the currently do and tied pubs would
continue to face the same problems as today.
6. The current dominance of the pubcos in
the beer wholesale market creates significant barriers to entry
for smaller brewers. Brewers can only supply their products to
pubco tenants if they are on the pubco lists. Pubcos require that
brewers offer them substantial discounts meaning that some small
producers end up making a loss on supplying pubco tenants. A substantial
number of products from small and regional brewers are excluded
from the pubco lists or priced at an uncompetitive level. In many
cases smaller brewers are almost completely excluded from their
own local markets.
7. We believe that a truly open and competitive
market will provide plenty of scope for regional brewers to promote
and distribute their products resulting in greatly enhanced choice
for the publican and the consumer.
A SUSTAINABLE NUMBER
8. The Fair Pint Campaign disagrees with
claims that the current number of pubs in the UK is unsustainable.
Social changes in specific areas will lead to changes in demand
from consumers in relation to their drinking habits. Many pubs
and publicans are able to adapt to those changing circumstances
as can be seen by the resilience of those pubs in the free of
tie sector. Through excessive pricing through the tie and through
aggressive manipulation of the rent review system pubcos and brewers
have reduced tenants' operating margins to unsustainably low levels.
Net margins for free of tie publicans can be as high as 20% and
as low as 2% for tied pubs. This prevents investment, bank lending
and adaptation in the tied sector and the severity of the current
downturn is exposing the vulnerability of tied pubs. Removal of
the tie will enable tied publicans to purchase beer at up to 50%
less than they are forced to pay in the tie, coupled with a thorough
correction of the rent review system, this will enable many more
pubs and jobs to be preserved.
9. Recent trading results from the sector
show that free from tie operators such as Wetherspoons and M&B
have been able to respond to changing market conditions and have
actually managed to achieve increases in trade and market share.
In comparison tied estates have done much worse.
A trading update from Enterprise Inns which
was published at on 22 January this year stated that trading over
Christmas and the New Year had been difficult with average pub
profit falling by 8%. Punch had unveiled even worse results for
its leased and tied estate on 13 January stating that like-for-like
profit fell 12% in the 20 weeks to 10 January.
The trading update showed that performance in
the group's managed estate had been stronger with declines of
just 2.5% in the 20 week period until 10 January and sales over
Christmas and the New Year increasing by 1.9%.
Greene King similarly reported on the 28 January
that its leased and tenanted division fell by 8.5%, in comparison
its managed estate has seen a 2.4% increase in like-for-like sales.
Free of tie operators such as Mitchells &
Butler and JD Wetherspoon have been reporting strong growth. On
20 January JD Wetherspoon stated that like for like sales had
risen 2.6% in the quarter to 18 January and had climbed 6.4% since
the group had launched price promotions. Mitchells & Butler
reported its "strongest ever record of market share gain"
with sales of cask ales rising by 18%. The group stated that it
was able to charge 40p a pint less for a standard lager than the
average price in leased pubs. The Chief Executive Tim Clarke stated
that the trade had reached a "tipping point" in the
value gap between managed and tied tenanted operators.
10. Our research has shown that pubcos typically
buy their beer at a discount of £250 per 36 gallon barrel,
equating to a price of as little as £100/barrel. They sell
it on to their tenants at the list price of £350-450 per
barrel depending on product. Pubcos do offer discounts to some
tenants but these are typically only £40-45 per barrel, and
these are limited to the minority of tenants who sell large volumes.
Free of tie multiple operators are able to negotiate their own
discounts of £180-220 per barrel. Individual free tenants
are able to negotiate up to £170 discount per barrel meaning
that, for a £350 barrel, an individual, free of tie tenant
could be £170 per barrel or 60p a pint better off than a
Similar discounts are available on smaller kegs
and bottled beer. The table below shows the cost at which Enterprise
Inns pays the brewer, Coors, to supply one if its tied tenants
with an 11 gallon keg of Carling the price that Enterprise will
then charge its tenant for that keg and the price which any free
of tie pub would have paid if it ordered the same keg directly
from the brewer.
We have also produced an analysis of the difference
in cost of beer from one supplier, Scottish & Newcastle, to
their tied tenants and the cost that they are able to supply the
same products to untied tenants.
The final table shows how Enterprise Inns have
increased the cost of their products to their tied publicans at
twice the rate of inflation and how the rate if their increases
compares with the much lower rate of increase of duty.
