Pub Companies - Business, Innovation and Skills Committee Contents


Written evidence submitted by Phil Jones  

INTRODUCTION

1.  The evidence I am submitting illustrates the unwillingness of Pubcos in this case Enterprise Inns to adhere to the previous recommendations of this committee and those of its predecessors. I have been the licensee of an Enterprise Inns pub where my parents have been leaseholders for five years. Our experience of running a tied pub has been financially unrewarding and emotionally demoralising. Our family have worked to build not only a business but a focal point for the community. We have worked hard to support several charities raising many thousands of pounds. Even in a business that trades at over two hundred brewer's barrels a year, in the five years we have traded, £798,000 has been paid to Enterprise Inns through rent and tied purchases a staggering 57% of our turnover and the business has yet to pay back its initial capital investment.

REASON FOR THE SUBMISSION

2.  There are fundamental problems with the business model currently being operated by the Pubcos that cannot be addressed through a self-regulating, voluntary code of practice. Unfortunately our experiences show that Enterprise Inns is incapable of changing its approach towards us and no doubt other tenants. The Pubcos are extracting a disproportionate income from their pubs leaving them almost all unviable for the tenants under the current tied agreements. This has resulted in a massive decline in pubs that are vital community assets. The evidence is all around us, in every town and village across the country; either boarded up shells that were once crucial community assets or hugely under-invested pubs that are struggling to stay in business.

RISK AND REWARD

3.  Since the last Committee report much time has been spent by the BBPA and its members stating that all the industries problems are now solved with the introduction of their new Company Codes of Practice, all observing the BBPA Industry framework and promising as a result of these codes there is no need for Government intervention. The reality of these codes is that they do nothing to change the balance of risk and reward between tenant and landlord of a tied pub. The codes have been used to distract attention from the real issue affecting tied pubs; the financial health of tied tenants. Like any business we do not expect hand outs but should expect (when entering into a contract) that contract to allow our business to operate freely and if successful be profitable for both parties. Pubco policies such as "Business Recovery Plans" would likely be unnecessary in almost all cases if trading terms were equitable from the outset.

THE ANSWER

4.  Key to redressing this balance, at the very least is offering all tied tenants the option, periodically, to go free of the tie with the option accompanied by an open market rent review. Although this is a key recommendation of the previous committee, the Pub Companies have failed to address it albeit a misleading attempt of offering free of tie pricing in new leases that come attached with Tie Release Fees and a direct uplift in rent and some leases go further to circumnavigate updated RICS guidance by removing rent reviews completely but still increase annually in line with inflation. These so called offers would actually result in us being further disadvantaged.

THE COST OF TIE

5.  The cost of the tie to tenants has been addressed on previous occasions by the committee however its relevance has never been so fundamentally important. In 2004 the Trade and Industry Select Committee commented that "… the actual wholesale price paid by pubcos' tenants is in reality higher than is available to free house operators because of the higher discounts that are available to these operators." In that report evidence showed that the differential between tied and free of tie tenants per brewer's barrel (BB) was around £100. The 2008 BEC report revealed in evidence submitted by the ALMR the differential between tied v free of tie discount had increased to around £140. Although Enterprise Inns submitted their own evidence suggesting that discounts of up to £42.12 a BB could be achieved if over 500 BB were sold, in reality the average tied pub sells 180 BB per year and Enterprise admit that nearly half of tenants receive no discount at all. In 2011 the widening gap between free of tie and tied prices becomes more evident.

(i)
ProductFOT Net Price Tied List PriceDiscount Per

BB Available

Carling £294.51 £476.14£181.63
Strongbow£225.79 £443.75£217.96
Stella Artois £323.96 £546.48£222.51

This table illustrates that the discount now available to free of tie tenants ranges from £180-£220 per BB. It should also be noted that the free of tie were supplied by an independent wholesaler without any negotiation. It would be reasonable to assume that if agreement to purchase a certain number of barrels was made further discounts would be available.

6.  The impact of the loss of discount to us is reflected in the gross profit margin realistically achievable from selling tied products. While Pubcos would argue they do not set the retail price, clearly we must attempt to remain competitive with other retailers including free of tie and managed outlets. As the next table demonstrates the loss of discount severely affects GP%. The table also shows that we are now paying at least 60% than available in the free trade.

