Pubcos: 'Status quo not an option'

The Business and Enterprise Committee published a highly critical report on the pubco/tenant relationship today. The Morning Advertiser reports the committee's main conclusions and recommendations.

Introduction​

Whatever the effect of the pubco model on competition, the imbalance of bargaining power and information between pubcos and their lessees has produced a system which is biased against lessees, and needs to be examined in depth. Accordingly this Report examines the industry from first principles rather than being, as we first expected, a simple check on the implementation of the Trade and Industry Committee's recommendations.

Pub closures​

It is clear that figures for pub closures do not adequately cover cases where individual lessees go out of business without the pub itself actually closing. We cannot be confident that pubco lessees are less likely to fail than other publicans.

Transparency​

We note that, without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. We recommend that there should be industry guidelines on the average costs of running a pub such as those in the ALMR benchmarking survey.

These can be used by lessees as comparators against the rental assessments put forward by their pubco.

Trading history​

We accept that in many cases pubcos do not have access to their lessees' books.

However, they have access to a substantial amount of information about the business of a particular pub, and are likely to have extensive information if a business is in difficulties. Pubcos entering a commercial relationship with a new lessee should be required to share all their information on a pub's trading history with them.

Comparables​

A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses. Our predecessor's recommendation to create a register of rent reviews would have increased transparency. We note it has been disregarded, and neither the pubcos nor RICS has taken any serious action to make sure the rental system is not unfairly biased against the lessee.

A new valuation method?​

The rental valuation method for pubs appears to be the product of history and tradition. If it is to be fair, there must be far greater transparency about how rents are calculated to ensure equality between the parties to the negotiations. If this is not improved as a matter of urgency, there are compelling arguments for abandoning the method entirely.

The beer tie​

The effect of the beer tie on basic rent is that both pubco and lessee take a lower income. However, while the decrease in the lessee's income is absolute, the pubco has £110 from that part of the discount on its barrelage it has not passed on to the lessee.

The reduction in rent is accompanied by a reduction in the lessee's profit but an increase in the pubco's overall revenue. If the interests of the pubcos operating a tied system and their lessees were truly aligned, one could expect that pubcos would want a system in which the combination of rental costs and beer costs enabled their lessees to supply beer at a price which was competitive with other pubs. This does not seem to be the case.

Enforcing the tie​

It is entirely legitimate for a company to seek to ensure that the other party to a contract respects its terms. However, we believe that where a measurement device is used to police this, it should be properly calibrated, and subject to external verification. If necessary, the Weights and Measures Act 1985 should be amended to ensure this. Furthermore, given the impossibility of distinguishing between beer dispensed and sold, beer run off and disposed of preparatory to serving, and water used to clean the lines, we believe pubcos should not be allowed to rely on data from Brulines equipment to enforce claims against lessees accused of buying outside the tie.

AWP tie​

In 2004 the Trade and Industry Committee concluded that, "In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50 percent of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed." That conclusion remains valid.

Insurance​

Pubcos have a right to require that each of their pubs is fully and properly insured. It may well be that the insurance offered through pubcos is as good as or better than any that lessees could arrange directly. Nonetheless, since lessees are frequently not allowed sight of the policy, it is impossible to establish whether this is the case.

Moreover, it is also clear that some insurance policies require the lessees to pay for a benefit to the pubco. We do not see why pubcos should not themselves take out insurance against the risks they face directly.

Benefits of the pubco tied model​

We conclude that pubcos may offer a lower cost route into the industry and the opportunity for a lessee to create or maintain an asset in the assignment value of the lease. Lessees apparently often choose tied pubs simply because they are what are available in their preferred location, or because they are attracted to a particular pub. That would mean that pubcos were, by virtue of their large estates, diminishing competition by forcing those who wish to run pubs into their business model.

Business support​

The Trade and Industry Committee found that "the performance of business development managers (BDMs) varied across the industry from excellent to dire."

That conclusion remains valid. The evidence we have received suggests that there are still too many BDMs who offer lessees little or no support, and some who bully or intimidate them. Moreover, some of our evidence suggests that this culture is not limited to BDMs but can reach further up a company.

Financial Assistance​

It is surprising that the link between financial assistance and the extension of the tie was not made clear in oral evidence. Financial assistance which is offset by an increase in rental or an extension of the tie is, in effect, 'repayable' and does not confer the benefit claimed by the pubcos.

We accept that pubcos are helping their lessees with financial assistance but there are many lessees who appear to be eligible for aid but do not receive it. Pubcos need to make their policies on the administration of financial help clear with a fair and open application process for such assistance. Lessees need to know on what grounds they are turned down.

The Trade and Industry Committee found that, on the evidence presented to them, the immediately quantifiable cost of the tie was usually balanced by the benefits available to tenants. From the evidence we have received, we are not so convinced.We are particularly struck by the results of our survey which found that 63% of lessees did not think their pubco added any value. The pubcos offer little support that cannot be found by normal market methods.

A fair share of profits?​

Increasing a pub's turnover will benefit the pubco as it increases the sale of tied products. To our surprise it does not seem to benefit the lessee to nearly the same extent. Over 50% of the lessees whose pubs had turnover of more than £500,000 a year earned less than £15,000. The pubcos may share the risks with their lessees but they do not share the benefits equitably.

Lessees' attitude to the tie​

The dispute over the tie could be ended easily: every lessee could be offered the choice of being free or being tied. This would enable both sides to prove their competing claims. We believe each and every existing lessee should, in a phased programme, be offered this choi