Examination of Witnesses (Question Numbers
140-159)
MR ROB
HAYWARD, MR
NICK BISH
AND MR
JOHN MCNAMARA
9 DECEMBER 2008
Q140 Miss Kirkbride: Could you respond
then?
Mr Hayward: If I could respond
in relation to pubcos, as far as we are concerned, there is a
vast number of different forms of pubco and therefore it is not
easy to make the observation that one system does or does not
work. As you will hear later, you have two of the major pubcos
here but in fact they operate in a number of different ways, as
do the other companies. I have already referred to some of the
smaller companies and these tenanted estates. Each one of those
operates in a very different way in terms of relationships with
their leaseholders or tenants.
Q141 Miss Kirkbride: What are the
figures on the failure rate of pubco tenants between 2008 and
2004?
Mr Hayward: We were asked by your
clerk to provide some figures. The figures are difficult to pursue
to be precise. Some of you will know that I have an obsessive
interest in certain forms of statistics and I therefore provided
figures back with certain elements of caveats because the further
you break them down, the less reliable they are. Clearly the first
important thing to make reference to is the fact that the rate
of failure amongst pubs is accelerating rapidly; if that is clear
over the last three or four years, and one would expect in the
forthcoming year, given everything that is going on, that that
is the case, significantly within the whole hospitality industry—restaurants,
hotels, et cetera—there is a high rate of failure but they
are also finding that it is fading more rapidly. Specifically
in relation to the nature of the three different estates—lease
tenancy, free and managed—the figures we have provided showed
that the free trade had the fastest rate of closure. I have submitted
those figures with caveats but as far as we are concerned both
sets of figures we have taken over the last year have come out
with the free trade having the highest rate of closure. Those
are not our figures; we had them from the CGA, as we identified
in our response, which is an independent research organisation
that supplies lots of evidence to the trade. Broadly, that is
the evidence that we have but to be even more specific it becomes
more risky to break them down.
Mr Bish: To add to that on the
closures, I would welcome the chance to say something on codes,
having heard now properly. We also looked at the CGA figures and,
yes, we interpret them as being about 39% to 40% of the closures
in the pubcos or the tenanted leased estate and, as Rob Hayward
has said, the slight majority in the independent free estate.
It is difficult to point a finger and just say that it must be
them, as it were. Our interesting part of the research is the
closures versus openings because the total figure is what we are
addressing, but actually the rate of closure, certainly up to
September of this year, was lower than the equivalent period last
year, if you like, gross closures. What we find has fallen off
the cliff is openings. Openings in the year to September 2008
were 403 (CGA figures again); the equivalent period up to December
the previous year, but also 12 months, was 1,035 openings. This
is not just a pubco issue; this is a banks' issue. The banks shut
up shop about a year ago and to get into the business became much
more arduous. The net closures have accelerated hideously; the
closures have continued but the lack of openings has meant that
the net figure is much worse. That is important to note because
there are other opportunities or other targets, other bad boys
out there, as it were.
Q142 Miss Kirkbride: What about beer
sales? On-licence beer sales have fallen much faster than off-licence
beer sales. I know the accusation is that it is because of these
wicked pubcos not passing on the discounts to their tenants.
Mr Hayward: Beer sales have been
in decline for several years. Alcohol sales as a whole are now
in decline. In terms of beer sales, the rate of decline has been
the highest in the on-trade as against the off-trade. That is
not specifically to do with the question of the leased tenanted
estate; there is a whole series of developments. I have been doing
this job for ten years and this followed this pattern in terms
of a decline in the off-trade as against on-trade throughout that
period and significantly it coincides with ever greater aggression
in terms of supermarkets; they are discounting to an extent which
all pubs actually find incredibly difficult to beat against. Some
of your parliamentary colleagues have identified the insane and
some might argue unacceptable level of discounting to drive footfall
through supermarkets. I think that the gap between the on-trade,
in whatever form—managed house, free trade or lease-tenanted
estates—and the supermarkets has grown progressively. There
have been other factors as well of course which the industry is
facing, and again it is across the board. One should not underestimate
it; things like smoking regulations, which had a dramatic effect
on the pub trade whatever you were talking about. I had discussions
with Ted Tuppen, who is giving evidence later on, and with Caroline
Flint in relation to the impact of the smoking ban. We indicated
that we thought at that stage—this was two years before
the actual implementation of that—that we would probably
lose about 5,000 (ie. 10%) of the total estate as a result of
that smoking ban. I think everything has gone to show that it
has probably accelerated that process. There is a number of factors
that affect the variation between the on-trade and the off-trade
sales; it is not any one particular factor.
