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

Memorandum submitted by the Independent Family Brewers of Britain (IFBB)

  In response to your invitation to submit our opinions on the Tie to your Select Committee I am writing on behalf of the Independent Family Brewers of Britain. At the outset of the (then) Business and Enterprise Select Committee we were informed that the brewer's tie was not under threat and that the issues were simply to do with long leases carrying full repairing and insuring obligations. As your hearings unfolded it became clear that some parties were arguing for the complete abolition of the Tie.

  You pointed out in the announcement of the initial findings that "we would not wish to damage regional brewers" and we are grateful for that clarification, but nevertheless some parties are still arguing for limitations on the Tie and, for example, the right to have a guest beer on every bar from a small brewer. This move would be hugely damaging to those of us brewing cask ales for all the reasons we have stated before, and have summarised in the attached document.

  Many commentators seem to continually confuse long leaseholds with tenancy agreements and we would like to highlight the latter as a fair and effective way of taking on a small business. The brewery tenancy operates very like a franchised system with strong support from the "brand owner", in this case the local brewer, with strong local beer brands which are well known, and with effective and relevant support from the centre in return for the purchasing obligation in the tie. These agreements are popular with business partners who have modest levels of capital available, or are risk averse to leasehold or freehold values, or simply wish to be able to enter and exit their own business at lower cost.

  We have surveyed our tenanted business partners to understand their views on the fairness of their agreements and those results are contained in the attached document. It makes clear that brewery agreements offer strong support to licensees in many ways and in responding to the key question, "I believe my rent is fair for the business I do", 56% agreed and 26% disagreed. We believe that this is a positive finding in the current economic climate.

  The members of the IFBB are all members of the BBPA as well, as it is the main association for brewing in the UK. We therefore support the new code agreement drawn up with the BII and FLVA. It is well thought through and workable.



1.1  Introduction

  Brought together in 1993 to defend the tie, the IFBB in 2009 consists of 27 brewers who represent a distinct and unique sector of the UK brewing industry—the family owned and operated brewing company.

  Our pubs are at the heart of the communities we serve. We produce distinctive, regionally brewed cask beers ("real ale") and support regional and local suppliers through the use of locally sourced raw materials and services.

  While our breweries have been family owned and run for many generations, our businesses are dynamic and innovative, constantly developing new products and brands and spending millions each year on pub developments. We share a common goal to "maintain the traditions of cask brewing in Britain, and to continue to support and promote this healthy, profitable and vibrant sector of the industry".

  The name of each family brewery is still prominently displayed on (and in) each IFBB member's pub indicating the main brand of cask beers sold in the pub. Each of those names embodies a long brewing tradition.

1.2  Our Members

  Member companies are distributed throughout the regions of England and Wales:

Member nameLocation

Charles WellsBedford
Daniel BathamDudley
Donnington BreweryStow-on-the Wold
Frederic RobinsonStockport
Hall & WoodhouseBlandford St Mary
Hook NortonHook Norton
Joseph HoltManchester
JW LeesMiddleton
SA BrainCardiff
Shepherd NeameFaversham
St AustellSt Austell
Timothy TaylorKeighley


2.1  Beer

  The total volume of beer (lager, ale and stout) sold in the UK is 47,965,250[19] hectolitres, and IFBB members have a 5.9% share of that total.

2.2  Pubs

  There are around 54,000 pubs in the UK. IFBB members own 4,227 of these giving the IFBB members a market share of the pub market of just under 8%.

  There are 150,000[20] on-trade licences[21] in the UK as a whole. The IFBB share therefore of the total on-licence market is 2.8%.

  Around 75% of our members' pubs are operated as traditional tied brewery tenancies, with the balance as managed operations, ie directly owned and operated by the member brewer.

2.3  Employment

  IFBB members directly employ around 19,000[22] people in brewing and pub estate management, and if we assume that each pub—tenanted or managed—employs an average of seven people, a further 29,500 are employed.

2.4  Breweries

  Our members' breweries range in size from producing 5,000 hectolitres up to 800,000 hectolitres, and each operates one brewery.

  Distribution of beers, ciders, wines, spirits and minerals to the pub estates is undertaken by most members using directly employed staff. All members sell not only to their own pubs but also to free-of-tie ("free trade") accounts and to non pub customers.

  An extensive range of beers brewed elsewhere is also usually available. Nearly all members offer national and international brands of beers, especially lager beers which they tend not to brew. This range offers good opportunities for inter state trading in the EU and many members have forged partnerships with imported lager brands from other EU countries.



3.1  Basis of the tie

  The traditional pub usually has one of three forms of ownership, giving rise to different bases for the tie:

    1. Freehold—where the owner licensee buys the pub outright and is therefore free to buy all products from any source. Often the owner licensee will take loan finance from a supplying brewer in return for a product tie (tie by loan).

