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

Examination of Witness (Question Numbers 100-119)



  Q100  Mr Hoyle: You have not asked them to change anything; you have not said you disagree with that. Are you really telling us this?

  Mrs Simmonds: First, we have not got to the stage of negotiation.

  Q101  Mr Hoyle: In fairness to RICS, they did say that there had been some strong negotiations.

  Mrs Simmonds: They said there had been healthy dialogue.

  Q102  Mr Hoyle: That means strong negotiations, does it not? Do you want us to get RICS back and ask them what they mean?

  Mrs Simmonds: We had not got to the stage of negotiations. Clearly, the witness sat here this morning and said RICS was at a very early stage of working up the code. We shall work with RICS in any way they wish, but we have certainly not put any pressure on them and see their independence as absolutely fundamental to the way this goes forward.

  Q103  Mr Hoyle: What is your definition of "healthy negotiation"?

  Mrs Simmonds: We have had a couple of meetings with RICS. I have met the representatives.

  Q104  Mr Hoyle: I am sure that is not what it means.

  Mrs Simmonds: I know the chief executive, but it has been no more than a conversation. Members of my staff have had a meeting with RICS but we have put them under no pressure at all; nor would we consider doing so.

  Mr Darby: My definition of "healthy debate" is just the kind of debate we are having here. It is a frank exchange of views and a general, healthy discussion of the issues in the industry.

  Q105  Mr Hoyle: That is how I look at it. Mrs Simmonds sees it slightly differently. It appears to be a cup of tea, a biscuit and a bit of sympathy. That appears to be what she is expressing to me at the moment. You can reassure us that there have been no disagreements and pressure and you absolutely accept what RICS propose?

  Mrs Simmonds: Absolutely.

  Q106  Mr Hoyle: No doubt that will unravel in future. If the tie is beneficial to the lessee why is it being recommended that lessees should be offered the choice of being free of tie? If it is so open why not give them the benefit?

  Mrs Simmonds: I know that the Committee has received a good deal of information particularly from family brewers about the importance of the tie to the distribution of beer. That has been absolutely clear. It is also hugely important that we understand the support that pub companies and breweries can give to individual tenants particularly in this very difficult economic time. My colleague has just returned from Cockermouth with all the problems it has experienced. It is absolutely clear that individual businesses are struggling there. Where one has the support of a company to help open up the business as quickly as possible that takes place. I think your report made clear that the breaking of ties would end up raising rents in individual premises which probably would not move us forward. BBPA is very supportive of keeping the tie; it does not believe it should be broken. Therefore, to go completely free of tie was not an option we were prepared to discuss even in mediation, although we were absolutely clear that we would discuss the operation of the tie at the time. That is what we are here to do today.

  Q107  Mr Hoyle: That is the real failure, is it not? If you were good, honest brokers and were given a really good deal you should be saying that you are so transparent, above board and reputable that you would allow people to choose whether or not they wanted the tie. Surely, there is nothing wrong with that?

  Mrs Simmonds: You would be changing the way that market worked in a fundamental way.

  Q108  Mr Hoyle: You are saying that you can screw them into the ground and you do not want the screws taken off?

  Mrs Simmonds: Not at all. As my colleague has made absolutely clear, up to now it is absolutely vital to us that we have tenants who are doing well in business and have the opportunities which we believe they will have through the new code to take up the issues so we do not have a David and Goliath-type situation emerging from it. Therefore, there is more transparency in the system and greater equality in the way it is negotiated. We do not believe that the ties should be broken. If you want to be free of tie you operate a different type of premises. One of the ways the tied model has worked and the problem it has got into is that it gives people an early opportunity to go into something where they can make some money, particularly on assignment. One of the problems we have is that those assignments now are not worth what they would have been a year or so ago.

  Q109  Mr Hoyle: You are saying that you use that profitable instrument and you do not want fairness for anybody in the system. That is the way you can make profit; you can hide behind it and it is the way you see it going in future. Am I right that last time the tax increase because of zero inflation was about 2%?

  Mrs Simmonds: In terms of excise duty on beer it has been 20% since the March Budget 2008.

  Q110  Mr Hoyle: No; it went up 2% last time.

  Mrs Simmonds: It went up 2% in March 2009 and a further 8% when VAT went down in December 2008.

  Mr Hoyle: When VAT decreased it went up more?

  Chairman: I do not want to go too far into these other issues. They are important questions but not for today.

  Q111  Mr Hoyle: It is a key point, Chairman. The tax went up 2% and yet you put up the price by 7% to those people who were tied under the beer orders. Mr Darby will confirm it if Mrs Simmonds does not understand her own industry.

  Mrs Simmonds: It is not only the 2%. When VAT went down excise duty was put up by 8%, and we very much hope that the chancellor will remove that when we have the Pre-Budget Statement tomorrow. I know that we are not here to discuss that situation.

  Q112  Mr Hoyle: Mrs Simmonds, you can hide all day. I have given you the facts. Mr Darby will not deny it because he knows I am absolutely correct on that.

  Mr Darby: Forgive me; you have not given me an opportunity to answer the question.

  Q113  Mr Hoyle: To put it another way, the government is taking 70p a pint and the pubcos are taking 95p a pint.

