STEPHEN
DOUGLAS CORBETT
West
Essex Golf Club, London E4 7QL
Tel:
07946721117 email: stevedc76@yahoo.co.uk
Pubs Consultation
Consumer and Competition Policy
Department for Business, Innovation and
Skills
3rd Floor, Orchard 2
1 Victoria Street
Westminster
SW1H 0ET
Pub Companies and the Beer Tie –
A Case for Reform
The
future of the British Pub is in danger. Pubs are still closing at a
rate of around 26 a week – thousands have been lost over the last
few years and many more individual businesses have failed or are
failing. The reality is that this is only the tip of the iceberg –
there are many thousands more under invested, asset stripped, once
vibrant thriving pubs, waiting beneath the surface ready to float
onto the market as ‘serially failed’ tied pubs suitable for
alternative use. In a society where the pub is at the heart of many
communities, this simply is unacceptable.
The
real reasons for pub failures are hidden behind a wall of deceit and
a smoke screen of National proportions put in place by those causing
the damage in the first place and perpetuated by their lobbyists and
‘paid for’ trade organisations intent on maintaining industry
status quo for no other reason other than it benefits an
irresponsible few. The beer tie and the ‘Pubcos’ that operate it
are the fundamental cause of the systematic failure of the UK’s pub
sector. Part of Britain’s legacy, heritage and tradition is being
destroyed in front of our eyes for the sake of satiating the demands
of short term private equity greed.
Around
50% of pubs in the UK are owned by Pub Companies - large property
companies known as ‘Pubcos’ who lease pubs out to tenants to run
as their own business. These pubs are contractually obliged to buy
their beer from the Pubco who charge over market rent for the
property and as much as double the price for beer that is available
on the open market - this is known as the beer tie.
The
sector has been investigated no fewer than 26 times since 1966; 22
times in the UK and 4 in the EU, and each time there have been grave
concerns about the Pubcos and the beer tie. In more recent years the
BIS Select Committee have examined the model 4 times and each time
they have produced a damning report that painted a worrying picture
of Pubco abuse, lack of tenant support, agreements not honoured and
downright bullying.
After
much political debate the Government have decided to act and are
currently consulting on proposals to establish a Statutory Code and
an Independent Adjudicator to govern the relationship between large
pub companies and their tenants. Although long overdue, they have at
last recognised that after many years of serious concerns and
numerous complaints the pub is sector dominated by unfair contracts,
anti-competitive behaviour and market foreclosure that has damaged
pubs, driving prices up - and quality down - for publicans and
consumers alike. The overriding factor in all but a few cases is the
disgraceful way the Pubcos and brewers that copy the tied supply
model choose to implement the beer tie arrangement.
This
document seeks to draw attention to the terrible effects that the
tied model and the Pubcos are having on pubs, part of the cultural
heritage of the UK and creating much needed debate and honesty in a
sector where it has been missing for so long.
The beer tie – A low cost road to
ruin?
Pubs
operate under many different forms of ownership and management,
ranging from independent free houses to pubs owned by large pubcos.
Most will come under the following descriptions:
Freehold
- The owner buys the pub outright and is free source products from
any supplier at competitive market rates.
Leasehold
- May operate under a tied or a non-tied arrangement.
Tenancy
– A short term tied agreement, typically for a 3 to 6 year term.
There
are many other agreements most of which operate outside of the
Landlord & Tenant Act and provide the occupying tenant little or
no security. These agreements include; Franchise, Tenancy at Will
(TAW), Retail Partnership etc. Some Pubcos and brewers are seeking to
use these agreements as a replacement to traditional leases in an
attempt to circumvent calls for greater transparency and potential
Government legislation. Certainly, there has been a push by some of
the larger Pubcos to place prospective tenants on short term lease
agreements that offer no rent review provision, relying exclusively
on annual RPI linked increases to push rents upwards. Pubcos have
committed themselves to removing upwards only rent review clauses
from all lease agreements yet still include RPI linked rents. In a
declining market place any form of compulsory rent increase agreement
simply cannot be right.
