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
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
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.
The survey results cover 178 outlets and all five of the national
pubco and super regional landlords. The key findings are set out
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
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.
of existing leased outlets are subject to a machine tie - all
Punch, Greene King and Marston lessees surveyed were tied for
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.
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.
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.
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.
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
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
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
13. The ALMR Benchmarking Report was established
in 2007 to establish common KPIs for the sector.
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:
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.
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,
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%.
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.
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
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
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
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
An extract from Milestone data provided to ALMR by Enterprise
is attached at Appendix IV Back