Small Business, Enterprise and Employment Bill

Written evidence submitted by the Campaign for Real Ale (SB 15)

1. Introduction

1.1. CAMRA, the Campaign for Real Ale is a consumer group with over 166,000 members and acts as an independent voice for real ale drinkers and pub goers. Our vision is to have quality real ale and thriving pubs in every community. Our decision making process is wholly independent of any commercial company or other organisation. We are not-for-profit and all proceeds are put back into achieving our campaigning objectives.

1.2. CAMRA supports the introduction of a Pubs Code and Adjudicator which we regard as necessary to secure a sustainable long term future for the tied pub sector. Self regulation has failed to address the problem of large pub companies exploiting a position of power and information asymmetry to impose excessive and unjustifiable costs on a significant proportion of tied pub tenants.

1.3. It is vital that a Market Rent Only option is included in the Enhanced Code (applying to companies with more than 500 pubs) so that tenants of the large pub companies are able to choose between a tied and non-tied arrangement. This choice will create a very powerful market incentive for pub companies to ensure that they offer tied agreements which allow small businesses to thrive.

1.4. CAMRA is pleased that the Bill establishes that the Secretary of State must ensure the Pubs Code delivers the following principles:

· That pub companies’ dealings with their tied tenants must be fair and lawful

· That large pub companies’ tied tenants must be no worse off than if they were free of any tie agreements

2. Tenant earnings

2.1. Survey evidence suggests that the majority of tenants tied to the large pub companies earn less than the minimum wage. A CAMRA commissioned survey in 2013 saw 57% of tenants tied to the large pub companies stating their annual earnings as being below £10,000 a year. [1] In contrast only 25% of free of tie tenants stated earnings below £10,000.

2.2. The same survey showed a similar pattern when considering the number of tenants declaring earnings of below £15,000 a year. A shocking 80% of tenants tied to the large pub companies reported earning less than £15,000 a year compared to only 40% of free of tie tenants.

2.3. There is no justifiable business rationale why tenants tied to the large pub companies are earning so much less than free of tie tenants. Instead of adding value to the businesses of their tenants it seems that the large pub companies are actually making it far harder for their tenants to succeed.

3. Pub Closures

3.1. Pub closures have increased from 12 a week in early 2012 to a current high of 31 a week. We believe a significant number of these closures are the result of large pub companies charging excessive rents and tied beer prices; making many of their pubs unviable which they have then sold on; often for redevelopment.

3.2. The table below sets out the current pub closure figures. It is clear that the Non Managed (mostly leased and tenanted) pub sector is significantly underperforming compared to the wider pub sector in terms of both net closures and decline in absolute numbers. We believe that this underperformance is due to tied pubs being made artificially unviable due to excessive rents and tied beer prices charged by the large pub companies.

Total Outlets

Tenure

Dec-13

Jun-14

Openings

Closures

Net Closures

Transfers in/out

Difference

% Change

Net Closures Per Week

Free

19,877

19,875

643

940

-297

295

-2

0%

-11.4

Managed

9,719

9,718

187

196

-9

8

-1

0%

-0.3

Non Managed

26,320

25,347

34

525

-491

-482

-973

-4%

-18.9

Total

55,916

54,940

864

1,661

-797

-179

-976

-1.7%

-30.7

3.3. Net pub closures provide the most accurate measure of closure rates. This is because the gross closure rates include a large number of temporary closures for refurbishment work or transfer of operator.

3.4. Punch Taverns and Enterprise Inns have both sold a significant number of pubs over the past few years. Punch Taverns sold 433 pubs in their last financial year, reducing to a total ownership of 4,096 pubs. [2] Enterprise Inns sold 428 pubs in their last financial year reducing the pubs they own to 5,493. [3] These figures alongside the net pub closure figures suggest to us that the underperformance of the large pub company tied pub model is a major contributing factor to an increased rate of pub closures.

4. Public support

4.1. CAMRA’s campaign on pub company reform has received strong public support. A petition calling for an end to the Great British Pub Scandal received 44,900 signatures within weeks at the start of the year. [4] During the last 18 months CAMRA’s members have sent MPs 10,837 emails calling for action to prevent pubs being put at severe risk of closure due to unfair practices in the pub sector.

4.2. CAMRA also commissioned independent consumer research in June 2011 which found that 64% of all adults think it is unfair that "at the moment public house tenants are tied into contracts that prevent them from buying beer on the open market at competitive prices." [5]

5. Market Rent Only

5.1. CAMRA are disappointed that the Bill does not make any provision for a Market Rent Only option for tenants of the large pub companies. Such an option would provide tenants with the choice of a non tied agreement for a higher rent or a lower rent in exchange for being tied. The fact tenants are currently denied this choice allows large pub companies to impose both high rents and onerous tie arrangements.