There
is no evidence to suggest that it would be any more expensive to
enter into a free of tie lease than one that is tied. This is a myth
kept alive by the Pubcos who seek to divert attention away from the
fundamental problem caused by the beer tie. Before the emergence of
the Pubcos in the early 90’s, free of tie leases were plentiful and
competition was healthy. It wasn’t unusual to see freeholders offer
reverse premiums or rent free periods in the hope of attracting
experienced operators into successful pub businesses. Post 1989 Beer
orders, armed with cheap debt, the Pubcos aggressively acquired tens
of thousands of freehold pubs and overnight pubs and the supply of
beer in the UK simply changed hands. Gone were the real ‘low cost’
entry offers as the transfer of power and profit shifted to companies
such as Punch Taverns and Enterprise Inns and entire industry was
essentially brought to its knees.
Pubcos
actively and glossily market their model as a low cost entry to the
pub business. This all too often attracts vulnerable, naive,
ill-advised, ill-resourced and highly inexperienced people who invest
their savings and who frequently find themselves ruined within 2
years or less. The standard, quality and success of any pub business
depend on the level of experience, commitment and investment by the
actual publican. This cannot be achieved in a distorted and totally
unfair market. Where once there was competition between tied and free
of tie leases, thousand of tied tenants have since suffered at the
hands of the dominant, un-regulated Pubcos and brewers that copy
them, losing their homes and their livelihoods in the process. The
true cost on an entire society will never truly be known. In a very
short space of time a low cost entry became an extremely high cost
exit and the fallout is evident for all to see.
Why
are pubs closing?
There
are currently around 50,000 pubs in the UK. These are tough times and
consumer confidence is weakened by the expensive cost of going out
brought on in the main by overinflated tied product prices and a
nation of serially failing, under invested pubs. It is clear that the
increases in product prices purchased through the beer tie, combined
with high levels of rent, is leading to the failure of many more tied
pub businesses than free of tie.
Much
scaremongering has taken place by the Pubcos with little foundation.
Campaign for Real Ale’s (CAMRA) own statistics indicate that more
tied pubs are closing than free of tie and in fact there are more
free of tie pubs now than there were five years ago. The BBPA have
consistently presented pub closure figures in a misleading way as
they do not include reclassification of pubs from tied to free of tie
just before they close. A pub that may have been tied for the last 50
years is sold to a property developer as a free of tie pub,
subsequently, on receipt of planning permission, closes and then
registers in the BBPA figures as a free of tie closure. This is
misleading and wholly inaccurate.
Whilst
pub closure figures are a good indication of the poor health of our
sector they capture only part of the picture. The Pubcos still refuse
to publish individual pub failure rates where the tenant surrenders
the lease, goes bankrupt or simply hands back the pub keys because
they can’t make it pay, only to be replaced with a new tenant or a
management company. This ‘churn’ rate, if published, would
provide a damning picture of sector abuse and paint a more accurate
picture of the damage being caused by the Pubcos and their rapacious
exploitation of the beer tie.
We
do, however, have some indication of the tied sector churn rate –
Enterprise Inns most recent accounts show that out of 5,720 pubs,
1,463 have had tenants in them for less than a year, suggesting a
churn rate of 26%. This is a conservative estimate because it doesn’t
include pub closure figures, TAW’s or pubs that have had multiple
‘churns’ in a short space of time. In 2010 Neil Robertson, the
then CEO of the British Institute of Innkeepers (BII), issued a press
release stating that one pubco had a churn rate that had dropped from
65% to 35%. Even if were to only extrapolate the lower figure of 35%
across the whole sector this would indicate an annual tied churn rate
of circa 10,000 pubs. As the average pub is thought to employ 10
staff that’s around 100,000 lost jobs in the pub industry annually.
Has
self-regulation worked?
The
tied model has clearly failed and the pubs sector has been stifled by
the unreasonable and unsustainable business practices of the Pubcos.
There are parallels with what happened with the banks speculation,
which did so much damage to the economy. Some of the pub owning
companies can be seen to have behaved in a similarly irresponsible
manner, overvaluing their estates and borrowing vast sums against
this, which has led to not only their mind boggling levels of debt
but also to them taking much more than is reasonable as a proportion
of income from their pubs. This is damaging and destroying what would
otherwise, even in difficult economic times, be viable small
businesses that of course also employ local people and buy local
produce.
