Examination of Witnesses (Question Numbers
280-299)
MR GILES
THORLEY, MR
GILES KENDALL,
MR TED
TUPPEN AND
MR SIMON
TOWNSEND
9 DECEMBER 2008
Q280 Mr Binley: I have given you
notice of the question actually because I asked it in the earlier
session, but I did make the point that your statistics suggest
that the difference between leased pubs and managed pubs, and
I have already made the point about the difference in size of
business, that the leased pub is, on average, about 11.5% of the
take of the managed pub, but I said that the difference between
2006 and 2007 with regard to take is that take is up in tenanted
pubs by 6% and in managed pubs by 10%, but the profitability has
shown a 5% increase in the tenanted estate, but a 20% drop in
the managed estate. Now, this suggests to me that either your
DMs or your area managers are a total waste of time or you have
got some special costs in there that I do not understand or you
have had a massive improvement with your tenants in your tenanted
estate. My concern is that, if this is used in discussions on
rent reviews, then we do need to understand that difference because
it is an important piece of evidence.
Mr Thorley: I accept that. I do
not recognise the specific numbers, but I will happily deal with
the specific questions where those numbers came from separately
rather than go into the detail. What I would say though is that
in terms of the profitability of the leased and tenanted pubs,
the number which I do recognise, the 5% increase, reflects the
fact that over the course of the last few years we have sold more
than 2,500 pubs as part of the evolution of our business. Very
many of those pubs have continued to stay as pubs, albeit they
are, on average, smaller than the pubs that we retain, so the
number that we are talking about in profitability terms for Punch
is based on the average, not necessarily on that of our customer.
In relation to the results in 2008, actually we estimated that
the customer profitability this year had fallen and fallen by
around £2,000 per annum in terms of the income, so, therefore
we are reflecting the conditions in the marketplace. The conditions
in the managed marketplace are slightly different in that there
are significant additional cost pressures which are affecting
the managed sector which can be mitigated by our leasing and tenanted
operators.
Q281 Mr Binley: Chairman, I think
it is fair that we give Mr Thorley the chance to write to us because
the figures are so out of kilter.
Mr Thorley: I will happily do
that.
Q282 Mr Wright: Going back to the
wet rents issue again, we have established that the pubcos do
lease their pubs free of the tie, but can you just tell us what
proportion of your business is free-of-tie? Also, what differential
is there between rents? I think, Mr Thorley, you pull in £20,000
for a free-of-tie with an £8,000 rent and obviously £10,000
for the wet rent and £2,000 for the machine. Would that be
the sort of 40% mark? Would that be possible?
Mr Thorley: Yes, I have actually
given the breakdown in our submission between the different income
streams, so it is roughly that. I can refer you to the page. It
is actually in the summary on page 2. It is 44% rent, 50% beer
margin and 6% machine, so that is pretty close in terms of the
numbers. We have a couple of hundred pubs which are leased on
a free-of-tie basis and they reflect the circumstances of those
pubs. For example, we have some pubs which are currently run as
restaurants where the pub building is being let to an operator
who is running it as a restaurant. We have a Michelin Star restaurant
in Glasgow, and we have no Glasgow MPs here, but the Chardon d'Or,
which is in Glasgow which some of you may have been to, is actually
a very high-class restaurant. Now, beer, as a constituent part
of that business, is very, very insignificant and, therefore,
it is not necessarily sensible to lease it on a tied basis, so
we will take that into consideration where it is relevant in terms
of the strategy of the pub.
Q283 Mr Wright: Mr Tuppen, do you
have anything to add?
Mr Tuppen: The ratios are very
similar. We have very few free-of-tie pubs and they are in fact
pubs we inherited in transactions in the past, so our absolute
commitment is to the tie because we believe in it as the best
and fairest way of running decent tenancies.
Q284 Mr Wright: Do you offer a potential
lessee the option of a free-of-tie or a tied lease?
Mr Tuppen: No, we are not a free-of-tie
estate. We are a tied and leased tenanted estate.
Q285 Mr Wright: Mr Thorley?
Mr Thorley: We can give them a
free-of-tie rental bid if that is appropriate for the business
plan. Invariably, it is not.
Q286 Mr Wright: Do you make that
decision yourself?
Mr Thorley: It will be the Regional
Director, although he would need approval from his Operations
Director.