  Mr Darby: This is an absolutely crucial and complex issue. Having visited 400 of our pubs plus those of competitors in the year that I have been in charge of this pub company—I have conducted business reviews with tenants and lessees in many of those pubs—I absolutely agree that the fundamental issue when sitting before a lessee is not the tie but the price he is paying for beer. That has been accelerated by the fact that during a recession big managed house pub companies with large square footage pubs have used price as a means to attract more and more customers. There has been a lot of pricing activity in the market and we are the first to acknowledge that. In my discussions with tenants they do not say they are unhappy about the range of beers they get; they are unhappy about their ability to compete. We have to address that. First, the new code makes it very clear that before anybody enters a pub the terms on which they buy beer must be made very clear. Second, already in the market with existing tenants and lessees there is an enormous amount of evolution and support going in on pricing in the trade. We alone have given £2 million worth of concessions to tenants in the form of reduced prices, but at the present time we are trialling two agreements. The first is our retail agreement which means that the price of beer ceases to be an issue because effectively we run a business which we refurbish. The operator takes 20% of the take and we take responsibility for everything else, so you remove pricing and rent as an issue. The other agreement we are trialling is one which admittedly continues to be tied because we have five breweries and we care about our beers sold in our pubs. We have been in business brewing and selling beer for 175 years. We have offered 60 tenants an agreement to permit them access to what we consider to be free trade pricing. The reason we say it is free trade pricing is that we have a free trade business against which we can compare it, so we know what the prevailing rates are. Of those 60 tenants and lessees to whom we offered that agreement as a side letter, which means they get extra discounts in return for a higher payment but not a complete transfer of the discounts for that payment—the deal is arranged so that in the first instance they are at least £5,000 better off—half of them have chosen not to take the side agreement, the fundamental reason being that they do not wish to take on additional fixed cost in their business. They say they are happy with the way it works and recognise that rent is variable through beer pricing and that if trade goes up they benefit; if it goes down they suffer. That is the attraction. If you look at the pubs in Cockermouth that have been flooded, The Bush is effectively the brewery tap in the high street. The Bush sells 10% of Jennings' annual brewery output; it sells 500 barrels of ale a year. We are blooming keen to get that pub open for the benefit of the lessee who cannot trade now and because at the moment 10% less beer is coming out of Jennings' brewery. We have a very real interest in getting that pub open. In going up and down the high street yesterday in Cockermouth in the pouring rain it was interesting that the building activity was most intense in the pubs on the high street and least intense in small shops such as toys shops and shoe shops. That gives you an indication of what the tie does; it provides a sharing of risk.

  Q114  Mr Hoyle: I welcome what you have done in Cockermouth which is in the North West. I am from Lancashire. I understand what you are doing to ensure that Jennings reopens and continues to serve good beer. Nobody will take that away from you, but most people would say that it is in your interests to get those pubs reopened; it is coming up to the busy Christmas period and you have to get that brewery moving. But let us look at the rest of the country that has not suffered a flood and people have been screwed into the ground. Has any pub company offered their lessees the ability to opt out of the tie or restrict it? If so, what has been the result and how many examples are there?

  Mrs Simmonds: I am aware that at least one of our members has mentioned that. Wellington Pub Company did go free of tie. The information made available is that it is suffering as much as those who are tied pubs.

  Q115  Mr Hoyle: Is Wellington completely untied?

  Mr Darby: Yes.

  Q116  Mr Hoyle: But has any pub company offered that to lessees other than Wellington?

  Mr Darby: I think you know the answer to this question which is that at the moment there is still a preponderance of tie.

  Q117  Mr Hoyle: So, the answer is no?

  Mr Darby: No.

  Q118  Mr Hoyle: Is it "yes"? You cannot have it both ways.

  Mr Darby: Perhaps I may finish the answer. In this industry evolution was already going on, but there has been an absolute acceleration of the evolution of agreements. You will see that fundamentally to be commercially successful one of the things a pub company wants to offer in its armoury of agreement is free of tie. That will increase in number and you have to let time take its toll. But clearly a business like Marston's, Greene King, Fullers and Everards which care about the link between their brewing operations and pubs will not be queuing up to start releasing their pubs of tie because it is fundamentally part of their DNA.

  Q119  Chairman: It is different for Enterprise and Punch, is it not?

  Mrs Simmonds: But the market will move over a period of time because if they are not attractive to tenants in that marketplace it will not work as a model going forward.

  Mr Darby: I speak from experience of free trade. I am convinced that there will be evolution. If somebody goes to Punch or Enterprise and says he sees a distinct difference between them and Marston's and Greene King and therefore will not buy the "brewery" argument or whatever presumably there will be customer pressure to evolve their agreements. Their business model will evolve over time. But the biggest fear I have is that if there is some form of statutory intervention which results in a substantial flood of pubs going free of tie onto the market there will be some baleful consequences. Having been in free trade myself and knowing how thin margins are because there is a limited universe as a brewer it would represent a wonderful opportunity to build margin. As a brewer to make the running in the UK beer market is very challenging. I am not entirely of the view that the sudden wholesale release of tied pubs will result in an equally sudden leap in the profitability of tenants and lessees. Indeed, the Committee is on record as saying that a fundamental restructuring of the tie arrangements has consequences that are very difficult to predict. You have to consider the market pressure that customers will put on landlords to evolve.

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