5.2. A mandatory Market Rent Only (free of tie) option for tenants tied to large pub companies is the simplest way to allow market forces to work, and remove the current disadvantage to tied tenants compared with free of tie tenants. It is essential that rents offered alongside free of tie agreements are at a fair, open market rate, which is why we welcome the Government’s intention to require that the large pub companies ensure rent calculations are signed off by a qualified surveyor.

5.3. A Market Rent Only option would incentivise large pub companies to act in a competitive manner and make their tied deals fair and attractive, as failure to do so would result in a high proportion of their tied tenants choosing to become free of tie. We would anticipate that as pub companies improve their deals to better compete with new free of tie options, only a small minority of existing tenants would opt to go free of tie.

5.4. Too many tenants are substantially worse off because of their agreement with their pub company. Tenants have told CAMRA:

"Over the year September 2011- September 2012 the differential between what I paid to my pub company and what I could have paid on the open market for all my drinks was £41,650. Our rent on that property is £42,000 – almost the same as the saving I could make if I was free of tie."

Tenant, pubco tied pub, Surrey

"We’d make £50,000 more just on beer. What the pubco’s don’t get is how much of that money I would then reinvest in my business. This is why pubs are dilapidated."

Tenant, pubco tied pub, Berkshire

"Price wise the difference is absolutely crazy. John Smiths is £133, but you can get it for £82 wholesale. Kronenbourg is £170, you can get it for £100. It’s not little amounts – it’s lots."

Tenant, pubco tied pub, Burnham

"For Rebellion [brewery’s] Mutiny I pay £150 for 72 pints, where I can go and get it for £75 from the brewer."

Tenant, pubco tied pub, Berkshire

5.5. A Market Rent Only option would substantially increase tenant profitability, enabling tenants to invest in growing and developing their business, and enhancing their consumer offer.

5.6. In order to avoid potential instability within the major pub companies, CAMRA would be supportive of the major pub companies phasing in the Market Rent Only option over a five year period at rent review, staggering the impact and giving them time to make tied agreements attractive. We would propose that the Market Rent Option should be made available in any one of the following circumstances:

(a) at rent review or lease renewal

(b) if the Pub Company makes a significant alteration to the price at which it supplies tied products to the tenant

(c) if there has been an event outside of the tenant’s control and unpredicted at the time of the previous Rent Assessment that impacts significantly on the tenant's ability to trade

(d) if a pub owning company proposes a sale of their property interest (ensuring developers cannot exploit tied terms to evict a tenant)

5.7. The Bill should be amended to include a Market Rent Only option for tenants tied to the large pub companies.

6. Guest Real Ale Right

6.1. In addition to a Market Rent Only option, CAMRA would like to see a guest beer right granted to all tied tenants of the large pub companies. The guest beer provision should be defined as a beer that is either cask conditioned or bottle conditioned to ensure access for smaller companies and improved consumer choice. This would allow tied tenants to stock a single cask conditioned or bottle conditioned beer supplied from anywhere in the world at a freely negotiated price.

6.2. Despite the growth in the number of small brewers the pub market is substantially foreclosed to them because they are unable to supply the minimum volumes, discounts and logistics demanded by large wholesale and pub owning companies. Hundreds of real ale breweries currently locked out of supplying a large proportion of their local pubs would see their growth prospects improve.

6.3. Tenants would also benefit as a guest real ale option would provide a modest boost to their profitability, and would expose large pub companies to a degree of competition on wholesale beer prices, thereby driving down prices on other products.

6.4CAMRA notes competition concerns have been raised regarding restricting a guest beer option to real ale but we believe that the inclusion of bottle conditioned beers overcomes any possible competition concerns. The 1989 Beer Orders established a right for tenants tied to the largest brewers to stock a single cask conditioned beer outside of any tie arrangement. The Bavarian Lager company lodged a complaint in 1996 with the European Commission that this measure amounted to a quantitative restriction on imports as at the time most beers sold outside of the UK were sold in bottles. [6] Following discussions and agreement with the European Commission the UK Government amended the guest beer provision in 1997 to include bottle conditioned beers. The 1989 guest beer provision was repealed in 2002 due to changes in pub ownership which meant that tenants were no longer able to benefit from the provision.

6.5 Alternatively, consideration could be given to a guest beer option that would define a guest beer as a beer brewed by a brewer anywhere in the world with an annual production below 200,000 hectolitres. This reflects the maximum production limit allowed through the EU’s small breweries’ relief

7. Tenancy at will and franchise agreements

7.1. CAMRA supports the Government’s decision to include franchise and tenancy at will agreements within the scope of the Pubs Code.

