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

Memorandum submitted by Punch Taverns Plc

  Punch Taverns plc ("Punch") welcome the opportunity to make a submission as part of the consideration by the Business, Innovation and Skills Committee ("the Committee") of developments following the publication of its Report on Pub Companies in May of this year ("the report"). This memorandum is further to the detailed oral and written evidence submitted by Punch to the original inquiry.


  1.1  Punch are one of the UK's leading pub companies, owning some 7,670 pubs—out of a total of approximately 57,000 pubs in the UK. Some 6,840 of our pubs are leased and tenanted while the rest are managed premises.

  1.2  Punch readily acknowledges that the Committee raised in their report important and genuine concerns about the relationship between pub companies and their lessees. We recognise that these need to be addressed in a constructive manner.

  1.3  Even before the publication of the report, Punch had begun a process of improving the relationship with our lessees. In our Interim Results announcement on 29 April 2009—prior to the publication of the Committee's report—we identified the need to evolve further our business model and provide greater clarity to our business partners—our lessees. We continue to be fully committed to building sustainable and open relationships with our lessees, as fundamentally we only succeed as a business if they succeed.

  1.4  Punch agrees with the Committee that it is timely to look now at the significant developments in the industry which have taken place since the publication of their report on 13 May 2009—namely the industry-wide mediation process which ended with the production of a revised Framework Code of Practice on the Granting of Tenancies and Leases ("the Framework Code"); and both the submittal of a super-complaint by CAMRA and response by the OFT.

  1.5  The period since the publication of the report has also witnessed continued challenging economic conditions for the pub industry. Punch has responded quickly to provide assistance to our lessees at more than more than £1.6 million per month through further product discounts and/or rent reductions. We have to date assisted more than 2,400 lessees with such extra support. This is more than double the level provided in the previous year. Financial assistance of this type is not subject to subsequent repayment.

  1.6  Punch appreciates the opportunity to explain the implications of developments since the original report of the Committee. This memorandum will first offer comment on the four areas highlighted by the Committee in their call for evidence, along with a consideration of the super-complaint submitted by CAMRA to the OFT, and finally some concluding comments.


  2.1  Punch supports the RICS' Pub Industry Forum Report and Recommendations and has worked to ensure that the key recommendations are included in the Framework Code.

  2.2  Beyond this, Punch not only guarantees to abide by the terms of the Recommendations but will incorporate them into the Punch Charter, which sets out commitments to our licensees in the key aspects of our relationship.


  3.1  Following the publication of the Committee's report, Punch took the lead in working with others in the industry—lessees and landlords' representatives, small and large brewers, other pub companies and consumer groups - with a view to making clear and sustainable changes to our business model and in doing so addressing concerns highlighted in the report.

  3.2  This took the form of a mediation process which involved stakeholders from across the industry and was presided over by Michel Kallipetis QC, taking place from June to October 2009. Mediation was entered into by Punch in good faith in order to seek an amicable and negotiated settlement of issues raised by the Committee's report. It is regrettable given the importance of the issues under consideration that not all parties who entered into mediation were able to agree to the Framework Code which resulted from the process.

  3.3  The key elements of the Framework Code are detailed below and constitute obligations on pub companies which amount to a step-change in their relationship with lessees. Pub companies will be obligated to:

    — Establish standards of competence for BDMs and set out a procedure to deal with complaints and resolve disputes.

    — Describe the various rental and purchase obligations offered by the company.

    — Demonstrate transparency with regard to prices charged, eligibility for discount and whether they will allow guests beers supplied outside the tie.

    — Make clear the pub company's policy in respect of rent setting and review including full transparency in regard to how the Fair Maintainable Trade (FMT) has been calculated with a breakdown of costs and detailed information on the assumptions made on turnover.

    — Provide shadow P&Ls which must provide sufficient detail to enable tenants to take proper professional advice.

    — Draw attention to the availability of ALMR and other benchmarking reports.

    — Ensure Upward Only Rent Review clauses are not included in new leases and offer existing lessees the opportunity to convert to new leases subject to agreement.

    — Remove AWP income from the divisible balance and make clear how machine income is considered.

    — Supply lessees with full details about insurance cover and excess payable and price-match where lessees are able to find a cheaper like-for-like policy.

    — Set out a clear policy for the operation of flow monitoring equipment in accordance with minimum standards to be set out in the BBPA code.

    — Make clear the company policy with regard to restrictive covenants.

  3.4  Punch believes that the Framework Code offers a real and substantive step- change in the relationship between pub companies and lessees. We would like to bring to the attention of the Committee three aspects of the Framework Code in particular which substantially benefit lessees—namely; the breadth, speed and binding nature of the final agreement.

  3.5  Breadth—The British Beer and Pub Association (BBPA) represents companies owning around 94% of leased and tenanted pubs subject to purchasing obligations. The Framework Code will therefore have a wide-reaching impact on lessees across the industry. It is worth noting that of the current Punch leased estate of 6,840 pubs, around 1,500 lessees are represented by the BII or FLVA, organisations who signed up to the Framework Code. The agreement reached at the end of mediation therefore benefitted from the engagement and agreement of formal, representative bodies who spoke for substantial numbers of Punch lessees.

  3.6  Speed—The revised Framework Code will take effect on 1 January 2010, offering near immediate improvements to the position of new and existing tenants or lessees across the country.