(ii)
Selling Price to Achieve GP%:
ProductFOT TiedWholesale

Difference

40%  45% 50%  
Carling91.49145.69 59%£2.08£3.31 £2.27£3.61 £2.50£3.97
Strongbow77.49134.18 73%£1.76£3.08 £1.92£3.36 £1.88£2.11
Stella Artois93.49151.08 62%£2.25£3.78 £2.45£4.12 £2.70£4.53

(Prices shown are for 11 gallon kegs. Independent Wholesaler Price List v Enterprise Inns Retail Price List)

This table illustrates that a free of tie operator can charge significantly less for a product and is still able to produce a much higher gross profit margin.

7.  To put this table into perspective, this year the BBPA released statistics claiming that the average price of a pint in the UK is now £3.06. Using Carling as an example of a standard UK pint, in order for us to produce a gross profit of just 40% we would have to charge 23p over the national average. This would do further harm to our business driving more customers away to find cheaper alternatives such as free trade and managed competitors.

WET RENT + DRY RENT = OPEN MARKET RENT

8.  It has been argued by the Pubcos that they offer lower rents in exchange for higher beer prices that combined equal the open market rent for a particular business. This is simply not true.

Roger Whiteside has admitted that a genuine free of tie option would place their business model in "serious jeopardy". How can this be the case if the combination of income from tenants is equal to the open market rent? Surely if a tenant were free of tie then the Pubcos should be no worse off.

9.  The fact is that the total income from each pub is far in excess of the open market level and Pubcos are protecting bondholders and shareholders at the expense of their own tenants.

Take an example of a typical wet led community pub such as our own:

(iii)
TiedFOT
Turnover ex VAT350,000.00 350,000.00
Overall GP % wet/dry split 77%/23% (ALMR report 2010) 50%63%
Gross Profit £175,000.900 220,000.00
Costs @ 43% (ALMR report 2010)150,500.00 150,500.00
Operating Profit24,500.00 69,500.00
Rental Bid @50%12,250.00 34,750.00
Potential Profit For Tenant £12,500.00 £34,750.00
Tied Tenant Worse off by£22,500.00

This table shows a direct comparison of the same pub being let on both a tied and free of tie basis.

10.  The table above illustrates that a tied tenant although seemingly paying a lower rent, the operating profit is much lower due to the overall gross margin being reduced by the cost of the tie. The effect of the loss of discount impacts the gross profit by around £45k (225BBx£200). Therefore the total income for the Pubcos is approximately £69k (wet rent + dry rent) it is understood the Pubcos are achieving a barrelage discount of around £250. This is £34k more than an open market rent. This examples shows that not only the Pubco extracting double the open market rent from the business, the tied tenant's potential earnings are around £10k, at least 22k less than would be expected in a free of tie business. This is clearly not an equitable business relationship, nor is it a fair reward for a tenant running a successful business.

AVAILABILITY OF PRODUCTS

11.  Enterprise Inns boast an extensive Brand Portfolio although the reality is much of the market is foreclosed as many brewers cannot get their products listed. We have access to 74 cask ales currently on the Enterprise Inns price list with 67 SIBA delivered products a total of 141 products. A present there are over 3,000 cask beers being brewed in the UK which means we have access to less than 5% of the total cask ale market. The tied price list only has a very limited choice from any brewer. For example Wales's biggest brewer is Brains and we only have access to three of their products although in total, 14 ales are brewed throughout the year. This is a pattern that is seen consistently across the sector among brewers, severally limiting our opportunity to trial new products especially seasonal beers.

BRULINES

12.  Our experiences of the Brulines system and the procedures Enterprise Inns employ to police their pubs are totally unacceptable. We have found the system to be inaccurate on numerous occasions showing "phantom" data ie dispensing when the pub is closed. There is data showing before the system was in operation which was subsequently altered by a Brulines auditor although some dispense data still remains. There are many instances where line cleaning is not accounted for on cask ale lines and even line cleaning attributed to incorrect keg products. The Brulines system at our pub began to show a substantial positive variance of over 500gallons which was then eroded over five weeks where dispense data showed an average of 300 pints per day almost consistently for three weeks that then showed a negative variance of circa 500 gallons. We have requested an explanation of these 'anomalies' however we have yet to receive a response. The data has only ever been used accompanied with threats of fines and at the very worse forfeiture proceedings. There is no contractual mechanism in our lease nor in most, if in any at all that would provide the pub company with the ability to levy such "fines".

