Small Business, Enterprise and Employment Bill

Written evidence submitted by Alan Yorke (SB 69)

Comments on the Small Business, Enterprise and Employment Bill: Pub Companies

1. Summary

2. My name is Alan Yorke. I was a former tenant of the Foresters Arms, Forest Row, East Sussex, in a pub owned by Enterprise Inns. I was the first person to use the Pub Independent and Conciliation Service (PICAS), which I found quite frankly to be a farcical experience and flawed process.

3. Since leaving my pub in 2012, I have analysed the pub self-regulation process in detail and written numerous letters to stakeholders within the self-regulation process identifying weaknesses, contradictions and non-enforcement of self-regulation mechanisms. Unfortunately, there is an inability and reluctance within the various self-governing bodies to effectively address their shortcomings.

4. The necessity for a statutory code and independent Adjudicator as proposed in the Bill is therefore necessary, supported and very welcome as the current self-regulation regime is ineffective, self-serving and not sufficiently independent.

5. Information on the churn rate of tied pubs not given to BIS or this Committee

6. BIS, in drafting the proposed Code, and this Committee in considering this Bill, have not been given accurate information on the "churn rate" by pub company landlords or the BBPA. Although this information is easily available from their own records and has no commercial sensitivity, pub companies have never publically disclosed the rate of churn within their estates, particularly the number of agreements that were terminated before the agreement end date due to business failures by tenants. I believe that if aware of accurate "churn rates" within the tied sector, this Committee would better understand the demand for a Market Rent Option (MRO).

7. To give this Committee an indication of possible churn, I attended an Enterprise Inns "Business Foundation" course in London in July 2011. Based on my own research (through websites, Facebook and TripAdvisor), it appears that only 9 out of the 17 attendees were still in their pubs in October 2014. This suggests a churn rate of 47%. A model that churns so many tenants in a short period of time cannot be defended.

8. There are two other matters to consider. Firstly, if tenants were better informed, which is one of the objectives of the current self-regulation regime, the "rate of churn" should have reduced significantly in recent years. It would be expected that the BBPA and the pub companies would be trumpeting reduced "churn rates" as a key success indicator of self-regulation rather than merely stating self-regulation is working "because we say it is". Secondly, the BBPA quotes from a CGA Survey on the number of pubs in each sector to justify its bizarre contention that the tied model is more successful than the free of tie sector (using absolute pub numbers) but yet will not use accurate information from its own members to support its arguments. I cannot and do not believe that this is an accidental oversight.

9. London Economics Report

10. As some Committee members have quoted from the London Economics report, it is important to note the significant shortcomings in this report, some of which have been brought to the Committee’s attention by other stakeholders. The most bizarre inclusion in the report is London Economics claim that a single "guest" beer option would have a far greater impact on pub closures than if all beers were "guest" (free of tie). This conclusion discredits their report.

11. Another major flaw in the London Economics report is that it ignored current trends in pub closures. Whilst claiming that the introduction of a statutory code could result in 1600 pub closures, London Economics did not predict the current closure rate if a statutory code was not introduced. In other words even if Government did not introduce a statutory code, there is a possibility that more than 1600 pubs would close based on the tied model as it is currently operating. Why this scenario was not tested by London Economics is astounding and further discredits their report.

12. Temporary Agreements

13. A tenant running a pub business has to make certain financial investments (pay a deposit, purchase stock, employ staff and acquire fixtures and fittings, amongst others). These investments are incurred regardless of whether a prospective tenant signs a temporary agreement or a standard agreement. Why these financial investments should not be afforded protection under the Code when a tenant has entered into a temporary agreement is not understood. The inclusion of temporary agreements in the scope of the proposed statutory code is therefore supported.

14. There is a perception that a pub will close and not be able to trade in the absence of temporary agreements. There is nothing that stops a landlord pub company from operating the pub in their own name in between one tenant departing and another tenant signing an agreement (after having done all the due diligence processes prescribed in the proposed Code). If it is important that a pub remains trading between exiting and entering tenants, the landlord can operate it in their own names thereby negating the need for temporary agreements or special exclusions in the Bill.

15. It should be noted that the BBPA actively promotes and defends the tied model as having "a low cost of entry" so the pub companies should not require significant financial investments to run their own pubs as a temporary measure.

16. Market Rent Option

17. The current RICS guidelines using a "Fair Maintainable Trade" (FMT) misleads prospective tenants and their financial advisors (thereby undermining the usefulness and relevance of business plans). The reason is that FMT indicates the so-called trading potential of a pub but there is seldom a relationship between the current or recent trading performance of a pub and the FMT that has been assessed for that pub. This is a fundamental flaw in the current tied rental model and why a MRO is needed.

18. The fact that a pub company owns a pub building does not imply that there is a viable pub business. Changes in consumer spending habits does mean that fewer people visit pubs and that there is likely to be an over-supply. This over-supply should reflect in falling rental prices and tied beer prices; the fact that it does not is a flaw in the current tied rent setting process and a manipulation of the market.

19. Tied Beer Pricing

20. Beer duty is often claimed to be a major challenge to the pub industry but strangely high tied beer prices are not. Between 2012 and 2014, Enterprise increased the cost price of Doom Bar by 13.65 pence, despite beer duty declining by approximately 2 pence a pint in the same period. If a publican aimed to maintain a modest 45% gross profit, selling prices would have had to increase by a net 25 pence a pint over 2 years. There is obviously no justification for such price increases in the current economic climate.

21. Family Brewers

22. It is worth noting that whilst there are moves to exclude family brewers from the scope of the proposed Code, some Family Brewers have taken the lead in starting reform of the tied pub industry. Batemans, a Lincolnshire brewer and pub company (based on an article in the PMA dated 3 September 2014) has offered some of its tenants tied products at free of tie pricing. Batemans indicated that whilst there had been "short term pain" in the form of lower profits, it did consider that there would be "longer term gains".

23. Robinsons, a Cheshire brewer and pub company, has indicated in an article in the PMA dated 18 September 2014, that it too is innovating its tenancy agreements and is offering greater tied drink discounts (equivalent to free–of–tie pricing) based on local competition and what consumers are prepared to pay.

24. It is ironic that these family brewers have recognised that beer pricing is fundamental to tenant viability and appear to have taken steps to transfer profit from their own company to tenants; noting that it will have longer-term benefits to them and their tenants. Other family brewers, the BBPA, larger pub companies and London Economics have seemingly ignored the issue of excessively high tied beer prices as a key contributor to the failure of the tied model.

25. Conclusion

26. I care passionately about the British pub industry because of its heritage, its uniqueness and its importance. I therefore look forward to reading the report of the Committee and hope that it will make recommendations that benefit the pub industry as a whole, not merely pub companies or brewers.

November 2014

Prepared 5th November 2014