Q287 Mr Wright: So, if a potential
tenant came to you and said, "Look, I don't want this tied,
I want this free-of-tie", would that be offered to him or
would you say, "Sorry, but we're not going to do it this
way because we can see the potential for ourselves"?
Mr Thorley: Well, I think the
answer is that we would look at the circumstances of that pub
and if it was suitable for that type of operation. Remember, as
we were discussing earlier with Mr Bailey, we do see the business
plans and we get an idea of what is happening, what is proposed
in that pub and that will give us an idea.
Q288 Mr Wright: You have already
mentioned the element of training that is given free of charge
to tied tenants, but can you just tell us what is the cost that
the pubcos would bear for the tenants which the tenants themselves
would otherwise have to pick up if they were free-of-tie? What
would be the overall cost of that?
Mr Tuppen: Do you mean for that
particular training course?
Q289 Mr Wright: Not just for that
course, but overall. In other words, what is the difference between
a tied pub and a free-of-tie pub in terms of the benefit that
you would suggest that you give to them in terms of training and
the whole package which they themselves would have to pick up
if they were free-of-tie?
Mr Townsend: I am sorry, I am
not sure I have completely got the question. We clearly provide
an array of services and I think the Punch gentleman described
the detail of some of the services that we provide. That is the
whole emphasis of our business, it is what we do to try and help
pubs be successful, so, whether you have got the regional manager
as a business adviser with the investment we have put into regional
managers in the last couple of years and the investment we have
put into systems and tools to enable them to spend more time in
pubs, we have got 30,000 quality business reviews which have been
undertaken by regional managers in the last year and 8,000 property
reviews by the regional property team. Now, we believe that is
a very added-value service. There will be some protagonists to
the tie who will say that the regional manager adds no value.
I am sorry, I cannot argue that with them on an individual basis,
but we passionately believe in the tie and we believe that the
services that we can provide can help pubs be more successful,
and clearly we are going to continue to try to do that.
Mr Tuppen: In numbers terms, we
provide training and we provide a free rating service which would
cost several hundred pounds, so it is this business relationship
which was described to me by a licensee, one of your constituents,
who said, "My Regional Manager's fantastic. We have two superb
business reviews every year where we go out around the town, we
look at the competition, we look at pricing, we see what we can
do to improve the pub and then, if anything goes wrong, I ring
her up and she sorts it out". That, to me, is almost a perfect
definition of a regional manager.
Q290 Mr Wright: I just think that
is an add-on cost to a lot of the tied pubs which is probably
unnecessary. I was the secretary of my club for many, many years
and we were free-of-tie. We negotiated the barrelage agreement
with the discounts and everything else, but I could just phone
them up in an abstract way and say, "I need to talk to the
Manager", and they would be there, free-of-tie. I would ask
them, "Are there any courses that we can send our bar manager
on?" "Yes, you can", and probably free of cost
or at minimal cost, so I do not see where the difference is and
I just think it is probably an add-on cost to the tied bars which
could be saved and could probably even save a number of these
pubs from going under if they had that flexibility to carry out
their own training. Invariably, many of the people that come from
within the industry itself probably do not need to take up that
element of training.
Mr Tuppen: It is not just training,
there are so many other things. What we can do, and I would be
very happy to put this in a letter to you afterwards, are, for
example, special buying deals where our licensees, because they
are Enterprise licensees, at no kick-back whatsoever to us get
things more cheaply than they could otherwise get them, so there
are real benefits there. There are a whole series of things, and
I would draw your attention again to the 2004 TISC conclusion
which says, "The tie usually balances the costs and benefits
available to tenants and the existence of the tie provides demonstrable
benefits to both tenants and customers alike". I would very
happily either find the appendix that went with that comment or
perhaps give you an update to it so that you can get yourself
more comfortable that there is real value because, I agree with
you, if there were no value added, then the tie principle would
be less tenable.
Q291 Mr Wright: Mr Thorley, did you
want to add?
Mr Thorley: I was just going to
ask actually, did you negotiate that arrangement with a single
brewer or with a wholesaler?
Q292 Mr Wright: With a single brewer.
Mr Thorley: I think it is important
to notice the difference, and I refer back to the point about
the value of items. Needless to say, that single brewer would
not have been willing to provide its competitors' products. We
are. It would not have been prepared to give a guarantee of supply
for the remaining life of your tenure as secretary or for the
life of the club. We are for the life of the lease. It would not
necessarily give you complete freedom in terms of your stocking.
