Pubco Campaigners’ Letter to David Cameron

Rt Hon. David Cameron & Rt Hon. George Osborne

10 Downing Street/11 Downing Street

London

SW1A 2AA

9th April 2014

Dear David and George,

We are writing to you as supporters of pubco reform and of the Fair Deal for Your Local campaign, urging you and the Government to do the right thing – and back Britain’s pubs – and introduce a statutory code of practice with a market rent only option for the tenants and lessees of the large pub owning companies.

25th Anniversary of the Beer Orders – Time to get it right!

2014 is the 25th anniversary since a Conservative Prime Minister and Chancellor led the Government which introduced the ‘Beer Orders’ to break up the unhealthy dominance of the ‘big 6 brewers’ who dominated pub ownership and restricted both choice for consumers and access to a very closed market for small brewers. That Government rightly identified the problem and was right and courageous in taking action, showing that Conservative Ministers do intervene in markets when they are unfair, anti-competitive and failing consumers – which the current market certainly is.

The problem, however, was that – due to very well funded vociferous lobbying by large companies and their lobbyists – the Government agreed to ignore the advice of the Campaign for Real Ale and others and decided not to introduce a limit of the number of pubs owned by non brewing companies, introducing a limit only for brewers. This was a fundamental flaw, a loophole spotted and exploited by financiers which directly led to the creation of the large non-brewing pubcos. They did sweetheart deals with large brewers following golden handshakes, to carry on selling their beer and whilst the Beer Orders did affect the big brewers it in fact simply transferred the power from one dominant group of companies to another. The anomaly was quickly spotted by bankers, speculators and financial engineers. The result was the formation of a number of so-called pub companies, such as Punch Taverns, Enterprise Inns and Unique Pub Company. Those at the helm had little if any connection to the sector and very little empathy with it, little interest in the pubs, the people who ran them, the communities that used them or their wider economic impact. They were essentially land banking at the expense of the nation’s pubs, using tied product prices as funding for their debt mountain. Aided by investment bankers, pub company bosses produced financial models and projections that assumed perpetual growth in the rents and beer prices that they could charge their captive market of tied licensees, who would be unable to resist such aggressive pricing strategies. Through securitisation and more conventional debt, large sums of money were raised to acquire pubs from brewers who were obliged to dispose of them and, after that, from other pub companies.

The pubcos, led by Punch Taverns and Enterprise Inns, went on an acquisition spree, buying up pubs for more than their actual value, simply to inflate their share value artificially. In valuation terms, the same yield or multiple was applied to inflate portfolio values, with hypothetical wet rents [additional charges levied by a premium, typically added to wholesale costs for tied products such as beer with pub licensees prevented from buying on the open market.] being used, rather than actual numbers. To maintain the wet rent at as high a level as possible, beer prices have been increased year on year, substantially above the rate of inflation. In order to inflate artificially the pub and estate values, and then to borrow vast sums against that imaginary valuation, the companies were adding to the dry rents the profits achieved by wholesaling beer to create an overall rent. That led to the values being falsely inflated.

The disaster came when the property market collapsed and the large companies found themselves in billions of pounds of debt. The winners were the pubco directors; the losers were the publicans, communities and the pensioners whose funds unwisely left money in the pubcos. With their debt levels, the pubcos began increasing beer prices AND rents, a double whammy, squeezing the life out of tied tenants and when pubs failed, closing and selling off run-down pubs for alternative use.

The problem now, 25 years on – high rents and the ‘pubco price escalator’

So the fundamental problem, now, is that the large pubcos take too much of pub profits. The overcharging takes the form of both hugely inflated beer prices and excessive rents.

The latest Association of Licensed Multiple Retailers Benchmarking Survey showed that the average tied rent is higher than the average rent for free of tie pubs. So many tied tenants are being double-overcharged.  This makes it difficult or impossible for many licensees to make a living and has and is causing the failure of pub businesses up and down the country. Survey evidence, commissioned by CAMRA, showed that 57% of publicans tied to the large companies reported earning less than £10,000 per annum.

Not only are pubco tied tenants forced to buy their beer and other product from their pubco at hugely marked-up prices but every year the pubcos raise the prices to their tenants above inflation.

The most recent rise in February 2014 (e.g. 5p on a pint of Carling for Punch Taverns pubs and 6p on a pint of Stella Artois for Enterprise Inns pubs) which was not followed by wholesalers such as Red Sky – who supply the free trade. No wonder, when you consider that Punch Taverns – a pubco who don’t brew any beer – made £2.271 billion profit in ten years from on-selling beer to their own tenants!

