Examination of Witness (Question Numbers
140-157)
BBPA
8 DECEMBER 2009
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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