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. INTRODUCTORY
COMMENTS
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. RICS' PUB
INDUSTRY FORUM
REPORT AND
RECOMMENDATIONS
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. BBPA'S AGREEMENT
WITH BII AND
FLVA TO REVISE
ITS FRAMEWORK
CODE OF
PRACTICE ON
THE GRANTING
OF TENANCIES
AND LEASES
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. THE INDEPENDENT
PUB RENT
REVIEW SCHEME
(PIRRS)
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. THE FORMATION
OF THE
INDEPENDENT PUB
CONFEDERATION
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. OFT CONSIDERATION
OF CAMRA
SUPER-COMPLAINT
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. CONCLUDING
COMMENTS
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: www.camra.org.uk/page.aspx?o=305998 Back
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