Examination of Witnesses (Question Numbers
240-259)
MR GILES
THORLEY, MR
GILES KENDALL,
MR TED
TUPPEN AND
MR SIMON
TOWNSEND
9 DECEMBER 2008
Q240 Roger Berry: I have to say,
you have made a very serious allegation and you have taken an
enormous amount of time on this particular issue, so I assumed
you knew whether it was ten, 100, 1,000 or what. What kind of
ballpark figure are we talking about here?
Mr Tuppen: Let me explain to you
the point of my—
Q241 Roger Berry: No, I would prefer
it, given that you must know the ballpark figure, and in my work
I know ballpark figures, are you talking about ten a year or 50
a year or 100? What kind of figure are we talking about?
Mr Tuppen: We believe that the
vast majority of our licensees comply with the terms of their
contracts.
Q242 Roger Berry: That does not answer
my question. How about answering my question?
Mr Tuppen: There are some who
will buy outside the tie. It is our view that within that group
there are some who will not be declaring those purchases.
Q243 Roger Berry: Mr Tuppen, why
are you refusing to answer the question? You raised this specific
issue as a crucially important one, so why are you refusing to
answer the question?
Mr Townsend: If I can help, we
are pursuing an issue at the moment with a group of six licensees
in the Sheffield area that we caught literally in the last month
and we believe that the estimated amount of illegal purchases
that they have made outside of their contract with us amounts
to some £72,000, six pubs. Now, that is a very significant
issue, those six pubs in that area, and we will be pursuing that
with the full force of the law.
Q244 Chairman: Are they, by definition,
in breach with Customs & Excise as well or just with you?
Mr Tuppen: The point I am making
is that, once people have breached their terms of trade with us
and if they are in a position where they have paid cash for this,
they are then possibly in a position. Now, we think it is our
responsibility to report those to Revenue & Customs. We found
that another pub, which was close to a football ground, put in
special equipment on match days and, by their own admission, stole
£40,000 worth of beer from us over the last three years.
Now, these are very serious issues, this is not a Robin Hood crime,
and I am not suggesting for a moment, let me just make this very
clear, that this applies to other than a small proportion of our
estate and we do take it very seriously. In the first instance,
they are, without doubt, stealing from us. There is a possibility,
and it is our responsibility to report them, that they may in
a few cases also not even be declaring this to Revenue & Customs.
Q245 Chairman: So, if I have a pub
in my constituency, not one of yours, who can actually see the
beer being sold by a pub managed by the same chain down the road
for less than they can buy it for to sell themselves in their
own pub, there is a real incentive to do this.
Mr Tuppen: I do find that argument
very hard to take because—
Q246 Chairman: A pub I know, and
I could take you to it, not one of yours, can see a pub down the
road selling the beer to consumers more cheaply than they can
buy it themselves and the pub is managed by the same chain as
owns theirs. What is the logic?
Mr Tuppen: Well, we have been
talking about pricing and we have been talking about statistics.
There is a piece of research that came out yesterday supported
by Numis which shows that the average price of beer in tenanted
pubs, in our pubs in particular, is slightly less than the average
in managed houses. Now, there will always be cases where a particular
pub can sell beer for whatever price it likes. We do not control
the price at which beer is sold in a pub.
Q247 Chairman: But you control the
price at which you sell it to them. Can I just ask our colleagues,
the Gileses, if they have any observations on this problem about
stealing from pubs. Do you recognise it?
Mr Thorley: Well, I think using
the word "stealing" is rather pejorative. I have no
idea what level of VAT fraud there may be. I think it is worth
saying that Revenue & Customs are probably the biggest closer
of pubs in the UK of all types, not just in terms of the people
who take action first and foremost, and you can, I am sure, through
your good offices get those statistics. The reality of the situation
is that the factors that will affect the price of beer are very,
very significant, and I would refer you back to our submission
and the TISC in 2004. It is in Hansard [sic] Ev
239, Table 2 on page 34 of our submission, and it breaks down
a whole heap of things. We know in everyday life how business
works in terms of determining price and it can be a number of
factors. For example, if I am going to go and buy a television,
I can go and buy it on interest-free credit or I can ask for an
upfront discount. They are actually different ways of getting
the same result and there are very, very different ways of pricing
beer. Now, in the evidence that we provided in 2004, which was
using the AC Neilsen data which was referred to by the previous
witnesses, it showed that there are three main different routes
to market, free houses, tied pubs and managed pubs, and, interestingly,
the difference, on average, of a pint of beer between the three
routes to market was less than one pence and the most expensive
were the free houses and the least expensive were the tied pubs.