    2. Long (assignable) lease—where a premium is paid for the lease. These leases may operate on a tied or free-of-tie basis, dependent on the landlord/lease owner.

    3. Traditional brewery tied (non-assignable) tenancy—a shorter term tenancy agreement tending to be for a three to six year term, with a full or partial drinks tie, as offered by our members.

  The property tie originated when brewers started to buy their own pubs to guarantee an outlet for their own beers. This meant (in the days before mass distribution) that brewers could ensure the delivery of their cask beers to their own pubs and thus guarantee beer quality without there being concern around the short shelf life of the product. Cask conditioned beers have a secondary fermentation in the barrel so it is essential to use them within, ideally, three days from starting to serve from the barrel.

  With the tie agreement, the licensee tenant rents premises from the brewer and is supplied by that brewer with a range of products. The brewer has a marketing outlet, and the tenant the opportunity to run his or her own business.

  Traditionally, the vast majority of pubs in the UK have been operated on short-term tenancy agreements with rents calculated on the trading potential of the pub rather than on a commercial market rent. In the late 1980's national brewing companies (not IFBB members) began to offer longer-term leases, with a right to assign, and therefore build a goodwill premium.

  The Beer Orders of 1990 stimulated the break-up of the national brewers into separate brewing companies (now all owned by overseas global brewing companies) and large pub owning companies. Institutional investors favoured the latter, as the long leases (with upward-only rent reviews) allowed steady profit growth from property income for these investors. With property values escalating in the last two decades, pub companies were bought and sold routinely and consolidation produced today's two large pub companies.

  The recession has meant that values of freehold pubs and long leases have fallen, which has caused difficulties for individuals who have invested large amounts of capital in a pub business in recent years. By comparison, the tied brewery tenancy provides not only a low cost entry for a licensee starting a small business, but also offers a low cost/low risk exit as neither the freehold nor the lease need to be sold to another investor. A tied brewery tenancy is a less risky financial option (and requires less capital) than either buying a freehold or taking on a lease premium.

3.2  How it works

  The Tie has the effect of creating a dry rent and a wet rent payable to the brewery by the tenant licensee.

    — The dry rent is fixed (subject to rent reviews, which are covered within the tenancy agreement) and is the element for renting the building from the brewery. The rent is determined by the pub's past beer sales volume and on predicted Fair Maintainable Trade. The latter is the level of trade agreed to be achievable at the pub, if that pub is run by an average competent operator

    — The wet rent is variable, since it is a percentage of the prices paid to the brewer for stock ie beer and other products. This wet rent then varies in line with the pub's beer sales and the tenant pays rent only on what he sells. This offers the tenant some protection during a downturn because, if sales reduce, so will this element of rent. If the tie were to be abolished, then this protection would disappear and the fixed cost to the tenant would increase significantly



4.1  Entry into the trade

  In principle, the traditional brewery tied tenancy system operates as follows (although there may be some small variances between member brewers):

    — the brewer owns and insures the pub, and pays for repairs, improvements and alterations, and

    — the tenant will buy the inventory (tables, chairs etc) and stock at value, this being his only capital investment.

  A traditional brewery tied tenancy (inventory and stock) can be acquired for as little as £5,000 and would rarely cost more than £50,000, depending on the size of the inventory and ingoing stock value of the pub in question. This offers an excellent opportunity for those with relatively limited capital to run their own business.

4.2  BDM support

  The brewer provides a full support package to tenants, headed by access to a Business Development Manager (BDM) to advise on how to operate the pub and help deliver business growth.

  Within IFBB members' tied estates, the BDM manages an average of just 34 pubs, which is considerably fewer than most other pub companies which can be as high as 55 pubs. Taking into account other "head office" staff who visit the outlet to bring help and advice, the ratio is even more favourable, at approximately one to 20 pubs.

  As with any individual business, the brewery and the tenant will agree a business plan and invest, for example in capital expenditure, training or marketing. The brewery brings long experience of owning and operating the property, essentially providing retail knowledge and the intellectual property of decades' worth of successful pub operations. This invaluable insight helps ensure that the tenant makes progress in growing his own business. Free house operators do not have access to this type or level of business support.

4.3  Special Commercial and Financial Advantages (SCOFA)

  For newcomers and for experienced licensees, the brewery provides extensive support in order to ensure the success of the pub operation. The mutual benefit to be gained from a successful pub is at the centre of this support and licensees will be able to look to their brewery for a range of benefits.

  Each IFBB member provides a range of services and support free of charge, or at reduced cost, to its tenants. The value of this support is typically around £8,000 per pub in the first year depending on the family brewer in question. As these are not available to free house pub operators and any other on-trade outlet, they constitute a unique (and critical) aspect of taking a brewery tenancy. The majority of new licensees need this level of support in their first 12 to 18 months—without it many would cease to trade very quickly.

