Pub Companies - Business, Innovation and Skills Committee Contents

Written evidence submitted by the Association of Licensed Multiple Retailers (ALMR)

As the only national trade body dedicated to representing pub and bar operators - and the only one to have given written and oral evidence to each of the Committee's previous inquiries - the Association of Licensed Multiple Retailers welcomes the opportunity to contribute to the current inquiry.

By way of background, the ALMR was formed in 1992 specifically to represent the interests of those companies which operate multiple estates. Uniquely amongst industry trade bodies, the Association has no remit to represent landlord or brewing interests; our views and comments are therefore drawn solely from the perspective of licensees.

Between them our 91 member companies operate just over 6,000 pubs, bars and casual dining outlets - equivalent to two thirds of the managed estate in England and Wales. These pubs are valuable social and economic assets - community centres, social spaces, tourist attractions and significant revenue generators - as well as providing a well regulated and controlled environment for people to enjoy alcohol responsibly and socially.

Two-thirds of ALMR members are small independent companies operating 50 outlets or fewer under their own branding, predominantly suburban community outlets. Just under three-quarters of our members' sites are operated under lease from and of these just under half will have an industry landlord, the majority being long leases issued by one of the major pub companies. It is the views of these members we have captured in the attached submission to the Committee. These pubs may be assets but they are under-valued, under threat and under ever increasing pressures - regulatory, fiscal or competitive.

The 2004 Trade & Industry and 2008 Business Enterprise and Skills Select Committee inquiries were comprehensive and exhaustive. Both found that there was an "unhealthy and imbalanced relationship" between landlord and lessee arising from a lack of transparency and openness about the nature of the commercial relationship. It allowed the pub companies to "exploit their position of economic strength", to the detriment of lessee profitability and the health of the sector as a whole. Both set out a series of recommendations to address them.

In March 2010, the pub companies were given a final ultimatum by Ministers to reform or face statutory intervention. The challenge to them was very clear - they needed to put in place a comprehensive Code of Practice and effective self-regulatory structure; and, the major national pub companies needed to offer a free of tie and guest beer option. Failure to do so or if the arrangements put in place were not working effectively, the Government pledged to consult on putting the Code on a statutory footing with independent enforcement.

Notwithstanding the significant efforts made by many in the industry to address the Committee's concerns, insufficient effort has been directed at eliminating the root cause of disputes between landlord and lessee - namely the fair sharing of the economic benefits arising from the business. The Framework Code of Practice is silent on these substantive commercial matters. They also fall outside the remit of the dispute resolution mechanisms established in the wake of the Committee's inquiries.

There are inherent tensions in any commercial relationship of this nature, but these are exacerbated in times of financial and economic stress. The pub company model of long fully repairing and insuring leases was predicated and established in an expanding market at a time of economic prosperity. In a weakening market, characterised by rising costs and declining consumer sales, it proved to be unduly rigid and unable to react sufficiently well to market and retail pressures. In the current market, with high beer prices due to duty increases and soaring costs, the only point of flexibility is lessee's profit margin. As a result, over recent years there has been a very real disparity in the share of profits each side earns. From an ALMR perspective this is the crux of the matter and the experience of our members suggests that this remains untouched.

We therefore recommend that the existing regulatory regime be strengthened and expanded in line with Ministerial recommendations in order both to cement progress to date and to encourage further action - from the largest companies in particular - on the issues which remain extant from previous inquiries. Mandatory application of a comprehensive Code covering all aspects of the commercial relationship, rigorously policed and enforced with access to independent redress remains the only long-term solution.


1.  The Association of Licensed Multiple Retailers (ALMR) welcomes the opportunity to submit written evidence as part of the above inquiry. As the only national trade body dedicated solely to representing the needs and concerns of licensed retailers, and a contributor to all three of the previous inquiries in this area we are well placed to review the conclusions reached then and to assess whether activity to date by both the pub companies and the trade and professional bodies has been sufficient to address the significant and substantive concerns raised by previous committees and Ministerial expectations.

2.  The ALMR is a member of the Independent Pub Confederation and supports and endorses the collective submission. We have therefore confined our comments to those recommendations which are of particular relevance to the Association or where we have a specific insight derived from the experiences of multiple operators.

Codes of Practice - Compliance

3.  The IPC has provided detailed and comprehensive information on the Codes of Practice - in particular whether the specific commitments given to the Committee in December 2009 were met and whether the Codes are being complied with in practice. The evidence from a survey carried out by CGA on behalf of BBPA, IPC, BII and FLVA suggests that limited progress is being made but that compliance is still not comprehensive. We support and endorse these representations.

4.  The most effective self-regulatory mechanism in the world is meaningless unless customers are made aware of it, understand its obligations and know what to do when things go wrong.

5.  The ALMR has also undertaken a short survey of members to ask a small number of questions about the Code of multiple lessees - these companies were not included in the CGA survey.[1] The survey results cover 178 outlets and all five of the national pubco and super regional landlords. The key findings are set out below:

—  (1)  Over three quarters of existing leased premises had not received a copy of the company's Code of Practice. In some cases only one per company had been received, despite the fact that the Framework Code makes clear that the company code is read alongside the individual lease.

