Pub Companies - Business, Innovation and Skills Committee Contents

Written evidence submitted by Shepherd Neame Ltd

1.  Shepherd Neame Ltd, which is Britain's oldest brewery, dating back to the 16th Century, is an integrated independent family controlled brewery, based in Faversham, Kent. Shepherd Neame operates 359 No pubs, of which 44 No are managed, 15 No are leased and 300 No run as traditional tenancies. The Shepherd Neame estate is located within one hundred miles of the Brewery, predominantly in Kent, Sussex, Surrey, Essex and London.

2.  Following accreditation by the BII, Shepherd Neame formally implemented its Code of Practice in January 2011.

3.  We believe that the Code of Practice has engendered greater rigour, especially within the context of appointing new licensees. We consider this to have been beneficial for all parties, with potential new licensees obtaining better advice before taking on a public house, and a higher standard of professionalism being required before appointments are made.

4.  The Code of Practice has ensured that greater focus is given to following correct processes in all dealings with existing and potential licensees. We have resolved two potential disputes with licensees within the framework of the Code of Practice.

5.  Shepherd Neame maintains a close relationship with licensees and this is illustrated by the absence of referrals to PIRRS. In the event of disputes, licensees have full access to members of the Board. We hold regular social events to recognise outstanding performance and to celebrate long service.

6.  In the light of our experience to date, and additional benefits being provided for licensees, we will be redrafting our Code of Practice over the coming months.

7.  Shepherd Neame operates traditional tenancies, which have full protection of the Landlord and Tenant Act. The traditional tenancy provides a low cost and low risk business opportunity for potential entrants to the licensed trade. Both cost and risk are significantly lower for traditional tenants than for lessees operating FRI leases or owning freehold property.

8.  The cost is low because new tenants only have to purchase the trade inventory at ingoing, together with stock and the provision of a refundable trading deposit. Typically, the cost of taking on a tenancy is between £15,000 and £40,000 for a business, with a turnover of between £200,000 and £600,000, with some houses achieving a turnover in excess of £1 million. Typically, licensees make a profit of between £20,000 and £40,000, but this can rise to £100,000.

9.  Shepherd Neame retains and maintains the majority of the fixtures, eg water/gas piping, whilst the tenant provides the fittings, eg furniture/kitchen equipment.

10.  The risk is low because a tenant can issue six months notice at any time, without penalty. Shepherd Neame guarantees to take the house back and purchase the inventory if a new tenant has not been appointed during the notice period.

11.  The risk is low because Shepherd Neame maintains the structure of the pub, decorates and signs the exterior, provides building insurance and maintains fixtures.

12.  Shepherd Neame provides discounts and incentives (from 27 June 2011) for tied goods, but advises all licensees that the prices charged for tied goods are higher than would be obtained by a free trade customer. This represents the wet rent for the premises.

13.  The wet rent is reflective of trading conditions, effectively reducing when trading conditions are difficult. The benefits provided for tenants, eg insurance, repair, operational support, licensing, rating, purchasing benefits and Web site, equate to a value of £150 per composite barrel, ensuring that tied tenants have advantageous operational terms as well as the benefit of the low risk and entry cost for the business.

14.  Over the forthcoming year, we will be making additional investment in digital marketing, training and capital improvements to our tenanted houses. We have put in place a range of purchasing agreements, whereby individual tenants can purchase on similar terms to our managed house division.

15.  We believe that there is no market and consequently no market evidence for free of tie public houses, where the landlord repairs, maintains and insures the property, with these costs not being passed onto the tenant. Free of tie leases are all let on FRI terms, ie with the tenant exposed to the cost of structural repair and maintenance works and with building insurance charged back to the tenant.

16.  We believe that there would not be a realistic division of economic benefit, if traditional tenancies were operated on a free of tie basis. This would eliminate the availability of this low cost/low risk business opportunity.

17.  Within our estate, AWP income is of reducing importance, but we believe that the current system of income sharing is fair and transparent. If AWPs were operated on a "free of tie" basis, then such income would need to be added back to the divisible balance. This might increase overall costs for licensees and, given the length of rental agreements, would be less responsive to market conditions.

18.  We believe that estate wide provision of AWPs leads to higher quality and more frequent replacement of machines to the benefit of licensees.

19.  We believe that there could be considerable risk for illegal machines if AWPs were to be made free of tie.

20.  Shepherd Neame offers a wide range of cask conditioned ales to its licensees, together with seasonal/special event beers and output of our pilot brewery. We also provide a range of "foreign" cask ales on a regular basis.

21.  Cask ale is at the heart of our brewery and the tied estate is essential to retain viability within a highly competitive market.

22.  The provision of "guest beer rights" for cask ale could reduce cask volumes by 50% and would undoubtedly have an adverse impact on the viability of the brewery as a whole.

23.  The provision of guest beer rights would distort the wet rent/dry rent balance, resulting in the loss of the low cost/low risk business opportunity provided by the traditional tenancy agreement.

24.  We do not currently operate flow monitoring equipment within our traditional tenancies.

25.  We consider that to be effective, an industry benchmarking survey would need to take into account the different forms of tenure available.

26.  We believe that the provision of traditional tenancies ensures the survival of smaller houses, which would otherwise cease to trade.

27.  Shepherd Neame is committed to maintaining an open and transparent relationship with licensees. We regularly survey licensees to monitor the effectiveness of services we provide and our Business Development Managers achieve an approval rating of 80% plus.

17 June 2011

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Prepared 6 October 2011