Comparison of Costs from Enterprise Inns
compared to costs directly from a brewer
A 11 GALLON
|Price available to|
an untied tenant
direct from Coors
|Price at which|
Enterprise Inns sell
to tied tenants
11 gallon keg
|Price per pint||£0.72
|Difference per pint between tied and untied
|Gross profit per-pint to supplier||£0.36
|Gross profit if a pint is sold at £2.50
The price difference between leading beer and larger
brands supplied by Scottish & Newcastle Pub Enterprises (which
manages tied pubs on behalf of RBS) to its tied tenants and the
price that Scottish & Newcastle as a wholesaler sells the
same product to untied pubs
|Brand||Price from Scottish &|
Newcastle Pub Enterprises
to their tied tenants
|Price from Scottish &|
Newcastle to untied pubs
Increase in prices which Enterprise Inns charges to
its tied tenants for key popular brands between 2002 and 2009
||2009 price/pint||% increase
|Stella Artois||£1.15 (5.1% ABV)
||£1.55 (5.0% ABV||34%
|Hoegarden||£1.30 (5.0% ABV)
||£1.82 (4.8% ABV)||40%
|Boddingtons Draughtflow||£0.88 (3.8% ABV)
||£1.35 (3.5% ABV)||53%
|Greene King IPA||£0.86
|The increases shown are made worse when you consider that in many cases the ABV is reduced thereby reducing the duty paid.
|The average rate of inflation per annum across the same period, excluding mortgage interest, was 2.84%, giving a compound rate for the period from 2002-09 of 21%. Price increases in the sample of brands shown demonstrate and average increase of 43.8%; constantly twice the rate of inflation.
|Duty on a pint of beer has increased by 7p from 29p to 36p (24%) in the same period.
11. Tied pubs are finding it difficult to compete, because
despite current economic problems, pubcos are continuing to raise
beer prices and rents to their tenants in order to fund their
debt obligations. For Example Enterprise Inns raised its prices
by twice the rate of inflation in the first few weeks of this
year. It is this continuing pressure of tenants' bottom line caused
by increasing prices and increasing rents which is the main cause
of the problems currently being faced by the pub sector.
12. The BBPA and the "pubcos" are arguing that
the suspension of duties on beer or a reduction of the current
level of duty is would help pubs to survive in the current economic
climate. We would argue that levels of duty are a less significant
cause of the problems faced by tied tenants than the increasing
price at which tied tenants are forced to buy beer from the "pubcos".
The fact that "pubcos" are have been continuing to raise
prices despite the problems being faced by the sector, we are
concerned that any reductions in the rate of duty will be absorbed
by the brewers and "pubcos" and would not be passed
on to tenants or consumers.
THE 2004 TRADE
13. The only basis on which a tied arrangement can be
viewed as fair is if the benefits of the tie outweigh the costs.
Those benefits have to be capable of expression as a monetary
value. This prime principle, that the tied tenant should not be
worse off than if free of tie, has been upheld by the European
Court of Justice and the Appeal Court and was supported by the
Trade and Industry Select Committee in 2004.
14. In order to improve the fairness of tied arrangements
the Trade and Industry Select Committee's recommended the removal
of the AWP tie, new national guidance for rent calculations and
changes to the way profit assessment method for calculating rent
was carried out ensuring that they are carried out in accordance
with national accounting standards and with knowledge, prudence
and due diligence. The report also called for tenants to be given
a breakdown of how rents are calculated which would include the
whole detail of the profit assessment and how lease conditions
had been interpreted by valuers. It recommended that this information
ought to form an addendum to leases to ensure transparency. The
report also called for upward only rent reviews clauses to be
removed from agreements.
15. Pubcos' high leveraged business model is based on
securitization. There is around £20 billion of debt in the
sector and the two largest pubcos are struggling to service their
debt of about £8.5 billion. Most of the debt repayments are
fixed at a rate which is very high compared to the current cost
of capital, typically 6%. An analysis of Punch and Enterprise's
published accounts clearly showing that together Punch Taverns
and Enterprise Inns need £730 million a year to meet their
debt obligations, much of which is paid to offshore bondholders.
£730 million divided by the number of tenanted pubs owned
by Punch and Enterprise equals about £50,000 per-pub per-year.