13.  We have received is a separate damages claim from Enterprise Inns in which they have accused us purchasing tied products from an unauthorised source. Enterprise has used Brulines data over a period of 34 weeks in an attempt to identify a variance between tied products purchased and dispensed. The total damages claimed was for 1.92 brewers barrels @ £200 = £384.00 with an administration charge of £300+VAT. It should be noted that Enterprise Inns have increased the damages rate from £150 to £200 per brewer's barrel. When an Enterprise Inns BDM visited he told us to sign the damages claim form to accept the fine. We refused as we know the data to be wholly inaccurate as we have not purchased any tied products from an unauthorised source.

14.   Notwithstanding our refusal to accept the fine Enterprise raised an invoice for the damages and added the amount to our rent account. Had we had a Direct Debit in place for our rent that amount would have been debited without our authorisation and in the absence any primary evidence to support their claim, contrary to the committee being assured by Bridget Simmonds in her oral evidence on behalf of the BBPA and its members that this would cease immediately.

15.  Since the conclusion of the NMO report commissioned by Brulines the company released an article entitled; "FACT OR FICTION—DEBUNKING THE MYTHS ON BRULINES" the article claimed:

19.  Brulines take the data in the report and apply a "fine" to the tenant for buying outside the tie. Incorrect, Where Brulines Volume Recovery Service is contracted, each variance is thoroughly investigated with additional evidence of buying out being sought. Brulines do not assess "fines" or "levies".

16.  Recently Enterprise Inns sent "undercover agents" into our pub on a Friday night in an attempt to establish whether we are breach of our lease (buying out of tie). Although we are not in breach of our lease, it did prompt a visit from our BDM with further accusations that we were dispensing beer form a cask ale line that was not registered by the Brulines system. He told us he had "physical" evidence that we were doing such and were in breach of our lease. He was asked to supply the evidence and we invited him to bring an engineer to the pub to inspect the lines to ensure that Brulines meters are working correctly. We have not yet had these allegations made in writing. We can only assume this is an example of the "bullying" tactics used by Pubco employees that have been highlighted many times in other evidence.

17.  These actions clearly demonstrate that Enterprise Inns do not wish to work with us and we can assume we are not the only pub that undergoes covert visits that result in allegations and threats from Pubco employees. It demonstrates they are continuing to issue fines to tenants relying solely on the data supplied by Brulines in the absence of any primary evidence. It also indicates that Brulines may be issuing statements for the purpose of misleading a Parliamentary Select Committee. It is also concerning that the timing of the allegations being made by Enterprise Inns coincides with our lease renewal this year. It would seem that these allegations are becoming more frequent in an attempt to build a case to block our renewal that we are entitled to apply for under the Landlord and Tenant Act 1954.

BUSINESS DEVELOPMENT MANGERS

18.  Since my parents took on the business in 2006, I've yet to be convinced the any countervailing benefits actually exist. Two successive Business Development Mangers have added no value to our business in fact they have been a particular burden on relationship and our ability to trade. Neither has shown any understanding the local demographics of the business and many local Enterprise Inns outlets have failed under their "management".

SUMMARY

19.  The Pubcos have had seven years in which to change their business model to redress the concerns of three Parliamentary Select Committees. The industry is in desperate need of fundamental change if we wish to see the continuation real pubs being able to serve the communities in which they are located.

20.  This committee must now recommend to the Government that since the Pubcos will not commit to voluntary change and they must act to ensure that small businesses are able to compete in a free and fair market. Many thousands of people have lost their businesses, homes; many families have been broken apart and most tragically of all people have lost their lives due to this continuation of an archaic and restrictive business model.

21.  As I have already stated at the very least this committee should recommend the implementation of a Statutory Industry Code of Practice enshrined in each lease that gives every tenant the option of a genuinely free of tie option accompanied by an open market rent review. I would go further to hope that this committee would recommend that the issue of Pub Companies and the tied business model be referred to the Competition Commission for a full inquiry in the practices of these companies ultimately resulting in the removal of the supply-tie from our industry completely.

22.  This current state of our industry could never have been the intention of the Conservative Government with the introduction of the Beer Orders Act 1989. It is time to look at the principles of that Act and consider the introduction of a New Beer Orders to ensure a free, competitive market for pubs and brewers alike. It is the very essence the Competition Act to prevent companies engaging in practices that distort, restrict or prevent competition.



 
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Prepared 6 October 2011