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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 314-i
House of COMMONS
TAKEN BEFORE the
BUSINESS, INNOVATION AND SKILLS Committee
government CONSULTATION ON A STATUTORY CODE OF PRACTICE
Tuesday 11 June 2013
BRIGID SIMMONDS OBE
SIMON CLARKE, KATE NICHOLLS, MARTIN CAFFREY AND PETER BRADLEY
Evidence heard in Public Questions 1 - 152
USE OF THE TRANSCRIPT
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Taken before the Business, Innovation and Skills Committee
on Tuesday 11 June 2013
Mr Adrian Bailey (Chair)
Mr Brian Binley
Mr Robin Walker
Examination of Witness
Witness: Brigid Simmonds OBE, Chief Executive, British Beer and Pub Association, gave evidence.
Q1 Chair: Good morning and thank you for agreeing to speak to us. I do apologise for the slight delay to the start, but hopefully we will make up time. First of all, I recognise that this is an issue on which feelings run high, but I do not want any, shall we say, disturbance, contribution or audible comments from the back at any stage in the proceedings. I will clamp down on them if they occur. Obviously, Brigid, we know you from previous inquiries, but for the purpose of voice transcription, could you introduce yourself?
Brigid Simmonds: Yes. My name is Brigid Simmonds and I am the Chief Executive of the British Beer and Pub Association.
Q2 Chair: Thanks very much. I should explain: if I do appear to be squinting at you, I have managed to leave my reading glasses behind. My secretary is on a mercy mission to find them. I am hoping, at some stage, they will materialise. Can I start? In December 2011, you wrote to the Committee stating that, with the assistance of BIS officials, the improvements in the code could be "delivered effectively and speedily". Why did it go wrong?
Brigid Simmonds: I do not think it did go wrong, and I and my members would very much defend self-regulation as something that has worked. It has to evolve. I had four chief executives meeting with members of the ALMR and multiple retailers on many occasions last year. It takes time to get all those people together, but I think we have made meaningful changes in version six of the code, which are cultural changes as well as changes that make a commercial difference to lessees and tenants.
Q3 Chair: Could you just clarify who your members are?
Brigid Simmonds: BBPA represents 95% of brewing in this country and about 50% of pubs, but we are 95% of leased and tenanted pubs.
Q4 Chair: In the foreword to the consultation document, the Secretary of State said that the reform of self-regulation was not "sufficiently far-reaching". In many cases, "tenants are being…squeezed, through a combination of unfair practices, lack of transparency and a focus on short-termism". Do you agree with that?
Brigid Simmonds: I do not agree with that. We have had problems with particularly the leased side of the ways that pubs operate, but I think we have made significant progress. I said in version six that as far as we are concerned, the Minister, Ed Davey, when he was reporting back on behalf of the Government, said, "Government should not intervene in setting the terms of commercial, contractual relationships, where these are fully justified by law and have been found by the OFT to be raising no competition issues that significantly affect consumers. Fundamentally, whether or not a lease or tenancy includes a tie is a commercial decision on the part of both parties."
Chair: Yes, but obviously he was not satisfied, or events subsequently made him decide that it was necessary to take action. Can I just bring in Brian Binley with a supplementary?
Q5 Mr Binley: I understand why you would want to quote Ed Davey, Mrs Simmonds, but of course Ed Davey did not sit on this Committee, did not listen to all the evidence, and did not have a deep knowledge of the pub trade situation. Can I refer you to the Committee’s comments on this issue on page 105 of the fourth report this Committee has produced in this area, which has caused so much heartache, so many tears and so much trouble? It says, "We remain of the view that the only way to deliver a free, fair and transparent industry is to allow the market to speak. The introduction of a legally enforceable requirement for companies with more than 500 pubs to include a free-of-tie option and guest-beer provision will ensure individual agreements are exposed to market forces when they come to be reviewed, renewed, or when new leases are created." Those comments came after considerable research, which is more than, of course, Mr Davey’s were. Do you recognise that? Can I ask if you recognise that?
Brigid Simmonds: I do recognise that, but I would argue that Mr Davey really did understand this issue. We have some serious concerns about the consultation that is now being put forward, and I hope I will have an opportunity to articulate some of those.
Q6 Mr Binley: As long as you recognise that there is a serious differing view from this body, which did the research.
Brigid Simmonds: Of course.
Mr Binley: Thank you.
Q7 Paul Blomfield: The Government has set the threshold for the code, as you know, at 500. How many companies would be affected by that?
