Small Business, Enterprise and Employment Bill

Written evidence submitted by Paul Crossman (SB 65)

Background

My name is Paul Crossman and I am a licensee living and working in York. I am involved with four pubs, one leased by myself from Punch Taverns and three more which are owned freehold by myself and a business partner.

I have had my Punch lease since Sept 2007. We bought our first freehold pub from Marstons in 2008, our second from Punch in 2011 and our third also from Punch in 2013.

All of our pubs are wet-led operations specialising in cask ale.

1. Introduction

1.1 This report is intended to lend support to the contents of the bill, and to counter any possible claims that it should in any way be "watered down". Indeed quite the contrary, the intention is to highlight the vital need for the Bill to go further by including a "Market Rent Only" (MRO) option.

1.2 As someone who operates both tied and free-of-tie (FOT) pubs I hope I am well placed to comment on the differences between each sector, and therefore offer some insight as regards the complex array of grievances likely to be brought before an adjudicator.

1.3 My experience is that the tied model as operated by Punch Taverns (and by extension other large "pubcos", whether brewers or not, who operate a similar model) is highly detrimental to the individual small businesses which are actually operating their tied pubs.

Particular areas of concern are:
Highly excessive tied wholesale drinks prices.
Total lack of control over tied wholesale prices.
Limited product choice.
Excessive rents.
Flawed rent assessments under non-binding RICS guidelines.
Lack of "countervailing benefits" otherwise known as "SCORFA" (Special Commercial or Financial Advantage).
Punitive contractual obligations enshrined with pubco leases.
An imbalance of risk and reward within the relationship between pubco and tenant.
An imbalance of power within the relationship between pubco and tenant.
An imbalance of sophistication between the parties upon entering a tied agreement.

1.4 It is therefore my strong view (consistent with the conclusions of the four recent Select Committees) that "self-regulation" has not worked that reform of this market is now desperately needed. Therefore, unlike the authors of some of the other submissions to the committee (including Punch Taverns themselves), I very much welcome the aim of this Bill to enshrine in law the principle of "fair and lawful trading" and in particular the prime principle that "the tied tenant should be no worse off than the FOT tenant".

1.5 The Bill currently proposes a statutory code and an adjudicator, both of which are very welcome suggestions, and may well prove part of an effective solution. However, due to its sheer scale, I fear the task facing the adjudicator will quickly assume overwhelming proportions, resulting in delays in processing cases, to serious detriment of the interests of individual tied licensees and the wider pub industry. Furthermore each case actually brought before the adjudicator is highly likely include technical complications and intricacies making the process cripplingly labour-intensive and time-consuming when in fact, for most struggling licensees, time is of the absolute essence and all other resources are similarly limited.

1.6 It is therefore my firm opinion that there needs to be another swift and effective option included in the form of MRO. This is a simple and elegant solution which would provide the speedy resolution so desperately needed by struggling licensees throughout the industry.

1.7 I believe the introduction of MRO is perfectly justified by continued industry claims that the tie is beneficial to lessees due to the SCORFA they claim is on offer. It is important to note that ONLY the pubcos and those that represent them or benefit directly from them, are making these claims. If they are to continue to make such claims in the face of enormous evidence to the contrary then they must be prepared to have those claims put to the test. If their claims are true then they have nothing to fear, as lessees will clearly choose to remain tied. However, if lessees are receiving insufficient SCORFA in return for being tied then they must be able to opt out of the relationship since the pubcos will have defaulted on the legal obligations which justify their operation of the tie in the first place.

2 The Need for Statutory Intervention

2.1 Tenant earnings are under intolerable pressure in most cases (CAMRA quote 57% of tenants tied to the large pub companies stating their annual earnings as being below £10,000 in 2013 , as opposed to only 25% of free of tie tenants ).

2.2 This higher incidence of l ow earnings is a function of many factors which conspire against tenants , but ultimately it illustrates the fact that too little profit is being left in pub as a result of the problems with in an unfair tied relationship .

2.3 Excessive profits are being extracted from individual sites by pubcos in the form of vastly inflated wholesale drinks prices as well as in unreasonably high property rents. This arrangement means that the pubcos benefit twice over from the efforts of each of their tenants, since they not only make huge profits on the drinks, they then also enjoy an unreasonable share of the resultant (reduced) net profit (usually 50%) in the form of fixed "dry" rent on the buildings .

2.4 This situation all too often results in hardship and genuine suffering for tenants, and accelerates business failure. It also contributes greatly to the ongoing dilapidation of our national pub stock , and the accelerated level of pub closures we are currently seeing (31 per week at present). The long-term failure of the abusive tied pubco model has resulted in business failure and hardship for many licensees, and is culminating in the decimation of our pub heritage, as debt-laden pubcos are raising funds by divesting themselves of their assets (our pubs) and reinventing themselves as simple property companies through participating in alternative use conversions. (In this they are of course aided by our flawed planning laws.) The estates of both Punch and Enterprise for example have roughly halved in size over the past eight years or so, and it is no coincidence that we have permanently lost 20% of all of our pubs in the last 15 years. This is frankly catastrophic.

