Small Business, Enterprise and Employment Bill

Written evidence submitted by Greene King (SB 09)

Background to Greene King

1. Greene King is one of the leading pub and brewing companies in the UK. We run 1,900 managed, tenanted, leased and franchised pubs; restaurants and hotels; and we have also been brewing award-winning ales for over 200 years. We employ 23,000 people, roughly half of whom are under the age of 25. As part of our continued investment in the business, our estate and our people, we also operate a successful apprenticeship scheme and recently announced our intention to create an additional 2,000 apprentices in 2014, to add to the 2,500 we already have. We have run our business very successfully for over 200 years based on the tied pub model. Over 75% of our tenanted and leased estate of 860 pubs is operated under a traditional short-term tenancy agreement.

2. We are recognised for the overall quality of our pub estate and beer brands, which has been achieved by long-term investment and a continued focus on providing customers with great value, service and quality.

Executive Summary

3. This submission focuses exclusively on the elements of the Bill which relate to pub companies and their tenants, contained in Part 4 of the Bill.

4. Greene King does not believe there is a proven need to put a code of practice on a statutory footing, but as legislation has been deemed necessary, it should be proportionate to the problem. We have significant concerns about elements of the Bill and there are a number of changes we feel should be made to the Bill in this context.

5. The definition of ‘large pub-owning businesses’, which come under the scope of the enhanced code, to include companies with over 500 pubs, is entirely arbitrary and will create competitive disparities. Greene King owns over 500 pubs, but over 75% of our tenanted and leased estate consists of traditional short-term tenancy agreements, and we have had no recognised breaches of the voluntary code. Measures should instead be targeted at the more damaging, longer term, fully repairing and insuring leases.

6. The requirement for parallel rent assessments will be impossible to achieve in an accurate manner and will significantly distort the market.

7. The definition of what constitutes a pub should be amended, to ensure that tenancies-at-will (TAW) are not included. This would avoid a damaging situation whereby many pubs would be forced to close on a short-term basis due to the nature of the requirements in the code.

8. We believe there should be greater clarity around the record taking requirements for Business Development Managers in the Bill.

9. Any proposals which would add a free-of-tie option to the legislation should be avoided, as this would at the very least lead to significant pub closures and job losses.

Introduction

10. We welcome the opportunity to provide evidence to the Small Business, Enterprise and Employment Public Bill Committee. Our evidence focuses exclusively on Part 4 of the Bill which addresses pub companies. While Greene King does not believe there is a proven need to legislate in this area, we note that the measures in the legislation are, for the most part, more sensible and workable than previous proposals, some of which have included changing the nature of the tie or removing it altogether. It is our firm belief that the tie is not broken and that any changes, which materially affect the way in which it operates, will result in significant and damaging unintended consequences, including pub closures and job losses.

11. Despite this, we remain concerned about a number of the measures in the current form of the Bill, which would add costs and bureaucracy to an industry that is already struggling under the weight of red tape imposed upon it in the last decade. Aside from the smoking ban, credit crunch and recession, pub companies and their tenants have also had to deal with rising alcohol duties (which remain high despite the welcome recent cuts and removal of the beer duty escalator), a growing preference for consumers to drink at home, changing demographics and upward pressures on costs.

12. In this submission, we set out our concerns with certain aspects of the proposed legislation, and also make clear the importance of the Beer Tie, and the need to ensure that any proposals to add a mandatory free-of-tie option to the Bill are rejected, as well as other measures, such as the parallel rent assessment proposal, that aim to replicate the impact that a free-of-tie option might have on the industry.

Aspects of the Bill that should be addressed

13. We are concerned with the inclusion of TAWs in clause 61 (2) regarding the definition of a tenancy. We do not believe TAWs, which are flexible short-term tenancy arrangements, should be included in the Bill and within the scope of the Code. These temporary arrangements are specifically excluded from the current Industry Framework Code. In many cases, pubs would be closed if they faced the full range of provisions of the Code on a short-term basis. It is not in a pub company’s best interest to run short-term agreements except when transitioning from one long-term licensee to another. The exclusion of short-term agreements would not generate unintended consequences and we therefore believe that any short-term agreements of less than a year should not be included in the Bill and within the scope of the Code.

