Examination of Witness (Question Numbers
100-119)
BBPA
8 DECEMBER 2009
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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