Brigid Simmonds: It depends on how you define the 500. At the moment, the definition they have given of 500 is those that own 500 pubs per se, whether they are managed or leased and tenanted. We believe it should be only those companies that have 500 leased and tenanted pubs, of which there are six. Three are breweries and three are pub companies. The six would be Enterprise, Admiral and Punch, who are pub companies; Star, which is owned by Heineken; and Marston’s and Greene King, which also own breweries. The reason why we do not believe managed should be considered in this is that you will end up in a situation where a company like J D Wetherspoon, which only owns managed pubs but has more than 500, would be paying for an adjudicator that it will never use; there is also Mitchells & Butlers, which I think has 60 leases. We believe it should only be those that own leased and tenanted pubs, because that is the area where this Committee has expressed its concerns. We would have some other concerns about the way the definition has been made.
They have also suggested in the consultation that pubs that are free of tie-Wellington, the Grosvenor Estate and the National Trust also have free-of-tie pubs-should be covered by this code, by they are just like a commercial arrangement, as you would have in a shop. They have absolutely no knowledge of how the pub is run, they have no involvement in the pub, and there is a danger, at the end of the day, that if the barrier was set too high for them to lease those properties as a pub, they would choose to lease them for some other purpose. The last group that the questionnaire asks about is franchises. We believe, where they are proper franchises covered by the British Franchise Association code of ethics, which has its own disciplinary, complaints and appeals procedure, they should not be covered by the consultation.
Q8 Paul Blomfield: You have anticipated my next question. If you include managed within the definition as proposed, how many companies are affected? You have mentioned Wetherspoon.
Brigid Simmonds: There are a lot more. It is difficult to know the numbers for people like Trust Inns and Spirit, who might fall within that, but I think the other concern is that, if you are a smaller company-one of the family brewers, which have had no complaints put forward to PIRRS or PICAS about their conduct-and you want to buy 150 more managed pubs, they then find themselves caught by the adjudication, because their numbers go through that particular barrier. This is a complicated area, but we do not believe that small companies should be caught by this. I know that is why the barrier was set at 500, because you are putting a lot of burdens in terms of red tape and bureaucracy on smaller companies, and also the smaller companies have not been involved in any complaints that we have seen.
Q9 Paul Blomfield: I think you will know that this Committee equally does not want small companies to be affected, but 500 seems to be a reasonable threshold.
Brigid Simmonds: The BPPA and our members would accept the 500 threshold if it does not distort competition. I am sure I will go on to talk about this, but some of the proposals in the consultation-free-of-tie and guest beers-would materially distort competition, so you would then have an artificially set competition, rather than the competition of saying, "I want to go and take a Fuller’s lease, a McMullen’s lease or a lease by Enterprise."
Q10 Paul Blomfield: I am sure we will come back to some of those points. The industry is quite nimble in lots of ways. If the threshold is set at 500, what assurances can you give us that your members will not try to undermine that arrangement by setting up a series of smaller companies, each with under 500?
Brigid Simmonds: I have to be honest and say I think that is a bit theoretical as far as I am concerned.
Q11 Paul Blomfield: It is the sort of response that one might anticipate from the industry, and I guess you must have thought that through and talked to members about it.
Brigid Simmonds: First of all, it is not very easy to make those sorts of structural changes. There is protection under the Landlord and Tenant Act. It is more likely that some pubs would become managed, but that has to be a decision for the individual pub company about how they run their business. There is a question about whether policy should interfere with how companies run their businesses, just as one of the free-of-tie companies could decide that it was no longer going to let any of its premises as pubs.
Q12 Paul Blomfield: Have you had any discussion with any of your members about this being a possible response to the code?
Brigid Simmonds: No, we have not. As I said, the big companies would accept a statutory code and they would accept the 500 number, as long as it does not distort competition. That is where the concerns come, and I think you will hear from other people today who have different views.
Q13 Mr Binley: I refer again to your letter, which you wrote to the Committee in December 2011, stating that improvements could be "delivered efficiently and speedily". The original report, as you know, asked that this voluntary code be in working order and operating within a year of the publication of the report. I think we are almost three years from the publication of the report. Why is the code not implemented, ostensibly by your good selves, to this date? What has gone wrong?
Brigid Simmonds: To be absolutely honest, in the discussions that we had with BIS and with the Government, they made it absolutely clear that they wanted this to be right and they did not want it to be rushed. We got to the stage last year where we said that we hoped to be able to deliver those decisions by the end of the year. If you look at some of the changes that we have made, there is much greater clarity around insurance.
Q14 Mr Binley: Can I stop you? You have not implemented the new voluntary code. Let us be absolutely clear.