Pubcos therefore need to maintain current levels of short term
income to meet their obligations and to stop their business model
collapsing. Despite the current recession, pubcos are continuing
to raise beer prices and rents forcing many of their tenants out
of business. As more of their pubs close and fewer people want
to take a tied lease the pubcos are trying to get more income
out of fewer and fewer pubs. Like the banks, pubcos have been
caught out by over leveraging and securitized debt.
16. Figures which have been produced by Punch Taverns
showing the reasons for changes of tenants or closures in their
estate from the middle of 2005 to the end of 2007 shows that in
that period 5,697 of their tenants gave up their pubs. This means
that out of an estate of approximately 7,500 pubs, 75% of their
tenants have given up their pubs in a period of 18 months. Out
of the 5,697 closures or changes of tenant, only 442 were because
lease agreements came to an end. Other reasons include 1,119 tenants
giving notice, 724 cases of the retailer/tenant business failing,
726 tenants choosing to abandon their lease, 189 where the pub
has been repossessed because of debt or the tenant has bought
out of lease conditions. A high turnover of short term Tenants
at Will (TAW) tenancies1,861 during the periodshows
how the difficulties in running a tied pub business means that
pubcos are finding it increasingly difficult to find long term
tenants and short term tenants are not willing to stay in the
business. This level of closures and churn are not unique to Punch
and will be replicated within other pubco estates. This high tenant
turnover is clearly having a negative impact on the sector. It
is clear from these figures that tied tenants are far more likely
to abandon or lose their pub business than untied tenants.
17. Pubcos have not adopted the recommendations of the
2004 Select Committee report to improve the transparency of rent
calculations and to make the costs of the tie clearer to tenants.
Tenants are not seeing the whole detail of profit assessment,
and the assessments are not being carried out in accord with accounting
standards, applying fairness, prudence, knowledge and due diligence.
In addition they have totally ignored the request to remove the
AWP supply tie and when applying rent reductions have sought to
increase their supply tie for other products such as wines spirits
and minerals and in some cases even demanded control over tenant
18. The 2004 Trade and Industry Select Committee report
recommended that tenants should be given information about the
discounts that the pubcos receive from brewers and how this compares
to the free market discounts available, and how much of the discount
they pass on to their tenants. Despite this recommendation, it
is clear that pubcos are not open about the discounts they receive.
Figures taken from Punch Taverns and Enterprise Inns reports and
accounts show that companies are typically receiving a margin
of 85% on the beer they sell to their tenants. Pubcos told the
Trade and Industry Select Committee in 2004 and repeated in their
evidence to the current inquiry that they offer good prices and
that their tenants could not obtain the same in the open market.
This is not the case. Pubcos offer little or no discount to their
tenants. Whilst offering perhaps only £40/barrel discount
to a tenant buying more than 500 barrels there are themselves
obtaining £250/barrel discount from the brewers. A free of
tie tenant with even a low turnover can obtain discounts of £170/barrel
in the open market. A small free of tie group can find discounts
of up to £220/barrel. It therefore is not true that the pubcos
are offering competitive prices.
19. Fair Pint believes that there is a clear legal principle
that tenants under tied arrangements should not be financially
worse off than those who are free of tie and that is the only
basis on which tied arrangements can be legal under EU competition
law, but this has been ignored by all pubcos. We believe that
the pubcos have been unwilling to introduce transparency into
their business because it is clear that the benefits of the tie
are few and the costs are very significant. We believe that the
model is broken and it needs to be removed.
20. It is clear that the fact that the pubcos haven't
responded to the Select Committee's recommendations in a positive
way means that self regulation will be ineffective and there is
now a clear need for legislation.
21. We believe that evidence given to the Business and
Enterprise Committee during the course of the current Inquiry
shows that under current arrangements the vast majority of tied
tenants are very significantly financially worse off than those
which are free of tie and able to buy beer on the open market.
The existence of the pubco model has badly damaged the traditional
relationship between the brewer, the publican and the consumer.
22. Transparency is essential in rent or franchise valuation
calculations. The current system is opaque and we believe that
pubcos make their calculations less than clear in order to maximize
the rental returns received at the expense of their tenants. The
2004 Trade and Industry Select Committee report recommended that
tenants should be given information about the discounts that they
receive from brewers and how this compares to the free market
discounts available, and how much of the discount they pass on
to tenants. Despite this recommendation, it is clear that pubcos
are not open about the discounts they receive. We therefore believe
that there is a clear need for statutory regulation which gives
tenants and prospective tenants clear and transparent information
about pricing and discounts.
