Pub Companies - Business and Enterprise Committee Contents

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 legislative change.

  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 occur—if exceptions for estates of fewer than 500 pubs were allowed—would outweigh any possible benefits.

  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.


  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 tied tenant.

  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.

Table 1:

Comparison of Costs from Enterprise Inns compared to costs directly from a brewer


Price available to
an untied tenant
direct from Coors
Price at which
Enterprise Inns sell
to tied tenants
Price that
Enterprise Inns
pays Coors

11 gallon keg
£63.11 £128.00£45.00
Price per pint£0.72 £1.45£0.51
Difference per pint between tied and untied £0.74
Duty£0.36£0.36 £0.36
Gross profit per-pint to supplier£0.36 £1.09£0.15
Gross profit if a pint is sold at £2.50 £1.46£0.72

Table 2:

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
BrandPrice from Scottish &
Newcastle Pub Enterprises
to their tied tenants
Price from Scottish &
Newcastle to untied pubs
Fosters£117.01 £74.1057%
Amstel£128.27£83.85 52%
Kronenbourg£134.27 £92.5545%
Heineken£139.74 £97.8143%
Theakston Best£104.37 £59.6275%

Table 3

Increase in prices which Enterprise Inns charges to its tied tenants for key popular brands between 2002 and 2009
Brand2002 price/pint 2009 price/pint% increase
Heineken£1.09£1.67 53%
Stella Artois£1.15 (5.1% ABV) £1.55 (5.0% ABV34%
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%
Banks Bitter£0.88 £1.2238%
Greene King IPA£0.86 £1.2545%
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.


  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) tenancies—1,861 during the period—shows 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 accounts.

  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

Martin Willis FRICS—Chair
Managing Director of Fleurets Chartered Surveyors
Substantial clients include Enterprise Inns plc— Punch Taverns, Admiral Taverns, Marstons, Scottish & Newcastle Pub Enterprises

Rob May—Former Chair
Chief Rent negotiator for Enterprise Inns plc and prior to that an advisor to Unique Pub Company

Christopher Honeywill FRICS
Partner—Edward 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 Officer—Colliers 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
Director—Hotels & Leisure—Grant Mills Wood

Trevor Watson
Director of Valuation—Davis Coffer Lyons
Clients include Enterprise Inns, Punch Taverns, InnDeeD Pub Company, London Town Pub Company, Royal Bank of Scotland (1,000 tied pubs)

David Butters
Partner—Gerald Eve
Act for Greene King, Thwaites, Marstons, Whitbread and Punch Taverns on rating and other matters

Graham Coulter
Associate Director—Pinders
Pinders is wholly owned by Christie Group plc which is probably the largest UK selling agent for Enterprise Inns plc and Punch Taverns plc

Kelvin King
Valuation Consulting
Act for Edward Symmons & Partners (see above) and Ernst & Young which audits both Enterprise Inns and Punch Taverns.

Paul Simpson
HMRC—Capital Taxes Shares Valuation

Samantha Rowland
FPD Savills
Clients include Punch Taverns and Royal Bank of Scotland (1,000 tied pubs)


Amanda Barber FRICS
GVA Grimley
Clients include Scottish & Newcastle Pub Enterprises and Royal Bank of Scotland

Gareth Morgan FRICS
Managing Director—Cavendish Tate Commercial Limited

Mark Taylor
Associate Director—Jones Lang Lasalle—Rating

  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 freeholder—with the remaining 50% included in the profit assessment for the rent calculation.

  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 facing closure.


  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 solution.

March 2009

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