Q143 Mr Binley: I had the great privilege
and pleasure of working in the pub trade as a DM for a long time,
a long time ago. I know there is a difference between closures
of pub businesses and failures of pub businesses. You have not
really given us any direct figures on failures of pub businesses.
Do you have any?
Mr Hayward: We do not. We try
to differentiate between one sort of closure and another, and
you are absolutely right; Nick Bish made reference to the difference
between closure and failure. In trying to nail down the accuracy
of any one set of figures is very difficult. We do not have anything
specifically about failures. The people who have the most precise
details will be the different operators of pubs, whether they
are small brewers or large pub businesses.
Mr Bish: No, we do not have that.
I would say obviously that our members are quite good and tend
not to fail on a pub-by-pub basis, but, yes, pubs within our members'
estates do fail; they get, as it were, moved on to another operator
who can perhaps make more of a success of it. Occasionally whole
companies fail, but the estate will be moved through the administrators
or the receivers into other hands. I am afraid that the figures
that I have offered you were those where the business is no longer
operating as a pub. Within that is a cycle of unhappiness and
business problems to which you are quite right to refer.
Q144 Mr Binley: I wonder if Mr McNamara
might comment on this because you clearly track how good you are
at developing people in terms of many pub businesses. Have you
any figures in this respect, of businesses failing?
Mr McNamara: We track the CGA
papers; we look at those among others obviously and look at the
overall figures. Bear in mind we are 15,000 front-line members
who are doing the job. There are many more pubs than that out
there. We would love to have 50,000 front-line members with every
pub represented as a member. What we do know is that if you are
a member of a professional body and you train people—you
train yourself and your staff—the chances of your business
success increase four-fold. We know that as a fact, especially
if you go on to local free development, which is very high level
and very focused on running a business. All the qualifications
we do at level three have a dramatic impact on the bottom line.
We know that because we have tracked it. I would argue that our
membership is the best of the best.
Q145 Mr Binley: I am sure you would.
That is salesmanship.
Mr Bish: It occurs to me, in answer
to that last question, that the pubcos might well be able to give
you a steer in the second evidence session because they will know
those on their estates that are having special treatment, or have
even got to the stage of temporary tenancies where they are holding
the property but the original lease has in some way or another
failed. They would know those numbers. I do not.
Q146 Mr Oaten: On the level of closures,
you can talk about smoking rent levels, the economic downturn,
but is it not the case that actually we just had too many pubs
anyway, probably around 5,000 too many pubs, and what we are seeing
is an adjustment to get us down to what the market needs in terms
of the number of pubs?
Mr Bish: I would say that I, like
Rob Hayward, have been in this end of the business for 10 to 15
years now and I have been hearing that there are 10,000 too many
pubs and the market is going to adjust. In the bull market, which
we have experienced over most of the last period, there is always
somebody who makes the decision that they want to go into a pub—it
is a lifestyle choice—and they can make the difference;
they are local or they have some special way of doing it. When
it declines, the chickens come home; the business chickens come
home to roost in a big way and I fear that that adjustment is
going to happen this time. To answer your question, yes, you are
probably right, but who is to choose? It is the customer who ultimately
chooses as to whether they want a pub in their neighbourhood and
will patronise it and whether the quality of the people running
it can make a success of the business.
Q147 Mr Oaten: I am right in that
there could just be too many pubs?
Mr Bish: There could be too many
pubs.
Mr Hayward: I think it is fair
comment. If there were too many pubs, as Nick says, given changing
lifestyles when people are much more mobile, when they choose
to consume alcohol at home, then that probably adds to the original
observation that you made about there being too many pubs; it
probably adds a further tier in relation to it.
Mr Bish: We should add of course
that 36 a week pyramids up, does it not, and we might well have
already started that process in quite a vigorous way. What we
are exploring here is the whys and is it a bad thing. Individually
it is going to be a bad thing and we need to explore why it is
happening and are there any remedies available?
Q148 Mr Clapham: Coming in on the
code of practice, Mr Bish, if we look at what happened the last
time the Committee made its recommendations, in 2004, one of the
emphases that we expressed was the need to update that code of
practice to cover a number of issues, particularly the rent issue,
and yet we see that we have had a small survey done by the Federation
of Small Businesses who asked members, landlords, et cetera, and
99% of the 156 people who took part in that survey said that they
did not feel that there had been any changes at all. Is it possible
that all that you have done is pay lip service to the recommendations
of the select committee of 2004?