—  (2)  84% of all leased outlets were subject to a wet tie. This rose to 100% for Punch, Enterprise, SNPE, Greene King and Marston lessees. The only free of tie outlets were operated by smaller pub companies such as Wellington and GRS Inns.

—  (3)  61% of existing leased outlets are subject to a machine tie - all Punch, Greene King and Marston lessees surveyed were tied for machines.

—  (4)  A fifth of companies had seen the machine income removed from the divisible balance for tied outlets as required under the Framework Code and in line with the commitments given to the Committee by the BBPA in December 2009.[2] Half stated that this was only in respect of new leases. Half stated that it had been technically removed at rent review but in most cases had still been rentalised separately.

—  (5)  None of the companies had been offered a free of tie pricing or free of tie option in respect of existing outlets. These offers are only made available for new agreements, not as a variation to an existing lease.

—  (6)  A fifth of companies responding said that they had had discussions with Enterprise Inns about their tie release fee scheme which sees companies paying a substantial annual fee of, on average £30,000, to be released from the tie - effectively an additional rent. One company had also been offered a short term free of tie pricing agreement by Marstons.

—  (7)  43% of outlets had received a reduction in rent or an increase in beer discounts since their last rent review.

Code of Practice Effectiveness

6.  From an ALMR perspective the acid test of the Framework and Company Codes' effectiveness is whether they result in a rebalancing of the relationship between landlord and lessee and reduce the disparity in the share of the profits each side earns from the tied outlet; this more than anything is the root cause of dispute between landlord and lessee. The evidence from our members suggests that, for existing lessees, the new Codes of Practice have had little material impact on their day-to-day operations.

7.  The Framework Code of Practice is silent on substantive commercial matters - the price at which beer is bought, the way in which machine income is rentalised and whether and how RICS guidelines will be followed. At best the Framework Code requires pub companies to make clear their policy in these areas; the obligation is for transparency not necessarily fairness.

8.  The wording of the Framework Code has provided sufficient leeway for pub companies to disregard or mis-interpret industry guidance and commitments given at the last Committee sessions without being in technical breach of their obligations. The BIIBAS enforcement regime has proved powerless to act as a check on this type of behaviour as it falls outside their remit. This is a major weakness of the self-regulatory system and one which must be addressed as a matter of urgency.

Rent Setting - RICS Guidance & Benchmarking

9.  During the course of 2009-10, the Royal Institution of Chartered Surveyors reviewed and revised its valuation guidance on the setting and review of rents. For the first time, lessee representatives were involved in this process, including ALMR Council member, Garry Mallen. The end result is immeasurably better and the RICS has confirmed that a correct interpretation and application of the guidance should result in a tied tenant being no worse off than a free of tie tenant. The RICS is to be commended for its robust and rigorous reassessment of both its role and the guidance itself.

10.  Both at Mediation and in giving evidence to the BIS Committee in 2009, the BBPA and landlords undertook to abide by the revised RICS guidance once published. Despite this, the Framework Code only obliges companies to follow RICS guidance in respect of the disregarding of goodwill. Other elements - such as the establishment of FMT and the use of benchmarked operating costs are not included.

11.   A snapshot survey of our members who had recently undergone a rent review, found that no BDM was aware of the RICS Guidance or was familiar with its provisions and they were routinely disregarded. Our survey found evidence of routine inflated FMT volumes far in excess of average barrelage. It is now widely accepted that beer volumes have declined across the market as a whole over the past 5 years ie. since the last rent review agreement, yet no rent review carried out amongst our membership since the Code of Practice took effect reflects this. In fact, in 29% of cases, the initial rental bid was based on a barrelage in excess not only of the previous rental agreement but in excess of actual trade in the intervening period.

12.  For example, in one rent review case drawn to our attention by members, the FMT set in 2005 was 325 barrels. The site has never achieved this and despite annual volume decreases of more than 4% over the past review period, the initial FMT proposed by the pub company at rent review was 387 barrels. In another case, the incoming tenant took on a site based on an FMT of 200 barrels in 2005, despite the fact that, for the five years previously, it had traded below this. The pub company has proposed an FMT of 320 barrels at rent review. These are by no means isolated examples.

13.  The ALMR Benchmarking Report was established in 2007 to establish common KPIs for the sector.[3] For the past two survey rounds, changes have been made to allow an analysis of the different cost and profit structures of the leased and freehold estate and the tied and untied estate, allowing the benefit and impact of the tie to be assessed. The key findings are set out below:

—  (1)  The average controllable costs are higher in the freehold sector than they are in the leasehold sector but this gap has halved over the past year.

—  (2)  Freehold properties outperform leasehold sites on a range of indices - leasehold sites attracted half the capex investment of freehold sites over the past year and their gross margins were, on average, 3% lower.