Now, the cost elements of those businesses and the components
of those businesses are totally different and the route to market
methods of the operators are totally different, yet it shows that
there is a free market in terms of determining the price because
the prices are so similar.
Q248 Mr Wright: Just in relation
to the pubs which act outside of the agreement, what happens at
weekends when suddenly on a Friday evening a coach trip turns
up and the pub has sold out of beer and there are no deliveries
at weekends, no emergency deliveries? Would you expect the pub
to shut down or would you expect them to actually go out and purchase
the beer?
Mr Townsend: If they were genuinely
out of beer, having sought our own sources first, if it is after
Friday night and the telesales department is not available, the
first thing we would expect them to do is ring their regional
manager who can then organise for them an additional delivery
on a Saturday morning, if that was what was required, because
our distributors do work through Saturdays. Secondly, if the distributor
is not available to make a delivery, they can actually arrange
a collection from the depot themselves. Thirdly, if either of
those two things are not available, we of course can give them
permission to go and borrow from another pub and make it very
clear then that there is a reconciliation between the beer that
has gone into the pub and the beer that has been sold out of the
pub. There are plenty of facilities available by legitimate means
to enable the pubs to trade through exceptional circumstances
like that.
Q249 Mr Wright: We had evidence from
a lessee who said that he ran out of beer and was okayed by the
area manager verbally and later had a huge fine some months down
the line.
Mr Townsend: I could not possibly
comment on that specific case, but, if one of our regional managers
has formally agreed to allow one of his pubs to buy outside of
the tie because of exceptional circumstances, then there is a
record of that purchase that is made. It is inconceivable that
one of our pubs would then be fined for making that purchase later;
that simply would not happen.
Q250 Mr Wright: It may not have been
one of your pubs.
Mr Tuppen: If it is one of our
pubs, we would be very happy to go down the mine and look at the
information on that. We do make mistakes and we do not normally
get away with them, not today anyway.
Q251 Mr Oaten: I just wanted some
brief clarification on something. Mr Thorley, do Punch agree with
the statements made by Enterprise on fraud?
Mr Thorley: I have no idea about
the magnitude. It is certainly the case, and it was on Radio 5
Live this morning, on Wake Up To Money, there was an article,
nothing to do with the pub industry, which said that less than
1.5% of people who pay cash in hand are actually ever prosecuted.
Now, I am not suggesting that it is widespread by any stretch
of the imagination, but I am just saying that there are motivating
factors in small businesses. As I said, I was trying to defuse
it from being regarded as the norm to a position where unfortunately
it happens in a limited number of cases.
Q252 Anne Moffat: I am still concerned,
and I want an answer either now or we need to get an answer later,
about the scale of the problem. You said that you are not suggesting
that it happens in the majors and you also said that it is a small
proportion of the estate. You have managed to give examples, the
Sheffield example and others, but I do not think anybody understands
the scale of the problem. It could well be that the Treasury is
subsidising the industry at a loss.
Mr Tuppen: We will give you whatever
information we can. The point I was trying to make is that in
a number of cases, and there are some specific examples which
are pretty big numbers, we have found that people have gone out
of their way, working often with wholesalers, to breach the conditions
of their agreement, often buying specialised equipment through
that wholesaler to ensure that the beer that they sell does not
appear on our records. Now, that is quite a sophisticated thing
to be doing.
Q253 Anne Moffat: How much money
does that cost to find out?
Mr Tuppen: Well, the particular
incidents in Sheffield—
Q254 Chairman: I am sorry, but I
am going to close this down because we have got other issues fundamentally
to take, so we have to move on to those other issues.
Mr Tuppen: Just to be clear, we
have as much time as you need.
Chairman: We have to finish by 1.15,
that is our deadline, so I am sorry, Anne, we have got to move
on.
Q255 Mr Bailey: First of all, it
has been put to us that prospective tenants are seduced by pub
companies' websites, publicity agents and so on and they submit
business plans which are accepted and then subsequently prove
to be unacceptable to the tenant. Now, obviously the tenant has
to bear some responsibility for this. However, it would appear
that the pub companies are accepting business plans which they
must know, by the body of their collective experience, are going
to result in subsequent dissatisfaction. How many business plans
are actually turned down by the pub companies? Can you give me
figures from yours?
Mr Tuppen: We can answer that.
One of the things that, I think, is hugely important is that we
do not want the wrong people in our pubs. Following the recommendations
of the TISC, we confirmed the practice that we actually pay licensees
£250 if they say they cannot afford to get professional advice.
It is vitally important that they get proper advice and we offer
to pay for that. Specifically, and Simon has got the numbers,
on assignments where the incoming licensee is not actually transacting
with us, they are buying a lease at some market value from a third
party, about one in three get through, so we turn down two out
of three business plans.