Brigid Simmonds: We have implemented. I am sorry, Mr Binley, but we have.
Mr Binley: You included some of it.
Brigid Simmonds: The new voluntary code was implemented when it was published at the beginning of the year. There was a difference between that and the companies having time to have their codes accredited by BIIBAS. All the large companies had to have their codes into BIIBAS by the end of April; they all did. Punch has even had its code accredited. All the smaller companies will have their codes accredited by the end of the year. Version six of the code became legally binding once we implemented it from a date in January/February.
Q15 Mr Binley: No, it became voluntarily binding, didn’t it, not legally binding?
Brigid Simmonds: It is legally binding on our companies, and each tenant or lessee can use the Industry Framework Code-
Mr Binley: I think you are playing with words.
Brigid Simmonds: I am not. We have agreements with BIS lawyers.
Mr Binley: Can I clarify: there is no-
Chair: Just a moment. Order, order.
Mr Binley: Let’s get this right.
Chair: Order. Make your point, but please do not talk across each other.
Q16 Mr Binley: There is no legal underwriting in law. Let’s be clear about that.
Brigid Simmonds: We have QC’s opinion and we have the opinion of BIS lawyers that the code is legally binding, and that the code is absolutely clear that it has to be fair and it is legally binding. All our companies have to put that code into their own individual codes of practice, and if a lessee or tenant wishes to object to that code, they can do so.
Mr Binley: You put a bundle of lawyers in a sack and they will all disagree, so there are different views in this respect.
Q17 Chair: Can I just pick up on that? I have seen transcripts of comments made in court by lawyers on behalf of pub companies that implied that they did not think it was legally binding. I know this is an area that previous committees examined, and the conclusion of those committees was that it was, in fact, a grey area.
Brigid Simmonds: Chair, I think that is a misunderstanding-and I would perhaps pick up what Mr Binley said-by people who have been looking at that transcript. I think you are talking about a recent Enterprise case. When the proposed offence, if you like, was committed, the code was not in place, but there was absolute clarity, and Enterprise are quite clear, that the code is legally binding.
Q18 Mr Binley: Can I have one final question? Is it fair to say that the income to support your organisation comes primarily from the brewers?
Brigid Simmonds: The income of our trade organisation comes primarily from our members, yes. Our members are brewers and pub companies.
Mr Binley: I understand why you answer in that way, thank you.
Q19 Chair: Can I just pick up one other point? I will bring you in in a moment, Mike. I accept that you are not responsible for what the Government says on this, but the justification for not introducing legislation after we reported last time was that, in fact, the whole process could be implemented far more quickly. Based on the evidence that you have given, that was not so. Do you not agree that it was the delay and foot-dragging of the pub companies that has precipitated the Government entering into this consultation with a view to introducing statutory control?
Brigid Simmonds: I have to be honest and say I do not think that is the case at all. I think there are concerns, and we completely acknowledge those concerns out there. I think there is a real question about whether the number of complaints-BIS has already acknowledged that that was shown as 400 in the consultation, but it is absolutely clear that there has been nothing like that number of complaints against it-justifies statutory regulation. Obviously, we will be arguing about this; this is a consultation.
Chair: The Government obviously disagrees.
Q20 Mike Crockart: Going back to the point about whether the system is legally binding, I think it is worth while getting on to the record what was said in the court case. It was only May this year: Enterprise v. Valentine. In response to a question from the judge about whether this was legally binding, Enterprise’s advocate said, "No, it is not, but Enterprise are prepared to give it some effect in this case." That does not sound like he is saying it is legally binding.
Brigid Simmonds: It is legally binding but the case that you are referring to happened before the IFC was in existence. They are very clear that the Industry Framework Code is legally binding. I am afraid I am not a lawyer; I cannot go into the ins and outs of this, but I am absolutely clear that, if Enterprise were here today, they would say-and I will ask them to write to the Committee, if you would like-that, as far as they are concerned, the Industry Framework Code is legally binding. We have always been quite clear that their company code, when they went to court, would be taken as a material consideration-and that is the important part-as, indeed, it was in this case.
Q21 Mike Crockart: It is just that we have been in this position before. If we go back to 2009, when there was a case in which Punch were involved, they were talking about the Punch Retail Charter. In a court case then, they said that that Retail Charter "has no legal effect. It is simply a user-friendly document outlining what the parties can expect from each other." Your response to that then was, "This was simply a barrister acting without instruction and the company involved would not want its code viewed in this way." It seems like we are repeating ourselves here: in 2009, a barrister was quite clear it was not legally binding, but you felt it was; and here we are, four years later, in exactly the same position.