2.5 Many pub closures are unnecessary and are the direct result of failures in the tied model. Pubcos are causing pubs to become "non-viable" through their profiteering and neglect, and then using that non-viability as a justification for disposal of redevelopment. Our three free houses are all ex-pubco. One is a work in progress and two are already utterly transformed. Both of those (formerly moribund) pubs are now award-winning, thriving social hubs which are deeply valued by their local communities, employing many staff and contributing enormously to the local economy and of course to the exchequer. (One of our thriving free-houses would now be two homes if Punch’s own planning application had been granted three years ago.)

2.6 It should be noted that with so many tenants on low earnings the cost to the exchequer in tax credits is enormous, as are the losses in potential income tax and trade-related taxes.

2.7 There are several specific factors within the typical tied arrangement which conspire against tenants , all of which will require some attention from the adjudicator in each individual case . Points 4-7 below simply begin to give an indication of the scale of the task facing the adjudicator.

3 Wholesale Prices –Excessive leve ls and inability to negotiate.

3.1 Pubcos ofte n refer to the " discounts " they offer their tenants, but it is important for the committee to unders tand what is meant by discount in this context. The use of the term discount could be interpreted to mean that they are sharing with their tenants the benefits of their enormous buying power , and in fact the pubcos themselves attempt to present these "discounts" as SCORFA . This is absolutely NOT the case .

3.2 Breweries in the UK have initially high wholesale list prices which are ALWAYS discounted heavily to anybody in the trade. The more " buying power " a customer has the more discount they typically command. Due to their scale the pubcos command huge buying power and therefore receive large discounts , higher than can be achieved, for example, by ourselves in our three freehold pubs. Yet it is crucial to understand that the " discounts " they quote to their tenants are based on the initial wholesale price quoted by the breweries themselves, and invariably fall very far short of the level of true discount achievable by any ( single ) freehold pub dealing direct with the brewery.

3.3 Consequently t he fact is that in my tied pub I routinely pay 70-90% MORE for tied beer than we pay for the exact same (or equivalent) drinks in our three freehold pubs.

3.4 If tenants were actually sharing the benefits of pubco buying power then this would be an example of SCORFA, and yet the fact is that tied tenants of the large pubcos are invariably paying significantly higher wholesale prices than their FOT counterparts. Wholesale price differentials are a n absolutely crucial issue which would frequently be brought before the adjudicator.

3.5 This problem is of course exacerbated by the complete inability of tied tenants to exercise any control over the wholesale prices they pay. They cannot shop around and have to acce pt the significant annual price increases imposed upon them by their pubco. This means that tied tenants are denied a fundamental ability required by any small business, that of negotiation .

3.6 In our freehold pubs our buying freedom allows us to maintain our gross profit levels at a viable level, while keeping price increases to our customers to an absolute minimum. Tied tenants are comple tely unable to do this and therefore have no choice but to try to pass on the annual above-inflation price increases (typically 4-5% every year) imposed by their pubco. Given the fact that those prices are already 70-90% higher in our case it is clear that there is an ever widening gulf opening up between the prices w e must charge in our tied pub as opposed to our freehold pubs . This is one of the most worrying aspects of the beer tie for many tenants, as logically it can only lead to one eventual outcome in either the short or longer term ; i.e. business failure due to being rendered incapable of achieving a viable margin at a price which the market will tolerate . Relative annual price increases would also be an issue for the regulator.

3.7 This gulf is also inevitably widening in relation to the gross profit (GP) margins achievable in each sector. In our freehold pubs we are able to keep prices reasonable and minimise annual retail price increases whilst also maintaining a viable GP of around 60% (universally recognised as the optimum minimum level of GP for a pub) . In our tied pub we have to charge 25-40p more for most drinks, and yet we struggle to achieve a n average GP of m ore than 43% on our tied products. Such a low GP is intolerable in any pub, but is a particular problem for a tenant with a "fully repair ing " lease (as we have) which effectively imposes all the cost r e sponsibilities of a free house . GP inequality is another crucial issu e requiring attention from the regulator.

3.8 Incidentally GP is a particular problem for pubs dealin g largely in cask ale. All four of our pubs are entirely wet-led cask ale outlets, so we can quite legitimately claim to be experts in this field . Many feel that t he pubcos consistently fail to acknowledge the limited yield possible from cask -conditioned ale , to the further detriment of their tenants’ businesses. During my 2012 rent review I produced a detailed report explaining why it was quite impossible to serve the entire conte nts of a cask of real ale. M y conclusions were disputed and rejected despite the fact that my estimates were without any doubt demonstrably and factually " conservative " . This is a n extremely serious issue of "fair and lawful trading" with very far-reaching implications, which perfectly illustrates the urgent need for a statutory code, and an adjudicator with meaningful power s .

4 Lack of product choice

4.1 Tied tenants have a severely restricted product choice in comparison to their FOT counterparts. This places them at a s e rious competitive disadvantage in a changing market which is increasingly embracing local products, as well as innovative new styles of beer . Free houses can adapt quickly. In our tied pub we can only move at Punch’s relatively glacial corporate pace.