We do. Taking the example of the top five beers in the UK, and
in fact I have actually got the top six products, the number one
ale is Tetley's supplied by Carlsberg, the number one lager is
Carling supplied by Coors, the number one cask is Greene King
IPA supplied by Greene King, the number one cider is Bulmer's
Strongbow now owned by Heineken, the number one premium lager
is Stella supplied by InBev and the number one stout is Guinness
supplied by Diageo. Now, for an individual pub buying 200 barrels
of beer a year, trying to deal to get the best market position
which would logically be the number one products in each category,
he has to deal with six different suppliers or he has to sub-optimise
and deal with a wholesaler. We supply those six and another 250
different beer supplies in addition to that and a whole range
of cask ales. Now, that is the difference that we offer in terms
of just the beer supply, so certainty of credit, certainty of
terms, no minimum purchase obligations and guaranteed delivery
on a 24-hour basis, six days a week, so we do provide a very significant
service and we have put the infrastructure in. If the tie went,
it would not be the individual pubs that would benefit, but, sadly,
there are executives in Copenhagen or in Amsterdam or in Golden,
Colorado or in Sa¯o Paolo who would be sitting there, saying,
"Now's our chance to reap more profit from the pub industry",
and they are not going to plough that back into the individual
pubs, I am afraid they are simply not, whereas we have spent £300
million on our pub estate in the last five years.
Q293 Mr Wright: I can understand
what you are saying there, but really it gives the independence
to the free-of-tie to negotiate the barrelage agreement. Admittedly,
although the products are limited within the confines of that
brewer, you can actually get a significant discount. While we
are on the question of the discounts, as I said in the earlier
session, the fact is that prior to 2004 it was roughly a 50-50
split in terms of the discount, ie, the lessee would get 50%,
£50, and so would the pubcos. Since 2004, since the increase
in the products which have gone up by roughly 50% and, therefore,
the discounts themselves have gone up, the lessees are still getting
their £50 and the other money goes on, so, in other words,
why has the 50-50 split disappeared in the last four years?
Mr Thorley: Well, it has not because
an increasing number of leases which have been granted since 2004
have increased discounts. We have three broad lease agreements
in addition to free-of-tie. We have pubs that are on high discounts
of £95 a barrel plus, we have pubs on a medium-sized discount
of £45 a barrel and we have pubs on no discount at all. Each
of those is available to all pubs, so, therefore, there are certain
circumstances when one structure of the compensation benefits
one operator and there are different structures for other operators.
We can provide that data and it is reflected in the price, and
it does reflect the level of discount because the level of discount
will determine the gross profit made on each product line and
that will work out to the calculation of the rent, and that is
shown clearly in our submission in Appendix 3.
Mr Townsend: I would add that,
whilst I do not recognise your wholesale price increase up by
50%, which I think is what I heard, I simply do not recognise
that at all, the fact is that in all Enterprise agreements that
are receiving a discount, and that is about two-thirds of the
pubs in the Enterprise estate, the discount that is awarded to
the pub goes up exactly in line with the increase in the wholesale
price.
Q294 Mr Wright: What would be the
effect if the beer tie were removed?
Mr Thorley: I have already said
that, sadly, there would be some international brewers no longer
UK-based, and remember that 80% of our beer sales in the UK are
still controlled by four major operators all of whom are foreign
organisations, and they would simply redirect their efforts into
off-trade promotions, their marketing efforts, and you would see
a significant reduction in the amount of inward investment into
pubs by the pub companies because we would have no incentive and
we would have no connection with the trade of the pub anymore.
As I said earlier, the benefit of the wet rent, as some people
have called it, is that it gives us an immediate indicator of
the performance of the pub and we get an immediate change in our
income streams, not something that can be changed on a monthly,
quarterly or annual basis in the same way as the rents; it is
very much more flexible.
Mr Tuppen: We are often accused
of just being property companies. The reality is that we have
a total interest in the performance of the pub, so we invest in
its success and we want it to be successful so that it can sell
more beer and we can all make more profit. Were the tie to be
removed, we would indeed become just straightforward property
companies and, for a start, one would not see anything like the
£9 million of support that we gave to our licensees in the
past year, and Giles gave similar amounts. We have an interest
in the success of the pub that is exactly aligned with those of
our licensees and, whilst that has been under attack recently
by people who would like to see the agreements to which they signed
up changed, the reality is that we see this as something that
is for the long-term benefit of pubs in this country. The reality
also is that, if the tie were removed, there would be even more
pub closures and there would be a significant reduction in choice
for the consumer.