One typical example of the pubco price escalator sent to the Save the Pub Group shows that over a six year period 2003-2013 the price of an eleven gallon keg of Fosters increased to Enterprise Inns tenants 4.5 times the increase to freehouses! This is pushing the price of a pint up to customers, negating the Chancellor’s beer duty cuts, as well as making it difficult for licensees to make a living – yet pubco bosses continue to pay themselves huge salaries and bonuses. This is very simply an unnecessary – and distorting inflationary force in the marketplace – and one that we believe that Conservatives, who believe in free and competitive market, cannot defend.

The Coalition’s very welcome  cut in beer duty will not help the 20,000 or so pubs tied to the large companies unless this ‘pubco price escalator’ is dealt with through a fair deal for local pubs – the option to pay rent only and not excessive beer prices.

The Government fuel duty escalator has gone, the beer duty escalator has gone and now the alcohol escalator has gone, but now licensees and consumers need an end to the pubco price escalator!

The pubs market today 

Ironically pre-Beer Orders, we had the ‘big 6’ brewers dominating and skewing the market; now we have 6 big pub owning companies that similarly dominate the market and in the cases of the large leased pubcos, have distorted and abused the traditional brewery tie meaning that it no longer is fair for licensees or good for customers – and has been awful for the many communities that have lost pubs as a result.

Luckily we have small companies – small breweries and non-tied pub companies – and entrepreneurs and communities taking on failing pubco pubs; but this is only happening in a small proportion of cases as the big pubcos continue to hold on to their better-performing pubs and continue to take more than is fair from pub profits – whilst selling others (that could succeed under a different model) to supermarkets and developers.

So to really open up the market and the possibility of a rejuvenated pub sector – we need a Fair Deal for Your Local!

The Solution

This is why the BIS Select Committee ‘market rent only’ option is not only the right solution, but the only solution – and a market based one that will allow competition back into the market and this will give consumers a better deal, in effect finishing and properly doing what the Beer Orders were meant to and partially did with beer, and partially and spectacularly failed when it comes to pubs, due to the flaw.

Why Must the Government Act

Self regulation has failed and will fail because it has been set up (by the pubcos and their cheerleaders) to avoid dealing with the fundamental issue:

According to pubco-funded research, over one third of tied licensees don’t believe that their pubco complies with its Code of Practice (Research carried out by Him! according to them “showed that only 66% of pubs stick to the code of practice? This means that 34% feel that their company is not currently complying to the code”) despite it only seeking to deal with a few peripheral issues.

As in the 1980s, the large companies have a self interest in maintaining the current unsatisfactory status quo – so there is no possibility of them changing their model unless forced to do so, which is why legislation is essential.

Your Commitment

We were delighted when, in Prime Minister’s Questions last week, you confirmed that the Government is looking very seriously at this issue when you said “We want to look very carefully at what is happening in tied pubs and at the activities of some pub companies….We are looking very closely at what more we can do to make sure there are fair outcomes for Britain’s publicans and Britain’s pub goers”.

We agree and hope you will now back up these strong and clear words with action – which means giving tenants and lessees of the large companies a Fair Deal for Your Local via the BIS Select Committee market rent only option.

The Government itself has committed to introducing a statutory code of practice for the large companies to deliver fairness and to enshrine in law the long-accepted but largely ignored principle: that the tied licensee should not be worse off than a free of tie licensee. So you must not back down on that clear and unequivocal commitment.

Pub supporters, licensees and local communities were encouraged when you said you wanted this Government to be the most “pro-pub Government ever”. It is now time to prove that by acting – completing what the Conservative Government started in the 1980s – and backing a Fair Deal for Your Local.

The Government’s Own Consultation says bring in a Fair Deal!

The Government as a whole must of course also listen to its own consultation[1], undertaken last year. The results are clear and decisive:

  • The online survey resulted in 67.6% (of all respondents) in favour of a market rent only option – a clear and decisive two thirds majority.  
  • Of the written responses from tenants, of those who answered the question should there be the market rent only option in the statutory code, 84% said there should be.

The Positive case for Reform

Select Committee

The Business Select Committee have done 4 exhaustive reports into this issue over 8 years, all concluding that abuse of the tie was taking place and that the solution is the market rent only option. They were strongly critical of the Government in 2011 when it went back on its commitment to back the select committee report.

