Pub Companies - Business and Enterprise Committee Contents

Examination of Witnesses (Question Numbers 1-19)


18 NOVEMBER 2008

  Q1 Chairman: Good morning gentlemen. This is our first evidence session of this inquiry into pubcos. As always can I begin by asking you to introduce yourselves and then I will ask a general question about the state of trade in the pub industry first before we go into specific questions on pubcos. So can I begin by asking you to introduce yourselves for the record?

  Mr Jacobs: I am Brian Jacobs. I am a certified accountant and I have 50 years experience in the trade.

  Mr Davenport: I am Clive Davenport; I am chairman of the Trade and Industry Policy Unit for the Federation of Small Businesses. I do not have any experience in the trade.

  Mr Daly: My name is Paul Daly. I have been a bar designer for 15 years in the trade in England. I have owned my own bar, free of tie, for 5.5 years and I opened a tied bar three months ago.

  Q2  Chairman: Mr Jacobs, you speak as well for the Fair Pint Campaign.

  Mr Jacobs: That is correct.

  Q3  Chairman: Do you want to make any general comments about the state of trade in the pub industry at present, not specifically relating to tie issues and pubcos but more generally about the other issues that you face?

  Mr Daly: Trade generally is down at the moment. I would say of the big companies Weatherspoons is probably the only one that is up because they do pass on their discounts and their retro discounts to their customers.

  Mr Davenport: The British Beer and Pub Association statistics say that beer sales are down 7.2%, beer sales in pubs are down 8.1%, even supermarkets are 6% down; the beer tax black hole in the Treasury is set to reach £1.2 billion.

  Chairman: This is a narrowly focussed inquiry on a very specific issue but we are obviously well aware of all the problems facing the pub trade and we are considering how we should respond to that. We are now going to focus questions on the particular issues in our inquiry. Lindsay Hoyle?

  Q4  Mr Hoyle: It is good to see you again; it soon comes round.

  Mr Jacobs: It does not seem like four years ago that I was here.

  Q5  Mr Hoyle: That leads me into a very good question. What do you think has got better and worse for the industry, in particular for tied tenants?

  Mr Jacobs: If you take the whole trade for one minute, what has happened to the whole trade is that with the non-smoking introduction and with the credit crunch trade is down across the board. For the tied tenants it is even more difficult because they have fixed rents whereas if you are a freeholder you do not have that situation. That is the downside; I cannot really say that there is an upside.

  Q6  Mr Hoyle: There is nothing positive?

  Mr Jacobs: Nothing positive at all. One of the big difficulties of course is that one has to recognise that the pubcos have a mountain of debt and they are trying to service that mountain of debt. Unfortunately they are trying to service it out of a trade which is in fact slowly imploding through the weight of taxation, legislation and the general credit crunch.

  Mr Davenport: We did a survey of our members who are involved in the public trade and 99% of them said that the situation had not changed since 2004. That is a fairly high proportion, 99%.

  Mr Daly: At the moment we have to raise our game in the trade. One of the ways of doing that when you are free of tie is that you negotiate deals with your brewers. If you do go into a deal with a brewer they can give you all sorts of discounts and incentives which you can pass on and trade on the ground level. You can raise your game and offer more. You cannot do this in a tied venue.

  Mr Jacobs: I do think that if the pubcos had adopted the Trade and Industry Select Committee's recommendations of 2004 back in 2004 there would be fewer pubs closing today. The economic situation dictates that rent should be going down but in fact they are still putting rents up on the basis of RPI annually. If rents are going up at RPI and turnover is going down, there is only thing that is going to happen, pubs are going to close.

  Q7  Mr Hoyle: We can see that in our own constituencies from the boards showing closed or lease for sale. Is the revised code of practice working and being applied by the pub companies?

  Mr Jacobs: The BBPA was the first to issue a new code of practice following your recommendations. The interesting thing is that when the BBPA actually issued that code not one of your recommendations was taken on board other than upward only rent review but even that they altered. They altered that by putting in a barrier at the bottom saying, "it shall not fall below the lease rent". That is crucial because the possibility is that it can down and if it goes down the rents should go down below whatever the lease says. All the pubcos followed and did use and have used the BBPA code of practice as their anchor point. When asked "Why haven't you adopted the Trade and Industry Select Committee recommendations?" the pubcos say, "We adopt the code of conduct in line with the BBPA and as far as the Trade and Industry Select Committee recommendations are, that is all they are; they are only recommendations and we do not have to take any notice of them".

  Q8  Mr Hoyle: Would it not be fair to say that there are still some upward only rent reviews in existence and the clause has not been removed?

  Mr Jacobs: Fair Pint carried out a survey and quite a sizeable number said that the increases had continued to go up; 28% said they still had the upward only rent reviews and 58% said they had suffered an RPI increase.

  Q9  Mr Hoyle: Do you think Enterprise Inns misled the Committee because they stated to my question about it that as soon as legally possible they would remove that clause and yet they are the company that still have that clause within some of their tenancies?

  Mr Jacobs: What is interesting is that they have in some cases removed the clause by negotiations for one reason or another but very often that has been substituted by other things like an additional tie in your wines, an additional tie in your spirits. Therefore, although they give with one hand, they take away with the other.

  Q10  Mr Hoyle: Would you say they take more with the other?

  Mr Jacobs: They always take more.

  Mr Daly: I am designing a venue at the moment for a client who is an Enterprise client. He struggled for one reason or another and it ended up that they renegotiated his lease because of that struggle. They implemented an RPI index linked yearly rent review which means that should he should to go arbitration he will have to do it every year and that is a very expensive business.

