Examination of Witnesses (Question Numbers
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
Mr Jacobs: I am Brian Jacobs.
I am a certified accountant and I have 50 years experience in
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
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
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 countryEngland
and Walesand 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
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 frequentlyhalf a dozen a weekfrom
various people phoning up and asking for assistance regarding
their future. I cannot give them any assistance because nine times
out of tenmore than that, probably 99 times out of 100they
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
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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