The
problem is now as always has been that under a self-regulated
approach there is no will and certainly no mechanism in place to
restrain the pubcos from abusing their dominant position and taking
more than a fair share of the a pubs’ profits. The idea of relying
on corporate goodwill where it clearly doesn’t exist is ludicrous.
The BBPA have confirmed that they are not empowered to offer
provisions that balance risk and reward. The self-regulatory body
that proposes to govern over PIRRS and PICAS, has been unable to
confirm, despite written requests, that it will seek to deliver the
Government's commitments of 'fairness' or that a 'tied licensee
should be no worse off than if they were free of tie. The very fact
that the self regulatory process is unable to offer any reassurance
that it seeks to deliver the same commitments as Government,
indicates there is no motivation from the Pubcos to address these
fundamental issues. The absence of such assurances undermines the
credibility of the self-regulatory process and relying on any part of
it to deliver meaningful progress, even in its perceived state of
independence, remains a meaningless exercise.
The
Pubcos introduced codes of practice shortly after the T&ISC in
2004 and after six separate attempts we still have self-regulated
codes that address nothing more than the peripheral and less
significant issues. A self-policing code funded entirely by the very
people causing the problem simply cannot work and it’s crazy to
watch so many people get distracted by it.
Are
the fixed costs in a tied pub lower?
Far
from being a low cost entry there is much propaganda surrounding the
tied tenant having a reduced ‘risk profile’. Pubcos argue that
lower fixer costs (annual rental charges) are offset by higher
variable costs (higher price for beer purchases) when this simply
isn’t the case at all. In a recent benchmarking survey, the
Association of Licensed Multiple Operators (ALMR), found that tied
rents were higher than free of tie rents and in doing so, dispelled
the myth that the true cost of the tie was countervailed by cheaper
rents – the reason that the tie is allowed to continue under EU
block exemption.
In
1969 the Monopolies Commission, Beer – A Report on the Supply of
Beer, highlighted the fact that there was little difference, if any,
between the tied and free of tie price of beer sold to publicans.
Today that gap has widened, so much so that an average tied pub could
pay as much as double for beer than a free of tie tenant. Despite the
current recession, Pubcos are continuing to raise beer prices and
rents forcing many of their tenants out of business. As more of their
pubs close and fewer people want to take a tied lease the Pubcos are
trying to squeeze more income out of fewer and fewer pubs. Like the
banks, Pubcos have been caught out by over leveraging and securitized
debt and it is the tenants and consumers that are suffering.
I
run small, free of tie, low turnover bar in a golf complex in North
London with an annual barrelage of less than the national average.
While tied publicans across the UK continue to pay an extortionate
price for beer, perhaps as much as £160 for a 11 gallon keg of
lager, I pay less than half for the same product. I have attached the
latest price offer from Heineken UK showing Fosters available at only
£73.23 a keg (including retrospective discounts) and a FREE
promotional, marketing and training package that would never be
available in the tied sector.
In
Summary - Heineken offer to small free of tie bar:
Heineken
keg (11gal) - £240 brewers barrel discount
Fosters
Keg (11gal) - £225 brewers barrel discount or £245 a barrel with
retrospective discount.
Heineken
will provide all owned branded glassware free of charge
£1k
per year for the you to spend on anything required
6
free 11g kegs made available for captains day and charity days, etc
Access
to all Heineken free stock promotions across all product sectors
The
OFT did not give the pubcos a clean bill of health!
Pubcos
and the BBPA have claimed a clean bill of health by the OFT but this
is simply untrue. It was not in the mandate of OFT to consider
business to business issues instead they only considered the pub
sector as it applied to consumers. No report by a competition
authority for decades has found anything other than problems, of one
sort or another, in the pub sector. Whilst the OFT, in response to
CAMRA’s 2010 Super-complaint, declined to undertake a market study
they did caveat their decision by stating they did not have a mandate
to consider competition issues, supply terms or the fundamental issue
of the tied tenant being no worse off than if they were free of tie,
nor did they have the power to consider the commercial relationship
between landlord and tenant. Contrary to Pubco assertions It is wrong
for them to claim the OFT gave the industry a clean bill of health
when this is clearly not the case.