Mr Townsend: On new lettings,
where we are effectively doing the selling of the agreement and
the pub proposition to an individual licensee, one in four get
through, so there is actually a significant filtering-out process
and that can happen at a variety of different stages in the process,
whether it is at interview or whether it is at a point at which
a business plan has been submitted and is not acceptable. Under
assignments, we have the right to refuse our consent to assign
for somebody to sell the remaining portion of their lease to somebody
else. We have the right to refuse consent if we do not believe
that the business plan is sustainable or that the track record,
qualifications or the financing of the person buying that lease
are sustainable. To make it very clear here about the difference
between assignment and new letting, over 50% of the people who
come into an Enterprise pub have actually paid somebody else,
paid a capital sum to somebody else for the remaining portion
of their lease for the rights to run that pub on the lease which
is specified with the terms and conditions in that lease and they
have paid an out-goer for the right to be able to do that. That
is a transaction done between two independent people. We clearly
have an interest in that transaction and we do our very best to
make sure that that transaction is correct and that the information
shared between the parties has been complete.
Mr Kendall: From our perspective,
which is very broadly similar to what you have just heard, the
additional thing I would add is that I, for instance, see all
business plans associated with investments and in my region we
will do about 120 a year and, of them, I probably see a very small
number, four or five, that I think are pretty optimistic, to be
honest, and they will go back because I do not want somebody to
be encouraged to do something which I genuinely think is, quite
honestly, not going to be achieved, but the process of going through
the business relationship manager, the area manager and also the
operations manager, I think, does get to a very realistic business
plan.
Mr Townsend: The final point I
would add is that, for people who have no track record or no experience
in the industry who either wish to take a pub on assignment, ie,
pay somebody else for it, or take a pub directly from us, following
the 2004 inquiry where we said that we intended to take this action,
we have now fulfilled that action and it is a mandatory condition
that inexperienced people coming into a pub must have their business
plan signed off by an independent financial adviser as well as
a mandatory condition that they take legal advice as well, so
we make that very clear. It is not in our interest to allow either
naive business plans or over-optimistic business plans which could,
therefore, result in a business failure which, for all the reasons
we mentioned earlier, acts in our very worst interest. If I can
make one final point on this idea of business failure, and Mr
Hoyle was about to raise it earlier I think, it has been suggested
to this inquiry that we have no fear of a business failure or
a closed pub because of some insurance policy that covers us for
two years' loss of rent. That is a complete fabrication and really
we need to put the sword to that idea. There is no insurance policy
that can cover Enterprise Inns for the loss of rent or the loss
of income in a pub that has been closed down through a business
failure or abandoned; that is a total fabrication. It is an absolute
cost to us and we will do everything we can to prevent that business
failure.
Q256 Chairman: Is that true for Punch
too?
Mr Thorley: Yes. If I may say,
to suggest that we can seduce an individual or a small business
to go and visit the pub, to then negotiate the terms of the lease,
to write a business plan, to review it with us, to then agree
the strategy and then to move into the pub and operate the pub
under duress or some form of seduction is really quite extreme,
and of course it does not happen.
Q257 Mr Bailey: I think, in fairness
to the person who submitted the evidence, the term `seduced' was
mine. That is what, I think, was a reasonable interpretation of
the evidence that was submitted.
Mr Tuppen: On one thing relating
to that, we made it very clear that we do have 90-day cooling-off
periods and that was increased following the TISC 2004 from the
then 28 days. We do think, given the current circumstances, given
this perception that the all-powerful pub companies are in this
position of seducer, that this is in some instances too short
and, therefore, we have increased the cooling-off period effectively
to six months for our retail partnership tenancies.
Q258 Mr Bailey: I would like to pursue
this at greater length, but I am time-constrained, so I would
just make the general observation that, if the processes of submitting
and the acceptance of the business plans are so good, it does
seem odd that there is subsequently such a level of dissatisfaction
there, and I think perhaps we will have some further discussions
on that subsequently. I have a couple of other points, first of
all, to Punch. You operate premium-rate telephone lines for tenants
which means effectively that they have to pay for their particular
concerns, queries and discussions with you. What is your comment?
How much do you make from it?
Mr Thorley: Well, we do not. We
removed those six months ago, so the answer is no, we do not and
it is a standard-rate call. We have never had a premium-rate call
and we have never made any money out of the phone call itself,
just to make it absolutely clear.
Q259 Mr Bailey: Well, we have been
told that.
Mr Thorley: I think we have actually
moved it to a local call to make it even less now.
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