Pub Companies - Business, Innovation and Skills Committee Contents


Supplementary written evidence submitted by Punch Taverns plc

During the recent oral evidence session, investigating the tied pub sector, an example was raised by Ian Murray MP of a court case involving a Punch Taverns' licensee in which the legal enforceability of our Code of Practice was referred to.

As requested by Mr Murray during the hearing, here follows an outline of the details of that case and Punch's position on the issue.

Mr Murray made reference to Punch Taverns being quoted as saying its Code of Practice was "only a consumer-friendly document with no contractual effect". The case quoted by Mr Murray refers to a previous licensee of the Eastcote Arms, Towcester and dates back to August 2009, prior to Punch's BIIBAS accredited Code of Practice being introduced.

The reference is in fact to the Punch Charter, which preceded the Code of Practice and was a consumer focused document which set out what licensees could expect of Punch Taverns on a business wide level, but did not override individual lease terms. This was replaced by the Code of Practice in July 2010 and as we clearly stated at the Committee meeting and within the foreword to the code itself, licensees can rely on their date-stamped version of this code in a court of law. We also clarified within the foreword that any licensees who signed their contract prior to the code's existence could not rely on it as part of any legal process.

What we have endeavoured to create with our Code of Practice is a robust document which sets out the basis for transparent relationships with our licensees and clearly sets out the way we do business.

I hope this clearly explains Punch's position but I would be happy to answer any further questions that the Committee may have.

Following the oral evidence session held with representatives of the IPC, you invited the Pub Companies to submit any further views and evidence to the Committee in response to comments made. I would like to make a number of comments on behalf of Punch.

COMPLIANCE WITH THE CODE

Kate Nicholls of the ALMR sought to argue that the new codes would have represented progress had there been evidence of compliance. She then quoted statistics from the CGA survey to suggest compliance was poor. The statistics she quoted were selective and not representative of the record at Punch. We can confirm that all new entrants to Punch, since the code went live, have received a full shadow P&L in compliance with our code.

SANCTION FOR NON-COMPLIANCE WITH THE CODE

Karl Harrison argued that the only sanction for non compliance with the code was the threat of removal from the BBPA. This is wholly incorrect. The key sanction for non compliance is loss of accreditation with the BII. I can categorically assure the committee that loss of accreditation with the BII would have serious commercial consequences for our business and any other seeking to let pubs in the highly competitive lettings market. The BII is central to our quality assurance and training programmes and loss of status here would result in significantly fewer pubs being successfully let by Punch.

IMPACT OF FREE OF TIE ON PROFITS

Simon Clarke argued that conversion to free of tie would increase profits in his pub and his fixed rent would rise as a consequence. Whilst we are not in a position to comment on the specifics of his pub leased from Enterprise, the principle he describes is correct. However, he omitted to point out that as an independent free of tie operator he would not have access to the same level of discount on supply of beer as a large pub operator. The consequence is that this part of the profit from the pub, currently enjoyed by the pub company, would revert to the brewer. This is why Punch is not able to offer free of tie as an option but is willing to offer lessees the same level of discount that they could obtain free of tie but with a requirement that they buy from Punch on tie to protect our buying terms arising from scale. Taking this option, as Simon confirms, results in profits going up in the pub and therefore fixed rents rising for the tenant.

LICENSEE EARNINGS

Mike Benner attempted to argue that the new codes are not working because licensees' earnings are too low. This argument confuses cause and effect. A lessee will not be earning less than he would expect because of any failing in the code but because his pub is not performing to his business plan. What the new code sets out to achieve is that no new entrant can take on a pub without being made fully aware of the assumptions involved in our valuation of the pub as assessed by a RICS qualified surveyor.

Indeed at Punch we go further than this by advertising every pub for let headlining the expected earnings for a reasonably efficient operator as determined by RICS valuation. We also insist that every applicant takes separate independent professional advice to verify his business plan assumptions. We currently have approximately 120 pubs advertised to let with expected lessee earnings ranging from £20k to £60k dependent on pub size and complexity.

We also make it clear in our code how a lessee can ask for help from us if he is not earning to expectation. During this recession we have supported many of our lessees with rent and discount concessions costing some £2 million per month. However, we do not support every application for help because in some instances the pub is not being operated to the standards expected of a reasonably efficient operator.

Given the above I can be confident that, where a tenant is earning less than he would expect, it is because the pub is not performing to business plan and not because he was not aware of what to expect and the risks involved.

MINIMUM PURCHASE OBLIGATIONS

Simon Clarke claimed that minimum purchase obligations are being demanded by some pub companies. I would like to assure the Committee that no such minimum purchase obligations exist in Punch Taverns.

BENCHMARKING

Kate Nicholls described the information available from the ALMR benchmarking survey. Punch supports reference to the ALMR survey and provides a link to the benchmarking in its new code. Whilst it is valuable, the survey is not without its limitations and the Committee should guard against reliance on headline statistics often quoted to argue the case for higher costs in operating pubs.

First and most important is that the majority of data on which the survey is based is provided by ALMR members who, by definition, are multiple pub operators. Multiple pub operators include management costs in their businesses which are excluded from RICS guidance in valuing pubs, where it is appropriate to do so, and is therefore usually based on an individual lessee occupier who does not employ management but instead operates the pub himself.

To illustrate the impact of this point the latest version of the ALMR survey shows mean operating costs for a wet led community pub as circa 43% of turnover including 7% for the cost of a manager. A RICS surveyor using this as his comparable would exclude the cost of a manager and therefore assume operating costs of 36% for this type of pub.

Most tenanted pub companies, Punch included, do not operate open book arrangements with their tenants and are therefore unable to provide data on the running costs of their pubs. Nevertheless, RICS guidance is clear in that estimates of pub running costs will vary by pub type and size. A high barrelage wet led pub will typically have much lower running costs than a pub with low turnover or a complicated pub with high food sales. Punch has the advantage of being to verify it's assumptions through ownership of 800 managed pubs of our own and indeed has contributed and is actively helping RICS with a rental benchmarking scheme.

The tied pub model is complex and I hope the comments above help clarify understanding on some of the key areas under investigation. I am of course very happy to provide further information if required.

18 July 2011


 
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Prepared 20 September 2011