  3.7  Binding nature—The Framework Code will be a mandatory requirement for membership of the BBPA, meaning that this is now the industry standard.

  3.8  Punch believes that the Framework Code establishes a robust and challenging industry standard which guarantees new levels of transparency and equity for tenants and lessees. However, Punch intends to go further and exceed the Framework Code in order to offer, in the Punch Charter, the most attractive terms in competing for quality lessees.

  3.9  In advance of the Framework Code coming into effect on 1 January 2010, Punch have taken significant steps to improve their relationship with lessees, with the effect that the following provisions are now already in place:

    — Removal of the lessee machine share from the rent calculation.

    — Removal of upward only rent reviews.

    — Passing on of negative RPI rent reviews.

    — Removal of restrictive covenants on the sale of pubs.

    — Introduction of a price match commitment on our insurance premiums.

    — Publishing expected income for prospective lessees on our refreshed and updated website.

  3.10  More broadly, to further evolve our leased business model and build open and transparent relationships with our lessees, Punch has embarked on a major change programme "Pathway to Partnership", which will see a cultural shift to ensuring joint profitability for Punch and our lessees. As a further step on this path we will in December 2009 relaunch our "Partner Forums" to enable face to face feedback from our lessees.


  4.1  We have been fully supportive of plans by the BII—as endorsed by the Committee—to introduce a low cost arbitration plan for determining rent in the pub sector. As members of the BBPA, we are happy to support and finance the PIRRS.


  5.1  We note the establishment of the Independent Pub Confederation (IPC), which is an amalgamation of existing stakeholder groups. We also note that the IPC represents only a handful of licensees and includes a number of campaign groups that are not formally constituted membership organisations. Whilst respecting their right to participate in the important debate regarding the relationship between pub companies and their lessees, Punch would again highlight that of our leased estate of 6,840 pubs, substantial numbers—some 1,500—are represented by the BII and FLVA, who are signatories to the Framework Code.

  5.2  In addition, Punch operates a robust complaints procedure and would urge any of its lessees who have concerns about their business to speak to their Business Relationship Manager or their Regional Operations Director.


  6.1  The pub industry has been a perennial subject for investigation by the competition authorities, with several inquiries over the years by the OFT in the UK and the European Commission in Brussels. The supply tie has repeatedly been found by competition authorities to be compatible with EU (and therefore UK) competition law.

  6.2  The Committee will be aware that the since the publication of their report, the OFT has investigated the super-complaint submitted in July 2009 by CAMRA in relation to the supply of beer in pubs. Specifically, CAMRA raised concern about the operation of exclusive purchasing obligations by pub-owning companies, which require lessees to purchase beer solely through their pub-owning landlord (the 'tie'). CAMRA also raised other issues including the methods used by pub-owning companies for calculating rents.

  6.3  Whilst Punch did not believe that it was necessary for the sector to be the subject of another competition investigation given multiple examinations over recent years, we cooperated fully with the OFT in their review of the super-complaint.

  6.4  It is important to note that in submitting their super-complaint CAMRA made clear that they did not wish to see an end to the tie. We note comments made at the time by CAMRA Chief Executive Mike Benner: ""Total abolition of the `beer tie' would be a grave error and would be likely to turn the current storm of pub closures into a hurricane and lead to increased domination of the beer market by global brewers. Abolishing the 'tie' would be the classic example of 'chucking the baby out with the bath water." [24]

  6.5  The completion of the OFT analysis of the CAMRA super-complaint on 22 October 2009 concluded that the issues raised did not warrant further assessment and that no further action was to be taken. This conclusion was welcomed by Punch. We believe that both this decision and previous investigations by competition authorities in the UK and EU represent a robust record of detailed analysis of the sector. Further investigation would in our view be hugely time consuming and represent a major distraction from the challenges facing pubs across the country during the current difficult economic environment.


  7.1  The developments which have taken place since the publication of the Committee's report do in Punch's view represent substantial progress towards the establishment of a new relationship between pub owning companies and their lessees, characterised by enhanced levels of openness and transparency.

  7.2  Punch believes that the Framework Code is in terms of breadth of coverage, speed of implementation and binding nature, the most direct mechanism to deliver real and substantive improvements to the position of lessees. Punch has already begun the process of incorporating the content of the Framework Code into the Punch Charter and we look forward to our lessees both current and future benefitting from the provisions contained within.

  7.3  It is further the view of Punch that whilst the reforms offered by the Framework Code provide a substantial rebalancing of the relationship between landlord and lessee, they should be seen as a floor rather than a ceiling. Punch intend to exceed the provisions of the Framework Code in our quest to be the most trusted and best value pub company in the UK.

  7.4  The OFT analysis of the CAMRA super-complaint failed to identify grounds for further investigation. Given the continued challenging economic environment facing the sector and the far reaching attempts embodied in the Framework Code to improve further the pub company and lessee relationship, we are very firmly of the opinion that a further time consuming and costly examination of the sector by the competition authorities would represent a huge and damaging distraction.

  7.5  Whilst Punch welcomes the further consideration of the sector which the Committee is currently undertaking, it is our strong belief that the priority for the industry should be the implementation of the reforms agreed under the Framework Code, rather than devoting time and resources to further consideration of structural issues surrounding the sector.

18 November 2009

24   "Super-Complaint" prompts OFT probe into Pub Market CAMRA Demands a "Fair Share" for Consumers, 24 July 2009: Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 4 March 2010