14. The definition of a ‘large pub-owning business’ as one owning more than 500 pubs in clause 60, and the inclusion of such businesses in an ‘enhanced’ code, will create competitive disparities in the market. The 500 pub threshold figure is arbitrary and the enforcement of an enhanced code for certain pubs will provide greater incentives for prospective tenants to choose one pub company over another, while also ensuring that a larger regulatory burden falls on companies such as Greene King. The fact that Greene King has had no recognised breaches of the voluntary code shows that the 500 pub threshold fails to acknowledge the real cause of the perceived problems in the industry. Greene King operates the same tied model as the smaller, family brewers, yet the legislation shows no consideration of this. The arbitrary 500 pub threshold will penalise companies like Greene King for having run a successful business.

15. Should the existence of an enhanced code be deemed necessary, it should address the more damaging leases – the long-term fully repairing and insuring leases, rather than the traditional short-term tied tenancy agreements which make up the vast majority of our estate, and are the tenancies operated by the family brewers. Whereas the short-term tenancy offers a low cost entry and ease of exit for tenants, the longer-term leases require a higher level of investment from the tenants, who also receive less support and are tied into longer contracts. The Government itself identified the longer-term lease agreement as one of the principal causes of many of the problems faced by the pub industry in 2011. Targeting these more damaging leases would be a more direct means of addressing the real problem, while also avoiding the need for the arbitrary 500 pub threshold.

16. The requirement under clause 36 (6) for ‘large pub-owning businesses’ to provide parallel rent assessments will only serve to add more complexity and confusion for potential tenants, which runs counter to one of the key objectives of the Statutory Code. It will hinder, rather than improve, our ability to explain the construction of a rent assessment in a clear and transparent way. It will be impossible to produce an accurate comparison between tied and free-of-tie rents through the parallel assessments due to the substantial number of different and changing criteria that must be taken into account, and cannot be taken in isolation, when compiling such an assessment. There is near universal agreement from all stakeholders that the requirement for parallel rent assessments would be misleading and unnecessary, and would represent a backwards step in this process. We therefore believe that this requirement should be removed from the legislation. 

17. We believe there should be greater clarity around the record taking requirements for Business Development Managers in the Bill. Requiring this for every meeting or conversation would add a huge layer of bureaucracy to operations and could threaten the strength and nature of relationships between Business Development Managers and tenants. We suggest that record taking is only required for discussions involving commercial terms and conditions between landlord and tenant and not for all business or personal conversations. Examples of what could be included would be discussions on rent, beer prices or repair liabilities, while examples of what should be excluded would be help on running promotional activity or discussions about changes to the local competition.

The Beer Tie

18. We were concerned about calls during Second Reading for the legislation to go further and include a mandatory free-of-tie option for tenants. This would have a hugely negative impact on Greene King. We have operated pubs under the Beer Tie for over 210 years and strongly believe the model is not broken and that it will continue to evolve over time as an integral part of our diversified business.

19. Our short-term tenancies are based on achieving the best alignment of interests between the company and its tenants. Through these short-term tied tenancies, we are able to offer people seeking to run a pub low cost entry to self-employment, and in many cases a home, while also providing ease of exit. Tenancies have lower rents and the responsibility for maintaining the building falls on the Pub Company. The tied model therefore continues to provide a low risk business opportunity with what can be a high return on investment.

20. The introduction of a mandatory free-of-tie option would have significant unintended consequences, including:

§ Pub closures. Independent economic analysis, commissioned by the Government and conducted by London Economics, delivered what we believed to be a very conservative forecast, in finding that a free-of-tie option would result in 700 to 1,300 pub closures. We believe the impact would be much more significant, resulting in pub closures well above the upper estimate given by London Economics

§ Job losses. These would come about through pub closures, changes in the brewing industry, and to distribution and supply chains. Again, we believe that the London Economics report significantly underestimates the number of job losses that this would cause, but even their forecasts predicted that it would cause between 3,700 and 6,500 job losses. In reality, it would be much higher, with the impact felt across the country.

§ A substantial decline in pub investment.

§ A restriction in consumer choice. There would be fewer pubs and fewer beers available, as market share in brewing is consolidated amongst a small number of the most profitable producers.

§ The threat of brewery closures. Several breweries may cease production after centuries.

§ A reduction in tax revenues to the Exchequer.

September 2014

Prepared 15th October 2014