Will
the price of beer rise under a market rent only?
Reform
would undoubtedly reduce the cost of the beer in tied pubs as product
cost would be significantly reduced. If tied tenants were able to buy
beer on the open market at a competitive price, this would result in
some cases of a saving of up to 50%. The tenant could then choose to
offer beer to their customers at competitive rates or use the
increased profit to reinvest back into their business.
Will
brewers stop brewing?
The current dominance of the Pubcos
in the beer wholesale market creates significant barriers to entry
for smaller brewers. Brewers can only supply their products to Pubco
tenants if they are on the Pubco’ exclusively restricted product
lists. Pubcos require that brewers offer them substantial discounts,
meaning that some small producers end up making a loss on supplying
Pubco tenants. A substantial number of products from small and
regional brewers are excluded from the Pubco lists or priced at an
uncompetitive level. In many cases smaller brewers are almost
completely excluded from their own local markets. A truly open and
competitive market will provide plenty of scope for local and
regional brewers to promote and distribute their products resulting
in greatly enhanced choice for the publican and the consumer. There
are around 1,000 brewers in the UK and the vast majority do not have
access to two thirds of the pubs in the country.
Fewer pubs will close.
It
is difficult to see how the prospect of offering tied licensees the
right to a fair rent and being able to sell beer to their customers
at a fair price would result in pub closures. The Pubcos and their
lobbying arm; the BBPA, will tell us that more pubs and breweries
will close under a MRO but this is entirely without foundation with
no evidence to back it up. Reform of the beer tie through offering
tied tenants a market rent only option is intended to result in
higher licensee profitability regardless of the type of agreement
they have. With increased profitability comes increased stability and
financial prospects for the licensee, this cannot result in further
pub closures but instead offers a sustainable future for the tied
model and potential growth right across the sector.
Will Pubcos stop investing?
Pub
owning companies currently claim they invest in their tied estates.
They have argued that if a licensee chose to terminate the tied
agreement this purported investment would cease. On a market rent
only basis the pub company would only derive income from rent and not
from over inflated products. Unlike other commercial agreements, like
shops and offices, rent in the pub sector is determined by licensee
profitability. It follows that if the only revenue stream is rent the
pub company would be incentivised to ensure their licensees were
trading profitably. Investment and support of licensees, whatever
their agreement, would therefore form the foundation of any forward
thinking and optimistic pub owning company.
The
Solution – A statutory code and a market rent only option?
Government
is now proposing to legislate in order to secure a healthy pubs
industry and I believe the Statutory Code of Practice should include
the following provisions:
The
tied tenant should be no worse off (or better) than a free-of-tie
tenant.
An
option for the tenant to opt out of their ‘tied’ arrangement
resulting in them paying a market only rent to the pubco (MRO) and
allowing them to acquire products from any source.
There
should be a provision contained in all codes that contracts will be
fair, reasonable and comply with all legal requirements.
The
principles of both fairness and the tied tenant being no worse off
should apply to all pub owning companies with the MRO applying to
only those with over 500 pubs.
The
Market Rent Only option (MRO) is absolutely not abolishing the tie,
indeed it is making it work as it should. That is, if you pay more
(above market prices) for your beer, then in return your rent should
be lower (than market) and ‘countervail’ inflated product prices
leaving a scenario where the tied tenant is no worse off than if they
were free of tie.
The
Market Rent Only option reduces Adjudicator work load offering a
self-policing opportunity at an individual pub level. If it were made
available to tied tenants it would enable individual operators to
compare and contrast their tied agreement with the circumstances and
profitability of being free of tie. It is the terms of the tied
agreements, if perceived to be unfair and unreasonable that will
result in tied operatives choosing to release themselves of the
burden of being tied. The threat alone of this flexibility will
ensure that those pub owning companies operating tied agreements will
seek to maintain fairness and competitive behaviour rather than using
their inflexible models as a tool to oppress their licensees. If the
Pubco operated in a manner that was both fair and reasonable, no tied
tenant would opt out of their tied agreements, choosing instead to
stay tied in a fair and equitable agreement.
