Stealing? Yes, but can it ever be justified

By Kelly Smith

- Last updated on GMT

Related tags: Licensees, Chief executive, Renting

Taking risks: some feel there is no choice
Taking risks: some feel there is no choice
With the tie under attack, and licensees' margins being squeezed tighter than ever, 'buying out' has once again been thrown into the spotlight.

As the Business & Enterprise Committee (Bec) inquiry gathers pace, anti-pubco campaigners are defending the purchase of products outside a tenancy or lease agreement, saying livelihoods depend on it.

While pubcos have declined to reveal the extent of the issue — unsurprisingly, given that they are currently under review — a trade source estimates that 10% of tenants and lessees are buying out.

Enterprise Inns' recent statement on the subject certainly speaks volumes. In it, chief executive Ted Tuppen issues a stark warning to licensees caught breaching their tie: repay what you owe or get out.

This line of action has already led to an increase in pubs closing or awaiting licensee eviction.

"It is a breach of tie and tantamount to theft. While restricted to a relatively small number of people, the impact on our earnings can be significant," Tuppen tells the MA. "We also consider such action by rogue licensees grossly unfair to the vast majority who comply with their agreements.

"At a time when we are spending more than £1m a month supporting deserving licensees, we are also taking firm action against those who breach the terms of their leases with us. Generally speaking, on the first offence we give the licensee the chance to make good to us our losses on the condition they formally confirm they will not commit a second offence, and if it happens again we will most likely terminate the agreement."

The growing presence of Brulines beer-monitoring systems could be seen as a yardstick for the prevalence of buying out. So far more than 40 pubcos and brewers have installed the beer-flow meters.

"You don't need to be a rocket scientist," says Brulines chief executive James Dickson.

"The bottom line is that we've increased the number of our sites in the leased sector — and that's grown year on year because operators want to have transparency on quality of beer and in terms of volumes."

"I think there's an increase, and when times are tough, I suppose the temptation is greater. It's exacerbated by the ridiculous prices the supermarkets offer," says Mark Welch, operations director at north-west brewer JW Lees, which has recently become one of the last regional operators to adopt the monitoring system.

"We have always prided ourselves on having a very close relationship with our licensees, but unfortunately there are one or two who do break the rules, and the minority can spoil it for the majority. But there are proactive elements to Brulines and a variety of things we want to do with our licensees using it."

'Deeply unfair'

Fair Pint founder and Enterprise lessee Steve Corbett believes buying out will subside with Brulines uptake, but says there are ways around it, and many breaking the tie do so out of financial necessity.

"Lessees buy outside of the tie — or as Mr Tuppen prefers to call it, 'steal' — because they find themselves trapped in a deeply unfair arrangement where they are simply unable to survive. Unsustainable rent, combined with grossly overpriced beer, means many tenants are faced with bankruptcy and the prospect of losing their family home and life savings," says Corbett, who reckons up to 80% of tied pubs are in danger of closing in the current climate.

"With GPs of tied tenants in the mid-40s, it's no wonder many resort to buying out. If a tenant falls into arrears, the pubco stops supply and that forces tenants to buy out once again, so it's a never-ending scenario," he adds.

Tony Payne, chief executive of the Federation of Licensed Victuallers Associations (FLVA), calls for more leniency in such cases.

"There are occasions when people have no options — no alternative to buying out if a company puts them on cash-for-order and they have to pay a couple of days before they take their delivery. The other problem is that there's a surcharge if you have to have a delivery between your normal deliveries.

"This is why each case needs reviewing. Where licensees are doing their best they shouldn't be punished because they haven't got the money upfront.

"If the company has got a deposit or a 'lean' on the fixtures and fittings, it has the debt covered in any case. Why they can't offer the licensee that little bit of credit so that they can carry on trading?" he asks.

'Extortionate beer prices'

Punch lessee Christopher Harris claims "extortionate" beer prices and unworkable margins have driven him to pull out his Brulines and buy out-of-tie at the Egerton Arms, on Brook Street, in Chester.

Sales at the wet-only pub equate to 320 barrels a year, but Harris is not breaking even. "I can buy a 22-gallon barrel of Carling for £144 exclusive of VAT. After my discount, Punch is charging me £204 a barrel, which is still extortionate," he says.

"It's a case of what I pay out doesn't balance with what I've got coming in. I pay £641.20 a week including rent, insurances and bits and pieces. Rates are £100 a week, gas and electricity are £100 each, wages are £750 a week, and so on."

Harris says his area manager told him there were no concessions. What he did offer was £60 off each barrel of beer providing he sold it at £2.09 a pint. "Their idea is to build up trade, but you're talking double the volume before I start earning."

"There are a lot of people in the same position. If they are not supporting me, I'm going under. I might be able to hang out until after Christmas for the simple reason that I'm buying out," continues Harris, who admits to earlier instances of buying out due to under-ordering. Although he had informed his area manager, he was charged £500 for 10 barrels.

Punch refuses to comment on Harris's case. But corporate affairs director Nigel Turpin has this to say: "Our licensees are operating in a challenging environment at the moment and we are providing more support than ever to help them build sustainable businesses.

"We always encourage our licensees to discuss any issues directly with their business relationship manager, who will work with them to help find a solution."

Fines

Colm Powell, the former Enterprise lessee who this month was evicted from two of his pubs in Tonbridge, Kent — the Punch & Judy and the Ivy House — incurred fines of £60,000 at £180 a barrel for buying out during 2008.

"For every barrel you buy out you get charged £180. It goes on your account. When you do pay them any money on cash-with-order, they take the fines first," says Powell.

The multiple retailer's rent at the Punch & Judy was £57,000. "We were a back-street pub depending on local community people. We couldn't afford to pay high-street rent prices and extortionate amounts for beer," he explains.

"A barrel of beer delivered by a local wholesaler was £78 plus VAT. The same keg from Enterprise Inns was £114 plus VAT. And you can imagine it is probably paying less than the cash-and-carry because of the amount of beer going through. It has more than a 100% mark-up, without a shadow of a doubt."

End to the tie?

There are many more licensees and Fair Pint supporters who hope to see the tie scrapped. While the trade eagerly awaits the outcome of the Bec hearing, it seems the tied model is already loosening its grip — in some quarters at least. Greene King, for example, has introduced a series of new terms that include freeing parts of the tie for incoming licensees.

Trade consultant Phil Dixon predicts an end to the tie for low-barrelage pubs. "The market will determine that particularly bottom-end pubs — all pubs where there are no great beer volumes — are offered free of tie, firstly to ensure sustainability, and secondly to find someone to actually take them," he says.

But Dixon warns that these discounts may not be around forever. "The sting in the tail will be a rental assumption based on current market discount levels, which may not be sustainable in the long term. If pubcos lose their volumes by having to release the tie, it wil

Related topics: Other operators, Legislation

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