FSB Research

The Federation of Small Businesses conducted research in 2013 showing the benefit to the UK economy of the BIS Select Committee proposals for pubco reform showing that the introduction of a statutory code of practice including a market rent only option for the large pub owning companies would benefit the UK economy by an estimated £78 million. [2] With a market rent only option:

  • 9,888 pubs would take on a new member of staff or increase staff hours creating £48,666,758 of additional wages per year,
  • 10,359 pubs would spend money on maintenance, meaning an extra £10,359,030 to the economy.
  • 6,698 pubs would spend money on modernisation, meaning an extra £9,697,984 to the economy.
  • 9,796 pubs would spend more on advertising and websites, meaning an extra £9,796,000 to the economy.
  • 8,213 pubs would offer a wider range of beers, benefiting small breweries
  • 8,614 pubs in the UK would use the extra profits to bring down the price of a pint
  • 98% of tenants said would have more confidence in the future of their business[3]

Pub Closures

Up and down the country pubs are closing, permanently and temporarily, as pubco tenants fail, unable to make a living from the pub despite a reasonable turnover. The indebted pubcos are also selling off many pubs, including viable ones, often to supermarkets to cash on their value meaning permanent loss of a pub.

  • CGA Strategy figures show that there has been a much greater drop in the number of leased/tenanted pubs compared to freehouses between December 2005 and March 2013 – the number of ‘non-managed’ (tenanted/leased, mostly tied) pubs fell by 5,117 compared with a fall of only 2,131 in the number of ‘free trade’ pubs[4].
  • The BBPA’s own figures show that over ten years non-managed pubs decreased by over 8,000 whilst the free trade sector actually expanded by 1,600.[5]
  • Enterprise Inns and Punch Taverns collectively disposed of over 5,000 pubs between 2008 and 2012, a THIRD of all of their pubs in just 4 years.[6]

Support for pubco reform

A total of 210 MPs from all parties have signed up to support reforms with two unanimous Parliamentary votes supporting action.

Together the Fair Deal for Your Local supporting organisations have a membership of more than two million people.

Misleading Lobbying Against Reform

There has been a dishonest although well-funded lobbying campaign in full swing, desperately trying to stop the Government intervening. Much of the information being presented to Ministers and MPs is simply unsubstantiated and in many cases, actually untrue. Are you aware that pubco bosses and their lobbyists, the BBPA, have all been exposed as giving false evidence to a parliamentary select committee? That shows that their arguments simply can’t be trusted.  We would urge you to be very careful getting too close to them.

Luckily the Conservative Government 25 years ago had the courage to take on vested interests who were trying to maintain their cosy foreclosed market, it is just a tragedy that Ministers then gave in to them and allowed the disastrous loophole that has led to the pubcos and the damage this has done.  So we urge you not to give in to the misleading and unsavoury lobbying of the pubcos and their lobbyists and others who are opposing much needed reform for self interested reasons (including some brewers whose pubs would not be affected by reform but whoknow that a market rent only option would lead to increased access for our many great microbrewers to the pub market).

The truth about pubco reform – not the myths

  • There are some deeply misleading arguments from those companies and their representative associations who oppose reform of what is now a thoroughly discredited business model:

o   The market rent only option does not abolish the tie, indeed it makes the tie work as it should, ensuring that if a licensee pays higher prices for beer, they get a proportionately lower than market rent. Alas currently, that is rarely the case.

o   There is nothing in the proposed statutory code that increases ‘red tape’ over and above what already exists in the existing self regulatory code. Indeed, for a licensee, paying market rent only offers considerably less red tape as purchases can be made direct with brewers and suppliers – it cuts out the middle man & provides a simpler business model.

o   Far from being ‘regulation’, the market rent only option would free up thousands of small businesses, stopping abuse of the tied system.

o   A market rent only lease or tenancy also provides exactly the same low cost entry to the pub trade as tied agreements, but with more certainty for the landlord, the small business.

o   A market rent only option would help the British brewing sector, by allowing hundreds more breweries to have fair, direct access to thousands of pubs.

o   Reform would reduce the cost of the pint in most pubco pubs as costs would be significantly reduced whether by cheaper (fair) tied rents or, if a licensee chose the market rent only option, beer prices to licensees would drop to in some cases to half the current tied price.

