Pub companies: follow-up - Business, Innovation and Skills Committee Contents

Memorandum submitted by Fuller, Smith & Turner Plc

  I write as the Chairman of Fuller, Smith & Turner Plc, a brewery in Chiswick with 365 pubs. The Company was founded in 1845, and is sadly the last long established brewery left in London.

  I would remind you that I wrote to you on 30 January 2009 as we had heard that your inquiry into the outcome of the TISC inquiry had moved into the territory of questioning the Tie. I received a charming response assuring me that you were sympathetic to the position of Independent Family Brewers such as ours.

  In the event the outcome of the BEC Report has, as you will be aware, affected the operation of the Tie for all members of the British Beer and Pub Association (BBPA) through the mediation process that was undertaken. Each member, regardless of whether they have historically had a good relationship with their Tenants or not, have had to engage in a process that makes changes that are solely to the benefit of Tenants.

  I understand the issues that your Committee has faced, but would point out that any remedies to perceived imperfections to the way Ties have been operated in certain instances will inevitably be blunt instruments that affect all companies that operate Tied tenancies, regardless of how satisfied their Tenants may be.

  There is no doubt that in the current economic climate, there are many businesses both large and small that are finding life extremely hard, and many pub landlords are in this category, but the idea that this is due to the Tie without reference to the 20% increase in Beer Duty since March 2008 or the smoking ban, or the economic meltdown of last year and consequent shortage of lending from the banks is unrealistic. But if one reads the comments from opponents of the Tie one would be lead to the conclusion that the Tie is the evil relationship that is sinking the pub, rather than the very successful relationship that allows entrepreneurs with limited funds to start their own business.

  Opponents of the Tie have mounted a very high profile and concerted campaign both in the media and through local MPs, but as you are aware the issues are complicated. The BBPA has been trying to direct its efforts to finding constructive responses and solutions to the BEC Committee Report, and to let the OFT make its own decision on the Super Complaint, but please don't under estimate the cost to companies that all of this extra work by very senior members of management has caused. I am pleased to say that Fuller's has a team strong enough to deal with the distractions that this causes to running the business, but smaller companies can ill afford the complications caused at times like these.

  The current financial turmoil has put enormous strain on the tenants of all leases, regardless of which industry they are in, and wherever possible individuals and companies are doing everything in their power to renegotiate their rents, and this is understandable, but it is important to realise what the actual causes of such tensions really are.

  In other organisations I am involved with, tenants of property landlords are negotiating for reduced rents claiming that the economic outlook has changed dramatically. These tenants are not in our industry, and wouldn't even know what a Tie was.

  We have a list of 22 Pub Companies that have gone into administration since January 2008 headed by Laurel Pub Company (460 pubs) and Orchid (287 pubs). These companies collectively have over 1,500 pubs, and the interesting thing is that none of those pubs were Tied to anyone. They have gone bust because the pressures of the current economic environment, the Duty rises that are being piled onto the industry, the increasing pressure from additional legislation, the smoking ban, and the rents they pay to their landlords have combined to make their businesses unviable.

  Fuller's itself has a number of toxic leases which we entered into in better times with our eyes open, but now that times have changed these landlords (all of which are unconnected with our industry) are deaf to our pleas to reduce the rent. The result is that we have several sites in which we are losing money, and we would like to cease trading in, but we cannot. For the avoidance of doubt, none of these leases are tied.

  The issues between landlord and Tenant are inevitable in any industry, but in our industry the problems are all being blamed on the Tie, and that is not appropriate. The parties to the recent industry mediation saw an opportunity to reduce their rents, and understandably they have pursued that line relentlessly, and are continuing to do so, as this may be their only opportunity to avoid bankruptcy, but I would contend that it is not appropriate to consider the landlord Tenant relationship in the pub industry in isolation from the landlord Tenant relationship in other property transactions.

  In any group of rental agreements, you will always get some properties being over-rented, in the same way as you will always get some being under-rented. The market is not perfect, and you will get wrinkles in the system however carefully both sides approach a negotiation, but the recent mediation has come up with some sensible improvements to the BBPA code that both the FVLA and the BII have signed up to, and the RICS have also clarified their method of calculating rents. There is a low cost rent review system (PIRRS), there is greater transparency in the rental calculations, and there are better procedures on assignment (where so many problems have occurred), and the BEC Committee recommendations have been addressed by the BBPA to the extent that we can without transgressing the fearsome Competition Commission rules. There are better operating procedures, and practices criticised by the BEC report have been removed. None of this is without cost and represents a considerable transfer of value from the Brewery/Pub Company to the Tenant, and some of the more established pub operators have only signed up to this under sufferance as their Tenants in the main are happy with their rents, but any further transfer of value would, I fear, cause the voluntary agreement to fall apart.

  There have been suggestions that all pub companies should offer Tie free leases, and the Wellington pub company has been used as an example, but I am sure that you are aware that they have been quoted as not considering any rent reductions in the current climate, even though every Tied pub company that I am aware of has been happy to review rents with a view to reducing them if there are extenuating circumstances, and I am aware that most of them are already reducing rents at reviews if the RPI is negative.

  Criterion Asset Management which runs the estate on behalf of the Wellington Pub Company have been quoted as "indicating that the amounts provisioned for bad debts have substantially increased, as have costs linked with recoveries of unpaid debt, repossessions and void properties". "Wellington continues to experience a shortage of experienced and financially-strong Tenants looking to enter substantive agreements for pubs, and as a result around 7% of the estate is not currently let on long leaseholds". This does not suggest that freeing pubs from the Tie is the solution.

  As you noted in your report the Tie allows Tenants to pay less rent where their beer sales drop and it is thus a very appropriate model for the economic downturn, which is not how the critics portray it. However if lessees wish to have a Free of Tie pub, there has never been a better opportunity for them to purchase a pub for themselves, and to operate it Free of Tie. There are literally thousands of pubs for sale, and as we have seen, Punch have been happy to sell almost any of their pubs to their Tenants.

  You have heard a great deal about the less successful Tenants who (like the less successful businessmen in other industries) are having an extremely difficult time and many are going out of business, but as has been pointed out this affects both Tied and Free of Tie licensees.

  At Fuller's we also have some pubs that are losing money but even in these difficult times 46% of our Tenants are not only increasing their cash sales, but even their volume of beers sales are ahead too. There are two sides to every story, and the IPC are only talking about the unsuccessful licensees.

  There will always be poor sites, and there will always be poor retailers, and whilst the outcome for such operators is bleak in such an economic environment, it is the same in any industry, and it is not the result of the Tie which is actually a much more flexible relationship than that which operates in other industries.

  Some opponents of the Tie point out that Tenanted pub prices are higher than those in large managed house chains like Wetherspoon, and that this should have been taken into account when assessing the OFT submission, but that is like comparing a single shop to the prices available in ASDA. You may want them to be the same, but the reality of business is that the economies of scale mean they never will be.


  In a market that changes as fast as ours there will always be imperfections in any system, but the market will eliminate them over time. The BEC Committee Report has speeded that process up significantly, but it is not possible to eliminate all imperfections by legislation, and I would appeal to you now to let the industry get on with implementing the very significant changes to the new code and with dealing with the major threats facing it rather than spending more time on the Tie which has been the backbone of our industry for several centuries, and has served companies, Tenants and the public so well over that time.

  The British pub is the envy of the world, and it now needs everyone's support.

13 November 2009

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