BEC chairman Luff speaks out

Writing exclusively for the Morning Advertiser, Bec chairman Peter Luff explains why the Competition Commission should probe pubcos.

For nearly a year now, I have been a regular reader of the Morning Advertiser and its online forums. I have not been able to give even a hint of my views until my committee's report on pub companies was published.

Now it's out I welcome this chance to comment directly on our inquiry. Our report is on pubcos so our work inevitably focused on the beer tie — a subject which arouses extreme and opposing views. We had campaign groups telling us about the iniquities of the tie and lessees with distressing stories on one hand, and pubcos telling us about the benefits the tie brought in terms of market power and business support on the other.

As one post on a morningadvertiser.co.uk forum wisely said: "It can't be easy to sort out the wheat from the chaff when you're sitting… on a committee which receives so much totally conflicting evidence as the Bec must have done. One side: 'It's quite clear that it is black' other side: 'It's quite clear that it is white'."

MPs know from experience that life usually comes in various shades of grey; the fact that there was a great deal of discontent out there was undeniable, but we all know that pubs are facing a tough time right now, so how much of the discontent was really due to the pubco model? It is a fact of life that business relationships, particularly between landlord and tenant, can turn sour and that there are two sides to every story.

Survey​

We commissioned a survey of lessees because, frankly, it was impossible to tell whether the comments we received from lessees were the tip of an iceberg, or simply unrepresentative of the real situation. The survey also helped us put in context the flurry of supportive comments from the tenants of one pubco right at the end of our deliberations.

We took great care with the survey. Not only was the sample chosen independently, but we deliberately didn't publicise its existence to reduce the risks of results being distorted by campaigns — from either side. Of course we took account of all the evidence submitted to us; it was very useful and it was read with care. The comments cited in our report are a small part of the evidence we considered. But the survey means we know that those initial submissions were indeed typical of the feelings and experience of very many lessees. And our findings? Our report is a long and complex document of nearly 200 paragraphs so this can only be a summary.

The report looks at the progress since the 2004 Trade & Industry Committee report, which recommended that if the pub industry did not put its house in order, there should be a compulsory code of practice. It explores the fairness of the rental system; the effect of the beer tie, and of other ties; the benefits of the pubco tied model; dispute resolution and competition issues.

Our general conclusion is that, even though new codes of practice have been brought in, the problems identified in 2004 remain. The rental system still lacks transparency — it depends on a series of assumptions about fair maintainable trade and costs, and 44% of those who responded to our survey had not been given a breakdown of how their rent was calculated.

The Business & Enterprise Committee was just not convinced that the benefits of the beer tie outweigh its disadvantages. Perhaps most tellingly, most of the licensees in our survey had wanted a particular pub — it simply wasn't the low-cost entry into the trade claimed as one of the chief advantages of the tie that was decisive for them.

The survey showed that 67% of licensees earned less than £15,000pa, and that this does not increase hugely as a pub's turnover increases. The committee concluded that "the pubcos may share the risks with their lessees but they do not share the benefits equitably."

The committee examined the benefits of pubco support for lessees, and found that although some business development managers were excellent, there was "a worrying pattern in the evidence presented to us of lack of support for lessees, of verbal agreements not honoured, and, on occasion, of downright bullying." Pubcos had indeed offered financial support to lessees in difficult times, but in many cases this support was accompanied by extensions of the tie.

Clear problem​

Worryingly, the committee found that the industry still lacked a low-cost dispute resolution system, and although it was encouraged by BII proposals, it was astounded that nothing had yet been put in place.

Given the significant disparity in resources and power between pub companies and lessees, the committee was also concerned by the legal assumption that the parties to a commercial contract are equal, and recommended that this should be examined by the Department [for Business Enterprise & Regulatory Reform].

We have challenged pubcos to prove the benefits of the tie, by offering their lessees a choice between free of tie and tied leases, although this can only work if there is a properly transparent system for assessing rents.

We very much hope they will take up that challenge. But even if they do, that will not be enough. We are convinced that there needs to be a proper look at the effects of the tie on competition. That is why we recommend a reference to the Competition Commission.

This is not the "cop-out" industry insiders predicted — we can see there is indeed a clear problem, but more detailed analysis is needed before remedies are put in place and this is best done by the Commission