HC 1369 Pub Companies

Written evidence submitted by Marston’s Pub Company plc

Executive summary

1. We (Marston’s PLC) own and operate around 2,150 pubs in England and Wales, five breweries and an extensive logistical network. We employ over 12,000 people.

2. 1,650 of these pubs sit within Marston’s Pub Company. We run these pubs in partnership with self-employed licensees, always seeking to share risks and rewards fairly. We have long used plain english in our agreements and taken a fair rent approach.

3. We have evolved our business approach to our tenanted and leased pubs and made significant changes in response to a deep consumer recession and legislative pressures. These developments have helped to stabilise the performance of our tenants and lessees and resulted in us being awarded Tenanted/Leased Pub Company of the Year in the 2011 Publican Awards.

4. Our revised Code of Practice was accredited by BIIBAS in July 2010. We believe that it sets a very high standard, which is corroborated by the fact that the BII have not had to investigate any breaches since its launch.

5. Our tenants and lessees are able to take advantage of a wide range of agreements including free-trade beer pricing options and free of tie.

6. Our innovative Retail Agreement, which is accredited by the British Franchise Association, has been taken up by over 250 licensees. In a recent survey 93% of these said that they would recommend the agreement to others for its transparency and low risk.

7. We have invested heavily to support our licensees and to share our buying power with them. We have calculated these benefits to be worth around £28m in the last twelve months: an average of £17,000 per pub.

8. We urge the Committee to recognise the substantial progress which we have made and to allow us to continue to develop our business without further distraction. This would be the most effective outcome to enable us to continue to help our licensees to deal with the challenges posed by the economy, competition and higher taxes.

Tie options

As a pub owning and brewing business the tie is integral to our operating model. It allows us to share risk and reward with our tenants and lessees. It also underpins the extensive brewing and logistics network which we have developed over many years. We run five classic cask ale breweries from which we are able to offer our licensees an exceptional range of beers. We have been able to invest in and expand these breweries thanks to the close relationship that exists between them and our licensees.

We do recognise, however, that our licensees should have the ability to weigh up the benefits of a tied agreement against alternative options. As a result we offer a tied agreement (Advance) which allows our licensees to buy their beer at prices bench-marked against the free-trade and a free of tie agreement (Ultra Advance) which has no purchasing obligations to us. Both agreements are subject to additional charges, which are specific to an individual pub. The Advance charge is £4,000 lower in year one than the benefit of the lower prices which the tenant receives.

A licensee can consider whether to move onto one of these agreements at any point in his/her agreement cycle. When weighing-up such agreements our licensees have to balance the opportunities of buying their beer more cheaply or of widening their drinks range against higher fixed costs.

To date, take-up of these options has been limited- around 4% of our pubs have chosen one - because most of our licensees prefer the attraction of tied agreements where a higher percentage of the cost base is variable – i.e a lower (fixed) rent and higher (variable) beer prices.

Beer choice

Our tenants and lessees are able to choose from 18 permanently available cask beers, and up to five limited edition beers per month (over 50 per year), each representing the particular characteristics of one of our five breweries. Alongside these we supply an extensive range of lagers, ciders, stouts, bottled beers, wines, spirits and minerals.

It is exceedingly rare for any of our licensees to consider this range to be inadequate for his or her customers. Not only are we keen to sell our own cask beers in our own pubs but also there is limited demand for a ‘guest beer’ provision from our licensees.

In a few instances we have agreed specific arrangements with licensees to allow them to source non-Marston’s beers in return for a compensating fee. It is our experience that such agreements are normally surrendered once the licensee has experienced no appreciable up-turn in business.

Where the range of beers is a key trading issue we urge licensees to consider the Ultra Advance agreement which enables them to become completely free of tie. So far only three licensees have taken this option.

Amusement with prizes machines (AWPs).

We offer one agreement (Ultra Advance) with no AWP tie. Our Pathway tenancy, Open House base lease and Advance agreements contain AWP ties.

By actively managing AWPs on behalf of the majority of our licensees we are able to offer their customers the best possible gaming machine experience. A recent analysis by Gamestec, a major supplier of c.9,000 AWPs to the licensed trade, shows that the turnover generated by AWPs in a tied pub versus a free trade pub is nearly £12,000 greater per year. A well managed AWP offer attracts and retains customers who in turn spend more in the pub on drinks and food.

The data demonstrates that tied licensees gain real benefit from our professional management of AWPs, which helps to underpin the profitability of their pubs. The majority of tenants and lessees do not have the ability to engage the services of professional companies to manage the gaming machine offer. As a result we choose, for positive reasons, not to offer an AWP tie release in our basic tenancy and lease agreements.

Sharing purchasing power

A major advantage of the tie to our licensees is the opportunity to take advantage of our buying power. We offer competitive rates on a wide range of services from bins to banners.

We have been able to hold back brewers’ price increases from our licensees in 2010 and 2011. We did not increase the price of our own brewed ale brands for two years between 2008 and 2010. This year we have raised our beer prices by a weighted average of only 1% - the prices of over 90% of the draught ales, lagers, stouts and ciders which we sell have been unchanged this year – against market movements of up to 4%. In an environment where VAT increased in January by 2.5% and duty in March by 7%, this support has been invaluable.

Overall we estimate that the value to our licensees of these cost savings, deferred price increases, marketing and training support is close to £5m in the last 12 months, which is part of the afore-mentioned £28m of investment.

The Retail Agreement: real innovation

Recognising that tenanted community pubs were suffering disproportionately from the smoking ban, government taxes and regulations, the consumer downturn and increasing price competition from big managed pubs and supermarkets we launched our first Retail Agreement pub in 2009. We expect to have over 250 up and running by the end of June.

We take responsibility for developing the consumer offer in these pubs and for paying for the running costs of the pub. The self employed retailer receives at least 20% of the turnover from which he/she pays for staff, Council Tax and public liability insurance retaining the balance for personal remuneration. This means that the retailer does not have to pay rent or buy beer, allowing him/her to concentrate on driving sales in challenging market conditions.

This new innovative agreement has received wide acclaim, not least from our retailers. In a recent independent survey 85% of them said that they were making an acceptable living and 93% would recommend it to others. This agreement attracts three times more applicants than our traditional agreements thanks to its transparency and low risk. Having recently gained British Franchise Accreditation we intend to have 600 such agreements in place by 2013.

The Retail Agreement is real evidence of our willingness to evolve and adapt to changing circumstances grounded in an appreciation of the support our licensees need from us and of the expectations of ever more demanding pub users.

Assistance to licensees in trouble

Our revised Code of Practice describes clearly when and how we will help licensees who are struggling when circumstances change around them. In the last year we have continued to provide business advice, rent concessions, lower beer prices and capital investment to licensees determined to develop their businesses against strong headwinds. £3m of rent and beer pricing support has been complemented by £18m of capital investment.

In conclusion

We have continued to develop our business model to promote the success of our licensees since the last BISC review. We are committed supporters of the Industry Framework Code and related initiatives such as PIRRS. It is time now that we are allowed to continue this good work without further distraction from investigations and inquiries.

17 June, 2011