The unintended
consequences.
Positive
outcomes of the Beer Orders in 1989 were the breaking of the
stranglehold held by a handful of brewers on the UK pub sector and to
increase the choice of beers to consumers, the Orders succeeded in
both those aims. An unforeseen consequence was the birth of pub
companies, little more than non-brewing property companies. The
failing of the Beer Orders was the absence of a review and variation
of the regulations. This fundamental flaw has been considered and
gaming of Government intentions restrained by allowing the proposed
Adjudicator the power to review alter and amend the statutory code.
Leaving the beer tie model in an unregulated form enabled
exploitation of what are essentially unfair contract terms in
commercial agreements. Maintaining industry status quo is simply not
an option.
You
signed it so it’s your fault
It's
an ignorant argument - the courts and parliament are there to
encourage the development of commercial models with contractual
agreements being constantly challenged and updated. This shouldn’t
be any different in the pub sector. It is the role of society, the
courts and parliament to make the changes that are required. If the
government look with open eyes at the current situation in the pub
sector then they will see what four successive Business and
Enterprise Select Committees saw - an inefficient and exploitative
market place in the hands of an irresponsible few.
Why
Government must intervene.
The
pub sector is in urgent need of reform. Government must act now and
introduce a statutory code of practice that enforces the principle of
the tie tenant being no worse off than if they were free of tie. The
adjudicator must have real power to amend tied contracts at any stage
in the future should the market adjust negatively or Governments
immediate proposals not go far enough. Tied publicans across the UK
should be allowed to compete in a highly uncompetitive market place
and the only sure way of achieving this is to give tenants the choice
to opt out of the beer tie.
A
genuine market rent only option, irrespective of whether the tenant
chooses to take it, will mean:
Fewer
pubs will close.
More
jobs created
More
investment directly into pubs which will encourage a new breed of
patrons previously put off by the cost and inconsistency of run down
underperforming tied pubs.
Dealing
direct with brewers will mean greater discounts forcing more
competition at the pump
Greater
access to market for brewers
Increase
revenue for the Treasury
There have been many people and
organisations that have highlighted the disgraceful continuation of
the ill-conceived, damaging and highly anti-competitive practices
that exist in the UK pub sector. Britain, being a small place, has
allowed for this insidious structure to be set up by the Pubco
founders - most of who have moved on to other pastures. Along the way
they have found our quaint and perhaps naive, little industry very
easy to manipulate, pillage and ruin. The sector was built on
community, a common heritage, love of pubs and beer and a perhaps
even a sense of fun in some way. Fertile ground of course for the
pubcos and their premeditated pursuit of short term gain.
Be under no illusion, the Pubco
tied model is about financial engineering and not about running pubs.
They employ a relative handful of staff yet have negative impact on
the industry as a whole. By exploiting a loop hole in the well
intentioned 1989 Beer Orders, Pubcos have evolved through huge
borrowings and the extraction of vast sums of money from the industry
to pay down this accumulated debt. The question that has to be asked
is, why should retailers and consumers pay significantly above the
market price for goods to finance the existence of a business model
which benefits only a few?
My observations are underpinned by
thirty years of professional experience in the pub trade. I write
this document from the view point of someone with both free-of-tie
and tied pub experience having operated pubs, bars and restaurants
all of my adult life. Up until 2009 I operated a busy tied Enterprise
Inns pub with takings of over double the national average. The pub
was a fantastic asset to the local community; way ahead of its time
in terms of product range, service and customer accountability. The
beer tie systematically allowed transfer, without thought or
consideration for the tenant in occupation, over 95% of the pubs
profits to Enterprise Inns. My business never stood a chance. My pub
closed its doors for the final time in November 2009 and took with it
my entire life savings, destroyed my family and left a financial
black hole of over £250,000. I have not operated a tied pub since.
Stephen Douglas Corbett
14 June 2013
07946
721117