—  (3)  The differential between tied and untied rent has been significantly eroded -The gap between tied and untied rents was 21% in 2009-10 and in 2010-11 it has fallen to just 6%.

—  (4)  At the same time, gross margins remain substantially higher in free of tie leased estates, particularly in respect of wet sales. Again, the differential between the two has narrowed over the past year from 19% to 11%.

14.  Whilst reference is made in the RICS Guidance to the use of industry benchmarks for assumptions on costs in the presentation of rental bids, our survey reveals no rent review was prepared by reference to them and when the lessee referred to the ALMR Report it was not accepted.

15.  Just 13% of rent reviews were prepared using a realistic assessment of operating costs ie 39% of turnover. In almost three quarters of cases, the allowances for costs in the rental bid were between 33-35% of turnover. The depression of operating costs, particularly when coupled with inaccurate assumptions on FMT results in a distortion of the valuation model and an over-inflated dry rent.

16.  BIIBAS is unable to provide a check in these instances because the Framework Code and company codes simply reference the RICS Guidance in limited circumstances and to industry benchmarks. As there is no absolute obligation to follow guidance in all cases, nor a requirement to explain or justify why it has been deviated from, no breach of the Code is incurred.

17.  Attempts have been made to engage with BBPA to develop the Benchmarking Survey into a genuine industry database along the lines recommended by the Committee. These have been fruitless. As a result, misunderstandings on the methodology and results persist. In contrast, positive discussions have been held with RICS and BII on ways to encourage participation and disseminate the results. There is, therefore, growing awareness of the survey amongst lessees but this is not matched by an awareness and acceptance of its findings by landlords.

18.  A meeting was held with Enterprise Inns in May 2010 to discuss the results and to compare them with an internal benchmark of costs and operating parameters prepared by a firm of accountants, Milestone, on behalf of over 700 Enterprise lessees. Despite the public dismissal of the ALMR Report as inaccurate and over-inflated, a comparison of the headlines from Milestone's figures and the 2010 report show a marked similarity. Indeed, Enterprise's own figures show a higher average operating cost than the ALMR in some instances and one which is far higher than that regularly used in rental bids[4].

Enforcement & Policing

19.  ALMR is a Board member of PIRRS and this body may well provide an alternative route to resolve these type of disputes. It is, arguably, the single biggest step to address concerns in the industry which has been taken as a result of the 2008-9 inquiries. Cases like this may well end up at PIRRS but, as they must first exhaust all internal procedures for resolving disputes on rent, this will take time.

20.  It is extremely disappointing, however, that awareness of PIRRS is not more widespread - the IPC/BBPA survey found 56% of existing lessees were unaware of PIRRs and awareness amongst new entrants was only marginally better. It suggests that whilst effort is being directed at making lessees aware of their obligations and responsibilities, less effort it being directed at communicating the potential benefits of new mechanisms. The relatively low level of cases heard by PIRRS over the past year should not be taken as evidence of the fact that rent reviews are now handled more fairly. The PIRRS Board is only now taking steps to publicise the scheme - 18 months after it started operating.

21.  The fact that the ALMR has received five times the call volume on rent and lease related matters compared to last year is testament to the inadequacies of the self-regulatory regime. Similarly the fact that the new BII mediation service has had to deal with four major cases in its first four months suggests that not enough is being done to change the day-to-day commercial experience of our members.


22.  All parties to the Framework Code acknowledged in 2009 that, in and of itself, a new Code could not be a full and final solution to all the issues raised by the TISC, BESC and BISC inquiries. The existence and accreditation of the codes of practice represents a modest step towards reform of the commercial relationship, but one which has yet to deliver in practice for the majority of existing lessees.

23.  The most intractable elements of the commercial relationship - the assumptions on which rent is based, dilapidations, contractual relationships and pricing - remain outside the remit of the Codes and hence the self-regulatory regime to effectively address them.

24.  For this reason, we continue to believe that a stronger, more effective Code of Practice is required as recommended by both the Committee and Ministers in May 2010. The Framework Code must be expanded to include more specific commitments on RICS guidance and AWP income as well as an obligation for major pub companies above a certain market threshold to make available a free of tie and guest beer option to all existing lessees as part of the rent review process. The lack of effective sanctions and the lack of a comprehensive dispute resolution mechanism leads us to conclude that the Code should be given statutory backing and include an independent redress mechanism.

20 June 2011

1   A copy of the questionnaire is attached at Appendix I Back

2   The BBPA said in oral evidence that this would mean "the income is shared only once" ie not rentalised and that lessees would be £1,250 better off on average. Back

3   The ALMR's Annual Benchmarking Report is the most authoritative survey of its kind and tracks a wide range of indicators, including costs, turnover mix and profitability, as well as market trends. A full copy of the 2011 Report is attached at Appendix 1  Back

4   An extract from Milestone data provided to ALMR by Enterprise is attached at Appendix IV Back

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© Parliamentary copyright 2011
Prepared 6 October 2011