Mr Bish: I think it was Mr Hayward
who made the point about the codes. ALMR does not have a code
as such. Perhaps I could make our comment after Rob has had a
chance to speak on the BBPA code and John McNamara may have some
comments.
Mr Hayward: I think the answer
is emphatically `no'. We identified in our evidence precisely
what changes we had made. We wrote to one of chairmen mid-term
identifying the changes that we have made. We do not regard those
as superficial; they are substantial and they follow overwhelmingly
the recommendations that were made by this Committee in one form
or another. We have provided the outline. There is a process that
has changed since, which John will touch on, and is in the process
of changing as well. I think that is important. What we are dealing
with here is a relationship between a business and another person
who wants to set up in business. For example, we have made it
absolutely clear in our code that people should and ought to take
professional advice. People do not enter into these sorts of agreements
without taking legal and financial advice. In our own code on
page 6 it makes absolutely clear that people should take advice
in one form or another. It is absolutely clear that you should
take independent advice.
Mr McNamara: Can I make a point
about the code? Obviously if you look at the overall UK code of
practice, our members and our national council had a debate and
discussion around how we could help to clarify that relationship.
Codes of practice have been around for many years. What the national
council decided to do was to set up a not-for-profit company called
BII Benchmarking and Accreditation Services, which looks at company
codes of practice and asks: does that code do what it says on
the tin? Is it clear, is it explicit, does it cover areas like
what a tie is, does it cover areas of what property is and training
and signposting that the company does? Is it absolutely clear
in that code of practice what you would expect in that business
relationship? As you know, so far six companies have put that
code forward to us, to that independent committee. We have accredited
six and there are five or six more in the pipeline to come through.
The accreditation scheme is dynamic. It is also open to people
to challenge us, to come back to us and say that that code of
practice has not been observed and ask if we are going to do something
about that. We have had a number of inquiries from members and
non-members on that basis. Our first response is: have you gone
through the normal routes within the company to clarify that position?
If they do not get any joy through that, through elevating it
through an internal process, they come back to us and we go straight
back to the company and ask: has there been a breach; there appears
to have been a breach; what will you do about that breach?
Mr Bish: I want to come in on
codes because we have a different point of view. My members operate
on the receiving end of leases and of codes. The code is very
well; the BII have undoubtedly done a sterling job in improving
the transparency of codes, but the code is not the lease and the
leases have not always changed to marry up with the code of practice.
It is administratively quite difficult but nevertheless there
are issues where for instance side letters or changes to a lease
can be published quicker and more publicly to the lease as opposed
to the code because the code implies that the lessee should take
action, whereas the lease is what binds the courts when eventually
a decision has to be made on a dispute. The difference between
the two is quite important. We are on the receiving end of leases
which have not matched up with the codes.
Q149 Mr Hoyle: I think we have missed
out the reason why pubs do close. The truth of the matter is that
they are squeezed out of business because of high rents. That
leads us into part of the valuation. As the organisations, are
you happy with the Royal Institution of Chartered Surveyors method
of valuation? Are there any problems? If you see any, what are
they? Shall we start with you, Mr McNamara?
Mr McNamara: I guess the classic
definition from the international standard is: a reasonably efficient
operator. That definition is quite difficult to hammer down. What
is a reasonably efficient operator? In our terms, when you come
into the industry as a newcomer, we urge every individual: number
one, to take some external advice; number two, to qualify themselves
before they start anything; and, number three, to keep qualifying
themselves and keep themselves current. For example, anyone who
has done what we call the introduction to the licensed retail
operations, ILRO, and that is a three-day programme provided by
some pub companies and other independent traders, is brought to
a level of competence which is beyond the legal statutory requirement
to have a licence, to do a licensing examination. That ILRO programme
is the minimum in terms of giving someone the equipment to start
operating premises but they would need ongoing support, both from
BDM and from—
Q150 Mr Hoyle: But do you agree with
the Royal Institution of Chartered Surveyors way of valuation?
Mr McNamara: I think if the surrender
calculation is based around assuming a reasonably efficient operator,
then I do. I am not qualified to comment on whether the valuation
method produced by RICS is valid or not, to be honest. We try
and help.
Q151 Mr Hoyle: Are you happy with
how they do it? You do not know?
Mr McNamara: I am not qualified
to comment.
Q152 Mr Hoyle: So you do not see
any problems; you have not heard of any. Mr Bish?