  Q11  Mr Hoyle: So they have a double-headed coin and only the pubs are allowed to have tails.

  Mr Daly: Eventually he is going to give up going to arbitration.

  Q12  Mr Hoyle: Would it be fair to say that previously the business development managers were the most hated people within the tenancies? Have relationships improved or do you think they are just as bad as ever?

  Mr Davenport: In the survey we did we asked three questions. One was about the benefits available for tenants such as training, business support or reduced rent, had that been balanced and 96% of the recipients said no. That is a fairly damning indictment across the board. I think this is the advantage of the survey that we did, that we were not looking at specific areas, it is right the way across the country—England and Wales—and all sorts of different types of pubs so you are getting a much more balanced view from that than individuals.

  Q13  Mr Hoyle: So the enemy is still the business development manager.

  Mr Davenport: Yes.

  Mr Daly: Some of them are nice people, but they are just working for the man and the man just tells them to up the rent or collect the rent, chase you up in some way. I asked my BDM[1] what my rent review might be like and he said, "I'll basically send you a letter that says I'm increasing your rent three-fold and you will have to argue against that."

  Mr Jacobs: Fair Pint did a survey and 51% of the tenants said they hardly ever or never see their BDM; 83% said that the BDM does not offer them any genuine guidance. It would appear that today the general role of the BDM is to collect debt rather than to offer support. There is no partnership between pubcos and tenants.

  Q14  Mr Hoyle: How many people have ended up on the street? Have you any evidence of that?

  Mr Davenport: I personally did a survey which was a very good survey. When you are doing personal pub surveys it is a wonderful life. On a serious note, several landlords in one area came to me to make the point about a specific pub in their area. They were very angry about it because over the previous eight years five tenants had gone into there, so they were on an average of about an 18 months turnover of tenants over that period of time and one of those tenants committed suicide. That is about as bad as it is going to get.

  Q15  Mr Hoyle: It does not get any worse than that.

  Mr Davenport: No, it does not get any worse than that.

  Q16  Mr Hoyle: Do you have any figures of how many times the local authority has had to house people who have become homeless because of these companies?

  Mr Davenport: I do not have a statistic for that.

  Q17  Mr Binley: I want to understand a little more about how good or bad the relationship is between tenant and BDM because that is crucial to the whole business quite frankly. We have some evidence which I will read out: "Whilst being open and we have been bullied, threatened and harassed by their unscrupulous credit team and target led area managers". Can I ask how general that statement is, how much it can be applied and how relevant it is to the breadth of the trade?

  Mr Daly: I have only been trading now for three months with Enterprise but obviously as a designer I design for other people. This particular pub I am doing in Crouch End at the moment in north London the BDMs were particularly heavy handed to the point that when we were trying to renovate the pub they would not allow them to move the python. The python is the large snake like thing that all the beer comes through from the cellar. They would not let them move that for one reason or another which held up the whole process of refurbishing the venue.

  Mr Jacobs: I cannot actually give you physical evidence to support what you are saying but I do get phone calls frequently—half a dozen a week—from various people phoning up and asking for assistance regarding their future. I cannot give them any assistance because nine times out of ten—more than that, probably 99 times out of 100—they are too far gone, they are beyond saving. They are talking to me about having to pay in advance for their supplies, they have to get money, find money, take money out of the takings or whatever, go along and physically put the money down, get a receipt for it before they can even place an order. I gather that in certain parts of South Wales as many as 50% or 60% of tenants are actually having to face this type of credit harshness and really you cannot survive that. It is a form of harassment.

  Q18  Mr Binley: In the old days the relationship in the tied trade between the district and area manager and the tied tenant was a regular one, they saw them very often and it was a very supportive one based on, in many respects, mutual advantage quite frankly. Are you telling me that that relationship has broken down sizeably in your experience?

  Mr Jacobs: In my experience that has gone and gone forever. When the brewers who were actually manufacturing the beer had this relationship through their tenancies there was a whole regime, a paternalistic approach to how tenants would run their pubs, they used to know the names of the tenants, their families and children and so on. They used to look after them. However today I am sorry to say, I am an accountant, but accountants have taken the pubs away from the brewers, they have put them into the pubcos and they run them like a financial vehicle. They are not interested in them; there is no justification for the tie.

  Mr Davenport: If I could just add to that, the fundamental thing here is that in the old day the common aim was to sell beer so pub landlords and brewers were working together to a common end. Pubcos are effectively buy to let tenants; that is the way their business is run, they buy a property and they lease it out. Their interest is not in brewing, it is not in producing a good relationship with their tenants; it is just recovering as much money as they can on as regular a basis as they can so they can pay the overheads they have. The overheads they have at the moment, the gearing ration is enormous, a 70% mark up.

  Q19  Chairman: What you have just said is the answer to the question I was going to ask you, but why are pubcos treating their tenants so badly? They are happy to see so many tenants fail but that should not be in their interest.

  Mr Davenport: You are quite right, it should not be in their interests. The driver is the coin at the end of the day, that is what it is all about. Margins are what it is all about. They know they still have an asset and they can still sell that asset, it may be reduced because of the market as it is now and that is why they are having huge pressures now. Like any buy to let landlord the real value of their property has gone dramatically down and that has caused and is causing them enormous pressure. I think a lot of what was happening in the past and what is exacerbated now is down to the margin.

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