23. Fair Pint stated in our original evidence to the
Business and Enterprise Committee that the BBPA Codes of Practice
Framework on the Granting and Operation of Tied Tenancies and
Leases, which were revised in 2005 is response to the Trade and
Industry Select Committee's report, had not increased transparency
and did not reflect the Committee's key recommendations. We believe
that the evidence presented to the Business and Enterprise Select
Committee clearly demonstrates that the current code of practice
is failing and that there is a need for statutory regulation to
ensure transparency and fairness for tied licensees.
24. We believe that there is a need for clear guidelines
to the valuation process, which should be established on a statutory
basis. We believe that the guidelines should make it clear that
the method used to calculate rent should be carried out in accordance
with national accounting standards and with knowledge, prudence
and due diligence.
25. The 2004 Trade and Industry Select Committee's recommendation
that tied tenants should be provided with a comprehensive breakdown
of how their rent is calculated should become a statutory requirement.
The details of the rent calculations should become an addendum
to the lease together with any subsequent rent reviews.
26. Fair Pint recognize that some pubcos are seeking
to use a "franchise" system as a replacement to leases
in an attempt to circumvent calls for greater transparency. All
franchise arrangements should be viewed in the same manner as
tied tenancies and tied leases and as such they should also be
free of all ties and have their rent profit based.
27. We believe that all tenancies should include included
clauses which adjust rents to ensure that tenants can earn a wage
not less than the National Minimum Wage including any adjustments
for living in and holiday pay.
28. We believe that a national benchmarking system should
be established to assist with the assessment of the fairness of
rents charged to individual tenants. The system could perhaps
be based on the ALMR's existing benchmarking system.
29. All tenants should have access to arbitration as
a statutory right and the costs of arbitration should be included
as a cost against profits for rent purposes. Arbitration panels
should be entirely independent and could consist of a surveyor,
accountant and lawyer.
30. In order to promote the independence of the valuation
process Valuers should not be appointed if they represent both
the interests of the tenant and the freeholder. Action should
be taken to remove any conflict of interest.
31. The current rent review system for pubs is unfair
and has driven rents to an unsustainable level. The rent valuation
system is based on profit sharing, but methods of calculating
expected profits considerably under-estimates the true costs of
running a pub and along with the tie is a principal cause of the
current problems faced in the pub market.
32. The table below shows the membership of the RICS
Trade Related Valuation Group which includes representatives of
pubcos and valuers who represent pubcos but no representatives
of the pub tenants who actually operate pubs. We believe that
the Royal Institute of Chartered Surveyors "Guidance Notes
relative to Pub rent and capital values" is working against
the long term interests of the trade. RICS should update their
guidance in conjunction with representatives of both freeholders
and tenants to ensure that the guidance works in the interests
of all parties and promotes fairness and transparency. A truly
independent panel should be commissioned to review this issue.
RICS Trade Related Valuation Group
|FULL MEMBERS |
Martin Willis FRICSChair
|Managing Director of Fleurets Chartered Surveyors
|Substantial clients include Enterprise Inns plchttp://www.fleurets.com/enterpriseinns/ Punch Taverns, Admiral Taverns, Marstons, Scottish & Newcastle Pub Enterprises http://www.mypublife.com/my_pub.asp
Rob MayFormer Chair
|Chief Rent negotiator for Enterprise Inns plc and prior to that an advisor to Unique Pub Company
Christopher Honeywill FRICS
|PartnerEdward Symmons & Partners
|Act for Scottish & Newcastle (which owns 2,000 tied pubs through Scottish & Newcastle Pub Enterprises, and Royal Bank of Scotland (which owns 1,000 tied pubs managed by Scottish & Newcastle Pub Enterprises)
Gareth Jones FRICS
|Chief Operations OfficerColliers Cre
|Currently acting on behalf of Enterprise Inns plc, Punch Taverns plc and Mitchells & Butler plc in the sale of many pub freeholds.