Q295 Chairman: I do find the evidence
you have just given on discounts confusing because it contradicts
almost all the other evidence we have had, and we have heard particularly
that supermarkets are passing on these discounts to consumers
and, therefore, are undercutting pubs, which is a matter of some
concern to all of us who care about the future of pubs. The Association
of Licensed Multiple Retailers have given us completely different
evidence about discounting policies from the pubcos, so how am
I to understand this discrepancy in fact?
Mr Tuppen: We have been rather
pilloried over the last few months and the arrival of the Fair
Pint Campaign and their sponsors Messrs Farron and Mulholland
have launched huge attacks on our business model. We are quite
thick-skinned. Enterprise is a corporate entity. At the moment,
like everyone else in business, it is finding times pretty tough.
This is a tough world, but Simon and I are pretty thick-skinned.
Q296 Chairman: But is it not a fair
point that the Association of Licensed Multiple Retailers give
us completely different figures on discounts?
Mr Tuppen: I was about to give
you a solution. I would like to invite all of you, even those
who have left, to come and spend just a couple of hours in one
of our regional operations meetings. Most of all, you would meet
the eight human beings who are the regional managers who are so
roundly pilloried the whole time but who spend their lives trying
to help pubs. I feel really sorry for them, having constantly
to listen to the carping about their behaviour. I can assure you
that, whilst we all make mistakes, these guys are massively committed
to our business. I would invite any of you to come and spend a
couple of hours in one of our meetings and they will take you
through all of the details of the discounts. We can show you the
discounts if you spend time with us.
Q297 Chairman: Okay, we will take
you up on that. Just very quickly, ties on soft drinks, amusement
machines with prizes and insurance, can you justify the ties on
those three areas?
Mr Tuppen: If we start with insurance,
the commitment that we make to our pubs, and I can think of one
in particular that gets flooded twice a year by the River Severn,
in your constituency, I guess, who would not get insurance in
different circumstances, is provide to provide the best-quality
insurance to all of our pubs and charge a fair price for it. If
any licensee can demonstrate that he can get the same cover at
a cheaper price, we give him his money back, so we could not make
a greater commitment than that. They happen to be tied. We have
to have our properties insured and we go out of our way to get
them the best possible insurance. If they can get it more cheaply,
then we give them the difference, and I think that last year,
out of the entire estate, the number was 46.
Mr Townsend: That is 46 queries
in relation to the amount that we were charging, of which four
were then reduced in price.
Q298 Chairman: So you have made the
offer to never knowingly be undersold, the John Lewis-type offer,
but I should not talk about John Lewis, should I! You have made
the point on insurance, but what about the amusement machines,
Mr Thorley?
Mr Thorley: The amusement machine
market is in a very dire state and that is, sadly, through no
fault of our own. It is as a result of the introduction of fixed-odds
betting machines which were blatantly introduced by other operators
against the law. They challenged the Treasury or the Government
to effectively deal with them and instead they were retrospectively
legalised, so you now have a situation where you have bookmakers
with £500 jackpot machines which did not exist in the past
and the pub industry as a whole has suffered. The consequence
of that is that the number of machine operators has declined dramatically,
and what we have tried to do with the machine tie is to protect
our customers in providing machines at efficient rates and providing
the best support to make sure that they have the best machines.
Some of the statistics that have been quoted are very misleading.
The average machine rent for a machine in a pub ranges from £70
a week down to £20 a week. Now, you can understand that that
is a significant difference and there is a reason why the rent
is different and that is because the £20 machine is rubbish
and the £70 machine is very good in terms of its cash-in-box
take. What we try to do is maximise the number of our pubs that
have the betting machines at the best rates and that is the benefit
of being able to lease 13,000 machines compared to two for an
individual pub.
Q299 Mr Binley: My first question
is about the pre-arbitration process because I want to talk about
arbitration and that is why you have got an AN-DN structure actually
in most instances. Why was it, when we have complaints from tenants,
32 came from Enterprise and only 12 from Punch and yet Punch have
got more public houses than you? Presumably, your DN advice structure
is much less effective or what is the cause of that?
Mr Tuppen: Well, rather than deal
with the problem, I would like to offer the solution.
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