Protecting the Family Brewers

The Fair Deal for Your Local campaign are calling on the Government to introduce the statutory code of practice for all companies that own 500 or more pubs, with the code applying only to their tenanted, leased and franchised pubs – and with the proportion of the cost of the adjudicator being levied per pub.

Only six companies would be affected by this. The 500 limit would mean that none of the family brewers would be affected[7]. This is something we support – and it also deals with the arguments being put forward by the family brewers who seem to be suggesting they would be affected by the statutory code, when they would not. They should welcome the much greater opportunity they would have of selling their beer to many more pubs than would be able to deal direct with them at brewery prices, rather than having to go through the pubco at prices dictated (from brewery and to licensee) by the pubco.

Far from being an unreasonable burden on the six companies that would be covered by the new code, the reality is that the cost of the adjudicator would amount to an average of just £133 per affected pub (and it would only be levied on affected pubs), which is a very small price to pay for each pub, and a considerable saving in costs of litigation and licensee turnover.

This is no reason not to act, to allow many more pubs to thrive either free from grossly inflated pubco prices or with a new, fair tied agreement – one which a proportionately lower rent for higher beer prices – as was originally the idea of the traditional brewery tied model.

Conclusion

So we urge you to press ahead with bringing forward legislation to introduce, for companies with 500 or more pubs, a Statutory Code and Adjudicator alongside the all important market rent only option. These reforms are essential to deliver a solid legal framework that will eliminate abusive practices and ensure the long term sustainability of the pub sector and the estimated 250,000  employees[8] in the sector.

We ask you to listen to the voice of small business, the Federation of Small Businesses, the Forum of Private Business and the voice of the consumer, CAMRA – as well as the voices of the thousands of tied pubco licensees who simply want the chance to deal with the suppliers they choose, to innovate, invest and flourish.

The inclusion of a market rent only option is absolutely essential to incentivising pub companies to deliver a fair division of pub profit. A lesser reform will allow pub companies to continue to take an excessive share of pub profits whilst imposing unreasonable business risks on licensees – thus perpetutating the problem.  Suggested alternatives to the market rent only option are unlikely to be effective at securing the necessary rebalancing of risk and reward, in a timescale that would make a difference to publicans, many of whom risk being forced out of business and would lead to a huge workload and increased costs for an Adjudicator.

The recent survey, commissioned by the Federation of Small Businesses, indicated that 79% of tied licensees felt their pub company was taking too much of their pub’s profits.  The market rent only option is the best means of minimising workload and the necessity of third party intervention as it is likely that a large proportion of these 79% would otherwise seek reductions in rent and/or tied product prices following the introduction of an Adjudicator resulting in an impossible workload. Pub companies would have a clear motivation to ensure tied deals are competitive to avoid licensees triggering market rent only options at rent review or lease renewal.  With a market rent only option in place, the Adjudicator is simply there to deal with abuses of process, not to try to set rent and price levels.

It is time for the market to start working to give consumers a better choice and smaller breweries better access to their local pubs. It is time for a Fair Deal for Your Local!

Yours sincerely,

 

 

Greg Mulholland MP, Chair of the Save the Pub Group

Brian Binley MP, President of the Save the Pub Group

Grahame Morris MP, Vice Chair of the Save the Pub Group

Caroline Nokes MP, Vice Chair of the Save the Pub Group

Simon Clarke, Fair Pint Campaign

Dave Mountford, GMB

Val Spencer, Licensees Supporting Licensees

Gareth Epps, Reading CAMRA and Fair Deal for Your Local steering group member

George Scott (BA Law), Ferdinand Kelly Solicitors and Fair Deal for Your Local steering group member

 

[1] https://www.gov.uk/government/consultations/pub-companies-and-tenants-consultation

[2] https://pubaliciouspubs.wordpress.com/2013/12/12/federation-of-small-businesses-research-shows-the-huge-benefit-to-the-uk-economy-if-the-government-implements-a-fair-deal-for-pubs/

[3]http://www.fsb.org.uk/frontpage/assets/pubs%20research.pdf p. 3.

[4]  CGA strategy figures, published November 2013

[5] BBPA Statistical Handbook 2013

[6] Figures taken from Enterprise Inns and Punch Taverns annual reports available online.

[7] The Independent Family Brewers of Britain’s membership is listed at http://www.familybrewers.co.uk/meet-the-brewers.php.  None would be affected by the 500 limit.

[8] Figure based on BBPA calculations: the total number of pubs owned by the six companies affected by a proposed Statutory Code and their calculated average 10.5 employees per pub.

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