Mr Bish: We do not like it. We
do not like, for the leased estate certainly, the way the historical
method of valuing a pub and the fair maintainable trade is arrived
at. We believe it is slightly subjective; it is certainly based
on historical data and it certainly does not reflect the real
costs of doing business that my members are experiencing at the
moment. So we find it a bit of an anachronism. It is built on
the basis of the tied estate of the old breweries transported
into the new model of the leased estate and it does not fit comfortably.
We would rather see, and many of my members of course have this,
full commercial leases in the public market where it is based
on square footage and comparables and so on. I accept entirely
that a pub is a pub and you can turn a chemist into a shoe shop,
so the high street is a way of doing things, but the pub is not
sufficiently distinct, certainly for a long leased business, not
to go down that route and I think in broad terms we would prefer
it.
Q153 Mr Hoyle: Do you agree with
Morgan Stanley who similarly reported that 20% to 30% of tied
pubs could be uneconomic due to the high rents? Do you think that
is true?
Mr Bish: Any business can be uneconomic
due to high rents. I have no figures. I could not agree or disagree
with that.
Mr Hayward: RICS provides professional
services, as John has said. I am not sure what other alternative
route you would follow. There are panels to which you might give
consideration. There is another way of assessing the value of
a pub and that is the rateable value. There is a specific system
that operates for pubs and that operates on a national basis through
the valuation and it operates as an agency under DCLG, so there
is another set of valuations in effect put on pubs, which I think,
along with other factors, any person who is taking up a business
or any pubco will actually choose to look at.
Q154 Mr Hoyle: In the RICS guidance
it implies that the valuation method should be fair to tied tenants,
even though it does not explicitly take account of the fact that
a tied tenant may pay more, between 30-50%, for the beer than
a free trade competitor. Would you say that gives a disadvantage?
I think it does but what do you think?
Mr Hayward: The charge in relation
to beer and the relationship in terms of the tie has been looked
at on any number of occasions by this House and other bodies as
well. That is part of the process in terms of setting what is
in effect the value of the property, whether it is the beer tie
or the rent or the interlinking between them, and the other elements
that on a tie. They are the professionals and I cannot intrude
on that. I have been asked to do so on occasions and would not.
Q155 Mr Hoyle: But they do not take
it into account, do they? What you are saying is that you are
assessed a very high rent by the Royal Institution of Chartered
Surveyors saying, "This is the rent that you should pay",
but then there is no offset, is there, because if you are paying
30-50% more for your beer, it is just another way of screwing
you into the ground, is it not? What do you think the average
lifestyle is of a pub tenant?
Mr Hayward: I honestly do not
know. Coming back to the RICS, you have had evidence from them;
they answered your specific questions and they are in a far better
position to comment in relation to the processes, which they undertake
and they undertake on behalf of companies as well as individuals,
in the same way perhaps as a lawyer for the prosecution or the
defence. There is a variation in the process there, but you have
had the evidence from them.
Q156 Mr Hoyle: So you have not taken
a view?
Mr Hayward: In terms of general
processes, I would leave that professional judgment to the RICS.
Q157 Mr Hoyle: That is because basically
you are representing the people that are reaping all the money
and therefore you would not want to challenge the people who are
paying? Is it fair to say that?
Mr Hayward: I think it is fair
to say, Mr Hoyle, that if one looks at the share valuations in
recent weeks, and you have made reference to a particular City
company, you make your judgment about pub companies which presumes
they are not reaping those monies.
Q158 Mr Hoyle: That is because of
bad management and over-borrowing. They have been caught on the
barbed wire and the fact is that now they have been taking their
pound of flesh and the trouble is they have now been exposed for
what they stand for.
Mr Hayward: I will leave you to
ask questions of individual companies.
Q159 Mr Binley: Coming back to the
BBPA's submission, it was stated that rent will be reassessed
on the basis of the trading pattern of the pub and what could
reasonably be expected of the business as it exists. Can I quote
you some figures I have from Punch Taverns primarily about relative
incomes between 2007 and 2008, recognising that leased firms take
about 11.5% of the sale take that managed pubs do. Leased pubs
take an average of £113,000 a year; managed pubs take £800,000
a year. Yet in the difference on the year these figures suggest
that sales of leased pubs are up by 6% with a 5% increase in gross
profit, whilst sales in managed pubs are up by 10% with a 20%
drop in gross profit. That suggests to me a set of figures that
is totally meaningless and yet that is used to set the basis of
rents in the way that your submission stated. Are you concerned
about those figures, bearing in mind they are used in that way?
Mr Hayward: I will leave Punch
to comment in relation to that.
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