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

Examination of Witness (Question Numbers 140-157)



  Q140  Chairman: The legally binding nature of PIRRS depends on the legally binding nature of the wider BBPA code?

  Mrs Simmonds: The BBPA code is legally binding on our members.

  Q141  Chairman: It is not legally binding, is it? It is done by agreement.

  Mrs Simmonds: It is a requirement of membership of the BBPA that members abide by the code, but the individual company codes are legally binding because they are signed by both the company and the lessee.

  Q142  Chairman: And PIRRS is also part of it and so is legally binding?

  Mrs Simmonds: Exactly.

  Mr Darby: It is caught in that net.

  Q143  Chairman: Because of our doubts about the good intentions of your industry born out of bitter experience these questions of enforceability are not marginal but central to our consideration. If on reflection you want to flesh out or reconfirm that answer subsequently we shall be delighted to have it.

  Mrs Simmonds: I would like to write to you about it.

  Q144  Chairman: Make sure you get it right so we get it correctly on the record.

  Mrs Simmonds: Absolutely.

  Q145  Chairman: There are many things we would like to talk about, but I take just one: the AWP tie. I have met AWP providers in my constituency and as a result I know a little more about the industry, more than I ever expected or wanted to know. Can you tell me why pub companies are so keen to keep the AWP tie in principle?

  Mrs Simmonds: The important part of the new code is that the AWP tie will be dealt with below the divisible balance; in other words, it means that income is shared only once.

  Q146  Chairman: That should not ever have been the case; it is wrong, and you have to make that plain?

  Mrs Simmonds: That is absolutely important. Enterprise have offered all their tenants the ability to go free of tie. The problem is that gaming machines are a very precise science. You need a certain level of expertise and some tenants and lessees find that they do not have the expertise to make the most out of the machine. Therefore, they choose not to go free of tie because they want to make sure they get the support to maximise income.

  Q147  Chairman: I would have a lot of sympathy for the argument if the share of income was correct and appropriate. I share with you some information that intrigues me. The average AWP stays in a pubco pub for 12 weeks before it is changed to maximise income and a much longer period is typical in the free sector. There is some prima facie evidence to suggest that they are better managed, not that I approve of these machines at all—that is a different matter—but I have heard only one side of the argument.

  Mr Darby: The important thing to have in mind in regard to gaming machines is that they are successful in a pub only if they appeal to game machine players and often they represent a very small group of people. Therefore, the currency of the machine and the fact it is refreshed on a regular basis and, as a statement of the obvious, is operating—in some cases it will not be—is absolutely crucial. A gaming machine player will swap between pubs if the machine offered in one becomes jaded. That is the reason we are so committed to the gaming machine tie, albeit also committed to an absolutely fair sharing of the income. Again, we apologise that this was one of the key recommendations of the previous Committee to which we did not respond. That was a failure on our part and for the record we are trying to address it in the revised code. What the tie enables us to do as a pub company is use our buying and negotiating power with gaming machine companies and provide internal expertise to ensure that the machines in our pubs are as far as possible of the highest quality. Just recently we have experimented with a tracker agreement, of which we now have 100, whereby we retain the machine tie, that is, we keep the relationship with the gaming machine manufacturers, but 100% of the income post rent and excise duties goes to the tenant of those pubs as a means of providing income. We try to maximise the income for the tenant but also guarantee the quality of the machine for consumers. Effectively, we do not draw any income from the machines in the tracker pubs. The net effect of it is that to make it work we depend on the gaming machine company to make sure that decent quality machines are in the pubs. Effectively, the working relationship ceases to be between the pub company and gaming machine company; it is between the tenant and gaming machine company. In those tracker pubs we have already seen a rapid divergence of takings from machines in those pubs where we are actively managing the offer and the tenant is or is not actively managing the offer. The net effect is that there is now a divergence in average takings of about £40 a week between our company average and the tracker average; the tracker is taking less. The gaming machine companies now say to us that the takings of the machines are reaching a de minimis level and they do not want to service them any longer because they take too little. A tenant on average will seek to reduce the rent of the machine by agreeing to less frequent servicing and emptying, a lower quality machine and so on, the net effect being that the tenant and company are worse off and the consumers stop using the pub because the machine is aged and not interesting to play. There is a loss of income for everybody as well as a loss of appeal to the consumer. We are absolutely convinced that the tie brings value. The key is that the income must be shared transparently and fairly.

  Q148  Mr Hoyle: You have told us that this is an experiment but different pubs also have different appeals. Is it across the whole range of pubs, or did you experiment with certain types of pub? Some people do not want to see gaming machines in pubs and certain pubs benefit from not having them. On the other hand, gaming machines are on the decline anyhow; people have shied away from them during the recession.