4.2 This is a seriously restrictive factor inhibiting the ability of tied pubs to compete in a fair market and places tied tenants at a very real disadvantage. Restricted product choice (and lack of agility) is another pressing issue which requires attention from the statutory code and the adjudicator if the tied tenant is truly to be "no worse off".

5 Excessive rents and a flawed rent assessment process

5.1 Last year a benchmarking survey showed that tied rents were equal to and in some cases in excess of FOT rents.

5.2 One of the major items the pubcos claim to offer as SCORFA is a reduced rent in return for higher tied drinks prices. They are largely manifestly fail i ng to deliver on that commitment.

5.3 A major part of the problem with rents is the manner in which they are assessed whereby surveyors are able to interpret the non-binding RICS guidelines in a partisan fashion. Therefore , at one point during our own ren t review for example, the surveyor acting for Punch estimated that our rent should be exactly double the figure suggested by our own surveyor. This is a case of two RICS surveyors apparently applying the same RICS guidance but achieving hugely different conclusions based on the interests of their clients. Throughout our review we were re ferred to by Punch’s surveyors as inefficient operators (despite Punch having heaped praise upon us in the preceding five years, during which we increased trade by 50% against a backdrop of the most catastrophic years on recent record for the wider pub industry).

5.4 It is widely believed by licensees that pubcos ALWAYS begin a rent review on the assumption that the tenant is not achieving "Fair Maintainable Trade" and is thus not a "Reasonably Efficient Operator", even when that tenant is clearly exceptionally successful. This gives rise to the frequent allegation tha t pubcos always seek to "penalise success". My own experience tallies exactly with this allegation. RICS themselves are completely failing to remedy this situation, and are seen by many as part of the problem. Furthermore the PIRRS route is mistrusted by many licensees, including myself, due to its industry patronage and lack of transparency. The adjudicator needs the power to intervene in flawed ren t assessments , and if necessary must to be able to set rents on an impartial basis when requested by lessees .

6 Lack of counterva iling benefits (SCORFA)

6.1 Under EU law the pubcos are permitted to operate a tie on the strict condition that they offer their tenants " countervailing benefits" (otherwise known as SCORFA) in return for trading under the restrictions of the tie.

6.2 It is my experience , as well as that of every publican with whom I have discussed the matter, that Pubcos fail to provide sufficient SCORFA , (I have mentioned "discounted" drinks and rents already) thus leaving their tenants at a very serious competitive disadvantage.

6.3 The services which Punch and other pubcos claim to offer as SCORFA can invariably be sourced for less on the open market by a FOT operator, and many of them are actually unnecessary and unwanted. SCORFA is an issue which nee ds scrutiny by the adjudicator and within the statutory code .

7 Imbalances of risk and reward, power and sophistication within the relationship between pubco and tenant.

7.1 Tenants commonly enter into agreements where they are the less sophisticated party. Even where professional advice is taken they are unable to foresee the intricacies of the forthcoming tied relationship, which are of course completely clear to , and dictated by, the pubco.

7.2 Tenants have very little power to affect the relationship once they are subject to a tied agreement, and are generally intimidated by the prospect of challenging their far better resourced "partners".

7.3 The relative risk faced by a tenant is huge in comparison to that faced by the pubco, as testified by the great many victims of pubco "churn" who have lost not only their homes and businesses, but in many cases their savings, their solvency and their health, and yet this is in no way reflected in the relative rewards available to lessees.

7.4 Imbalances of risk, reward, power and sophistication all have important implications in terms of "fair and legal trading" and are all therefore vital considerations for the statutory code and the adjudicator.

Conclusion

Statutory intervention is desperately needed by tied tenants, and therefore the contents of this Bill are very much to be welcomed. However the problems in the tied sector are both h ighly extensive and complex , factors which will clearly inhibit the pace of remedial action on a case by case basis.

Pubcos have consistently abused their position and continue to do so, placing their tenants at a severe disadvantage, profiting unfairly from a protected market which in turn distorts competition in the wider industry and accelerates business failure among their tenants.

Due to the failings of their business model large pub companies are currently actively exploiting our inadequate planning laws and divesting themselves of pubs, as well as leasing for alternative use s as they realise they can increase profits elsewhere.

Pub closures (currently recorded at 31 per week) are having a devastating effect on our communities, our precious pub heritage and our economy. They also have an immeasurable human cost in terms of the lives of those being evicted. There is a constant stream of evidence to support this assertion in terms of local and national press stories about pub closures and tenant evictions by pubcos.

Tenants need to be given more power to improve their own prospects, and time is very much of the essence .

The most vitally needed option is MRO as this will give tenants the immediate bargaining power they so desperately need in order to act in the best interests of their businesses, as well as those of the communities they serve, the wider pub industry and ultimately those of the exchequer .

The supposed dangers of MRO are being absurdly overstated by the pubcos and their lobbyists. Claims of 1300 or so pubs closing as a result must (if even to be believed) be contrasted with the current reality of 31 per week which will equate to 1612 pubs this year alone under the current circumstances.

October 2014