  All this contrasts with the free-of-tie leaseholder, who normally pays a large capital sum to acquire the lease and is then obliged to keep the building in good repair and fully insured, both at his own cost. He will receive little or no support from a brewery

  In addition to these specific support services, the brewery regularly alerts its tenants to issues such as new legislation which require their attention. This may lead to providing free follow-up advice given by experts on how to meet obligations cost-effectively. These benefits are substantial but not included in the quantified list.

4.4  Rental benefit

  A traditional brewery tied tenancy offers lower fixed rents than commercial property transactions. Rent has traditionally been calculated on beer volume and Fair Maintainable Trade figures as opposed to a full commercial rent based on the value of the property, its location and total square footage of the building.

  The variable "wet" rent paid to the brewer for stock, ie beer and other products varies according to trading conditions and offers the tenant some protection during a downturn because it reduces if sales reduce.

  If the tie were to be abolished, the protection of the variable "wet" rent would disappear and the fixed cost to the tenant would increase significantly.

4.5  Survey of tenants experiences of running a brewery tied pub

  Seven IFBB members have participated in a survey of their tied tenants, led by independent industry experts. A total of 719 surveys have been completed, representing just fewer than 24% of the total tied brewery tenancies across the IFBB members' estates.

  The survey results were collated on a member-by-member basis, and have been amalgamated to form a benchmark for the IFBB members. The survey results have been shared with each participating member, on both an individual brewery and collective IFBB member basis, but individual surveys have not been shared with the members, allowing their licensees to remain anonymous.



  The Independent Family Brewers of Britain represent a relatively small but distinctive part of the UK beer market. Our members are companies owning regional breweries and pub estates and the majority are private, family run, businesses. We rely largely on the "beer tie" to operate as both brewers and pub retailers.

  With the security of the tie, the brewers buy, insure and maintain the properties operated by their tenants. This provides a very low entry cost for tenants setting up in business, creating new employment opportunities for entrepreneurs. When sales increase or decrease, the system causes the financial impact to be shared between the pub and the brewery, thus lowering the tenant's risk.

  As the businesses are co-dependent, IFBB members provide extensive support services to tenants which are not available to licensees operating in the free house market. This is particularly helpful in a difficult economic climate. Not surprisingly then, IFBB members have an extremely low turnover of tenants compared to the industry as a whole.

  The tie also allows IFBB members to plan brewing plant capital expenditure over future years, secure in the knowledge that there are guaranteed outlets for their beers; the majority of which are Britain's best cask conditioned beers. Brewing is a highly capital intensive business and brewing, packaging and supplying beer on a large scale requires substantial capital. The tie system, therefore, plays a vital role by enabling smaller brewers to compete with the much larger enterprises.

  Brought together originally in 1993 to defend the tie, IFBB members meet periodically to discuss industry issues. However, they compete with each other, as well as with more dominant enterprises, and all their business relationships are conducted independently. There is no commercial agreement or network of agreements between our members.

  As we have shown, the tie works because of the mutual benefit between landlord and tenant. Their goals are aligned and commercial success is the shared vision. The mechanisms upon which that mutuality rest are the lower fixed rents and counterbalancing wet rents.

  There is a differential in pricing between wholesale prices in tied and free-of-tie pubs, and this has become more pronounced in recent years. However discounts to tied pubs have also increased and there is no valid evidence of differential retail prices between tied and non tied pubs.

  A comparison of the financial models for our tenancies and free-of-tie pubs shows that multiple valuable benefits accrue to our tied tenants by way of special commercial and financial advantages. The lower cost of entry and exit and the value of these advantages are also well illustrated by the evidence from tenants themselves. Moreover, the cost of property maintenance (borne by the landlord in the brewery tenancy) and the cost of business support are increasing.

  Pub closures in the recession have attracted publicity. The greatest difficulties are faced by those who invested shortly before the recession in long leases with full commercial rents and a product tie. The IFBB members have very few pubs operated on this arrangement. In the recession, it is apparent that a minority of these leaseholders are in economic hardship, often having paid substantial sums to buy their leases.

  Blame for such closures is sometimes attributed to the tie system. In fact, they face the same difficulties as other small businesses purchased for high prices before the recession. They should not be taken to be representative of the business model which the tie allows. On the contrary, the shared risk and reward approach contained in the traditional brewery tenancy is of greatest benefit to licensee tenants.

17 November 2009

19   British Beer & Pub Association (BBPA) Statistics Handbook 2009 Back

20   BBPA Statistics Handbook 2009 Back

21   On-trade means licensed for consumption of alcohol on the premises-a definition of a "pub" Back

22   IFBB annual members survey, August 2009 Back

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