  Mr Darby: There has been a recent upturn in gaming machines because digital machines that are kept up to date operate on a more frequent basis. Because they break down less often there has been a significant upturn in gaming machine performance. In our managed estate our gaming machines are now back in growth.

  Q149  Mr Hoyle: In your managed estate where you have the tie?

  Mr Darby: No—where we control the machine offer. There has been a long decline in gaming machine take but recently there has been an upsurge because new technology and better payout, £70, has made them more interesting to players. The problem is that if those machines are not available in a tenanted pub because the tenant makes the choice to go for a lower quality machine for consumers the machine holds less appeal.

  Q150  Chairman: On the question of the fair split of income from the machines, have you estimated what the difference will be as a result of the divisible balance being split differently?

  Mr Darby: In our advance agreement we are changing the divisible balance. The arrangement for the divisible balance in the advance agreement is that the income post duty and rent is shared 50/50, but we set a gaming machine target at 90% of the past 12 weeks of take. We then say to the tenant/lessee that he receives 75% of any income he makes above the 90% target. Therefore, it is three-quarters rather than half.

  Q151  Chairman: That is Marston's?

  Mr Darby: Yes. We are not unique in changing the relationship with the machines. It comes back to a general point I made earlier about commercial success. The most likely way to maximise income from a gaming machine is to have a partnership between the pub company and tenant/lessee. Whatever way you look at it, if the tenant/lessee is incentivised to drive the machine, which historically he might not have been because he did not get a fair share, there is a better gaming machine performance. At the moment we seek to have a significantly more attractive relationship on gaming machines. The net effect of it is that the tenant/lessee makes more money and so do we. You see that evolution already in pub companies.

  Q152  Mr Clapham: Mrs Simmonds is to reply in writing to the questions on PIRRS. Can she tell us in that reply why it is that the Royal Institution of Chartered Surveyors is excluded from the list?

  Mrs Simmonds: The RICS is the body. The individual chartered surveyors are able to go on that list; there is no problem about that, but I am very happy to reply in writing to make that absolutely clear.

  Q153  Mr Hoyle: Mr Darby, you said that if tenants went above the bar they received an extra take. What happens if they go below it?

  Mr Darby: We share the pain; it is 50-50.

  Q154  Mr Hoyle: Therefore, you do not have a guaranteed income; you share the pain 50-50 and the incentive is on the publican to go above the bar?

  Mr Darby: Yes. It is no different from the situation at the moment. We are on record as giving £3 million worth of support to struggling tenants and lessees to try to help them. We are happy to have discussions with them about reducing rent and providing more discount support, but equally when times are good outside the normal rent review cycle we would not dream of going to a successful tenant, saying that he has a successful business and is making lots of money and asking for a higher rent.

  Q155  Chairman: The trouble is that companies have done that in the past.

  Mr Darby: I am saying that in between the five-year review and outside the cycle we are now abating and conceding on rents, machine income and so forth.

  Q156  Chairman: I accept that you, Marston's, are doing it, but the picture I have of the industry as a whole and the response to our report and to these changes by individual pubcos is a very varied one. Some respond magnificently and others grudgingly. I heard that in the case of one pubco BDMs and area managers were uncertain what they were supposed to do as a result of what they had been told and were sacked for doing these things 18 months earlier. Do they really mean it? Is it a culture change or a temporary face-saving exercise just to see them through to the other side while we consider our recommendations? This is the challenge. You, Mr Darby, have told us of the good things you are doing. We need to be confident that the industry as a whole is doing these things.

  Mrs Simmonds: We need time to make these agreements work in the industry. We are happy to come back before this Committee and explain exactly how they are working on the ground, but we need to ensure that everyone is on a level playing field that Marston's have described to you in their answers today. We need to make sure that all of the new system will work properly because it is in the interests of tenants and individual companies that it does work and you are not dissatisfied. I do not want to hear again the accusations you made at the beginning.

  Mr Hoyle: It has taken us five years to get to this point. How much more time do you want?

  Q157  Chairman: The last question is: when do we next make our judgment of you?

  Mrs Simmonds: I believe we need at least a couple of years to make this work. We have already talked about June of next year as the time to get the bigger companies through with a little extra time, so we will have the full system in force next year. I suggest we come back in a year—I am happy to come back earlier if that is what you would like—to discuss how the system is working.

  Mr Hoyle: Tomorrow never comes, does it?

  Chairman: We shall reflect on that offer, but two years is pushing it a bit. Mrs Simmonds and Mr Darby, thank you very much indeed.

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