Angela D Warr-King FRICS MCIArb
|DirectorHotels & LeisureGrant Mills Wood
|Director of ValuationDavis Coffer Lyons
|Clients include Enterprise Inns, Punch Taverns, InnDeeD Pub Company, London Town Pub Company, Royal Bank of Scotland (1,000 tied pubs)
|Act for Greene King, Thwaites, Marstons, Whitbread and Punch Taverns on rating and other matters
|Pinders is wholly owned by Christie Group plc which is probably the largest UK selling agent for Enterprise Inns plc and Punch Taverns plc http://www.christie.com/splash
|Act for Edward Symmons & Partners (see above) and Ernst & Young which audits both Enterprise Inns and Punch Taverns.
|HMRCCapital Taxes Shares Valuation
|Clients include Punch Taverns and Royal Bank of Scotland (1,000 tied pubs)
Amanda Barber FRICS
|Clients include Scottish & Newcastle Pub Enterprises and Royal Bank of Scotland
Gareth Morgan FRICS
|Managing DirectorCavendish Tate Commercial Limited
|Associate DirectorJones Lang LasalleRating
33. We accept that as a result of the recommendations
of the 2004 TISC report many pubcos have removed upward only rent
reviews from leases. There is however clear evidence that many
pubcos have replaced upward only rent reviews with RPI indexation
which has the same effect as upward only rent reviews and are
inequitable at a time when beer sales are falling and therefore
pub tenants' profits are declining. Pubcos have in other cases
expanded the tie to other products as a result of removing upward
only rent reviews and therefore increased the cost to the tenant.
Pubcos should remove all upward only rent reviews or variants.
Where deeds of variation are to be used to vary the lease to remove
the upward only rent review then the pubco should not be allowed
to introduce or retain terms that enable it to avoid a rent review
it is feels that there is a risk of the rent being reduced.
34. In our original submission we showed how the AWP
tie allows pubcos to take three slices of money from tenants AWP
income. We believe that this is manifestly unfair and we believe
that AWP ties should be removed. This will have the effect of
increasing competition in the amusement machine market by allowing
companies to approach tenants other than those on pubco approved
lists which have to pay commissions to be on those lists.
35. The practice of placing restrictive covenants on
former pub premises to prevent them re-opening as pubs once they
are sold is clearly an anti-competitive practice and should be
prevented. We also believe that when pub freeholds are sold the
property should be first offered to the sitting tenant.
36. We believe that the current system of assessing the
rateable value of pubs lacks transparency and works against the
interests of tied tenants. We therefore recommend that tenants
should be allowed to consult and use their own rating advisers
and that 50% of the upfront cost should be borne by the freeholderwith
the remaining 50% included in the profit assessment for the rent
37. The current system for establishing rateable values
for forms was agreed between the BBPA and the Valuation Office
Agency. The BBPA does not represent publicans and should not be
involved in establishing the basis of a tax system of pubs. The
rateable value of a pub is supposed to be the equivalent of the
market rent for a particular year. It is our submission that the
proposed revisions to the system for establishing rents should
be applied to assessment of rateable values.
38. All pubcos should produce a statement of their exact
insurance cover and tenants should be able to procure in writing
a quote from an insurance company that can meet British Insurance
Standards and is not less than the same exact insurance terms
as stated by the pubco then the pubco must reduce its premium
to its tenant accordingly.
39. Fair Pint accepts that total removal of the tie may
take time to implement as its removal will trigger rent reviews.
40. Fair Pint submits that if a period of time is required
for removal of the tie then that could be set to occur so the
tie on new agreements cannot extend for more than 24 months without
both landlord and tenant having the ability to opt out of that
agreement. For existing agreements either party could opt out
after 24 months or the next rent review, whichever be the sooner.
41. We believe that allowing tied pubs to choose two
free guest lagers or beers, to be chosen by the tenant would be
an easily to implement temporary measure which could help the
financial position of the thousands of pubs which are currently
42. It is clear that the tie is the major cause of the
problems currently being faced by the pub sector. This is why
free of tie operators have been the ones who have been able to
adapt to current circumstances and build market share. It is clear
that the "pubco" business model is broken. The huge
differentials between the cost of beer available to free of tie
operators and the price charged by the "pubcos" combined
with unsustainable levels of rent are the reasons why tied operators
are finding it so difficult to make money.
43. The only way that the current problems being faced
by the sector can be rectified is if tied arrangements are changed
to ensure that tied tenants are not worse off than those who are
free of tie. We believe that the pubcos have been unwilling to
introduce transparency into their business in terms of pricing
and rents because it is clear that the benefits of the tie are
few and the costs are very significant. We believe that the model
is broken and the tie needs to be removed.
44. It is clear that the fact that the Trade and Industry
Select Committee's recommendations in 2004 were ignored by the
"pubcos". It is therefore clear that that self regulation
will be ineffective and there is now a clear need for a legislative