7.2. An exemption for franchise agreements would allow pub operators to avoid compliance by simply rebranding tied agreements as franchise agreements. Clearly where pub franchise agreements exist which do not include a rent then clauses in the Pubs Code relating to rent would not apply.

7.3. An exemption for tenancy at will agreements would likewise be problematic as these agreements can run on for many months and in some cases years. We do not think the Pubs Code presents any insurmountable barrier to the continued use of tenancy at will agreements and regard it as good business practice that a degree of due diligence is undertaken at the start of such agreements.

7.4. If an exemption were provided for tenancy at will and franchise agreements we are further concerned that this would create a market distortion by creating an incentive for greater use of such agreements.

8. The Family Brewers

8.1. CAMRA has long argued that companies with fewer than 500 pubs should be exempt on the basis that the family brewers’ tenancy agreements are fundamentally different from the long term leases offered by the large pub companies. CAMRA however notes the Government’s decision that the Pubs Code should apply to all tied pub companies.

8.2. Traditional brewery tenancies tend to be on shorter terms and present less risk as these agreements are much easier for tenants to exit from. Fewer than 1% of pubs operated by the regional brewers are operated on lease agreements. [7] In contrast, large pub companies offer longer term leases which present a much greater risk as tenants wishing to exit face the loss of any lease premium paid, dilapidation charges and are potentially liable to pay rent for the unexpired term.

8.3. In the UK the tied house system has been crucial to the survival of the family brewers. The value of the tie to regional brewers is demonstrated by the virtual extinction of medium sized brewers in the USA where tie agreements are not permitted.

8.4. A CAMRA commissioned survey in 2013 provides evidence to support our view that family brewer tenancies should be treated differently from large pub company leases. The graph below shows that 71% of tenants tied to the larger pub companies (more than 500 pubs) stated that they had a negative view of their beer tie agreement compared to only 49% of licenses tied to the regional brewers (fewer than 500 pubs).

8.5. On the basis that the Pubs Code is to apply to all pub companies regardless of size we would advocate moving the following requirements from the Core Code that applies to all into the Enhanced Code that applies only to companies owning more that 500 pubs:

· The requirement for all rent assessments to be signed off by a qualified surveyor

· The requirement to publish an annual compliance report

· The requirement to appoint a Compliance Officer

· The requirement to record all business conversations in writing

These changes would ensure that the Core Code impose no significant new requirements on the family brewers that they have not already voluntarily agreed to through their own existing Company Codes and the voluntary Industry Framework Code.

9. The De Minimis

9.1. We believe that the de minimis exemption for pub owning companies that employ fewer than 10 people is set at the wrong level. A number of small brewers will employ more than 10 people on the brewing side of their business meaning that even if they own a single tied pub they will be covered by the Code and Adjudicator. We believe that this will place a disproportionate burden on these small businesses and will deter other small brewers from investing in a small number of pubs to grow their businesses.

9.2. We would suggest an alternative de minimis exemption for any company that runs fewer than 10 pubs. This would be proportionate with Ministers’ intentions to exempt micro pub owning businesses from the scope of the Pubs Code.

10. Conclusion

10.1. CAMRA strongly supports the decision to introduce a Pubs Code and Adjudicator to protect Britain’s pubs from being put at risk of closure due to the unfair business practices of the large pub companies.

10.2. We believe that the Bill should be amended to:

· Instruct the Secretary of State to ensure tenants tied to the large pub companies are provided with Market Rent Only and Guest Beer options

· Provide an exemption from regulation for companies that own 10 or fewer pubs

10.3. We further believe that the Government should be encouraged to look at moving some of the more onerous requirements in the Core Code into the Enhanced Code in order to protect the family brewers whose tenancy model poses substantially less risk to tenants and has not led to widespread pub closures.

October 2014


[1] CAMRA commissioned CGA Strategy to conduct a telephone survey of 866 tenants. The full report is available from CAMRA on request.

[2] Punch Taverns – Annual Report 2013

[3] Enterprise Inns – Annual Report 2013

[4] https://you.38degrees.org.uk/petitions/save-our-pubs-from-corporate-greed-let-s-call-time-on-the-great-british-pub-scandal

[5] CAMRA Tracking Omnibus Survey June 2011

[6] europa.eu/rapid/press-release_CJE-10-63_en.pdf

[6]

[7] http://ec.europa.eu/competition/consultations/2009_vertical_agreements/independentfamilybrewersbritain_en.pdf

Prepared 15th October 2014