Brigid Simmonds: The Government was absolutely clear last year that the code was legally binding. Their lawyers looked at it; we have provided legal opinion. They agreed with us that the code is legally binding. It is legally binding. The Industry Framework Code is legally binding. The company codes go beyond that, so they would be a material consideration in a court case, but they have to implement what is in the Industry Framework Code.
Q22 Chair: If the Government thought it was legally binding, why do they feel it necessary now to bring in legislation to establish that?
Brigid Simmonds: Because I think that the Government wishes to go further than what is being offered under self-regulation, and I think that is a discussion that we have to have. Some of the discussions that I have had with you as previous Committees were about the ability for us to agree things under competition rules. That is why, I think, the Government has decided that they wish to take it further, but I would still maintain that we would have real questions about the number of complaints that have been brought forward. If you consider that there have been 285 enquiries to the rent review PIRRS service, 12 of which have gone the full course, and there have been 59 to the PICA-Service, three of which have been considered and five of which are in the pipeline, that is less than 1% of the number of leased and tenanted pubs-it is very small.
Q23 Mr Binley: Do you know how many tenants have left in tears and near bankruptcy? I do in my own small patch. I wonder if you do. Can I just finish with this? It seems to me that you are batting a very straight bat for the people who pay you money, but you have no understanding whatsoever or compassion for those people who are the victims of a system that is breaking people’s hearts. Will you accept at least that?
Brigid Simmonds: No, Mr Binley, I will not.
Mr Binley: I did not think you would.
Brigid Simmonds: I will say that I am as concerned and I feel as strongly about this as you. I am representing an industry that contributes £16 billion to this country. There is a real danger that proposals in this code will shut more pubs than the proposals that you are putting forward, which come from a small minority of people. Those people have something they do not have in any other industry: a low-cost arbitration scheme that they can come forward and complain to. We wish to continue that.
Mr Binley: Ms Simmonds, I worked as an area manager in this industry and I know it well. Ted Tuppen is well able to make his own voice heard without you doing it for him. Thank you.
Q24 Caroline Dinenage: I would just like to talk about the overarching principles. The Department has a clearly stated ambition to aim for, too: one is basic fairness, and the overarching principle is that "a tied tenant should be no worse off than a free-of-tie tenant". I just wondered how far you agree with those two overarching principles.
Brigid Simmonds: The first principle is already enshrined in version six. In fact, it was in version five. All contracts will be fair, reasonable and comply with all legal requirements, so we have no difficulty about that, and a complaint could be taken to PIRRS or PICAS if a tenant did not consider that was the case. Regarding a tied tenant being no worse off, we very much accept the principle. What we accept is that we need to do more to explain the benefits offered to a tied tenant. Where we have concerns-and I think the RICS would share these concerns-is on whether a formulaic approach using the SCORFA system is going to be possible, because each pub is unique. We do not, however, have a concern about the principle of it at all.
Q25 Caroline Dinenage: You briefly touched on version six of your framework code. What would you then see as the main differences between that and the proposals for a statutory code set out in the consultation document?
Brigid Simmonds: There are a number of differences, and I will just start with the two that we are most concerned about. The first is obviously free-of-tie, and I think the consultation document makes the points on both sides of the argument about why there are concerns about free-of-tie. Very briefly, however, first of all, the way that the tie works is that it is a buying power. If you take away that buying power, there is a real concern, first of all, around who is going to replace the funding that is provided by the pub company. Brewing in this country is not a profitable exercise; we are obviously hugely delighted that the Chancellor gave us a beer cut, but beer duty has gone up 42% in the last four years. We saw the beer-duty cut as something that we would like to invest in, but the way breweries work is that they sell their beer through their brewery.
The third area is around guest-beer provision. I have to be honest and say I simply do not understand this. We have almost 1,000 small breweries in this country. They are only 2% of the market but they are hugely important and have been growing. They are important to the choice of ales and cask beer that we have. The DDS scheme is run through SIBA. Enterprise has 8,000 pubs and 5,000 cask ales. There are 14,000 cask ales from 408 breweries. The choice in the big pub companies is absolutely huge; where the choice is perhaps less is where they are tied to a brewery, but even Star has a scheme that gives access to the smaller breweries.
The last area is about the gaming-machine tie. We have a concern about removing the gaming-machine tie. There are many agreements now that offer a choice about whether you want to be tied on gaming machines, but you need real expertise to make money out of gaming machines, and we are concerned that you would no longer be able to do that. Those, then, are our concerns around what is in version six and how the Government sees the potential for this statutory code. There are, obviously, options within that that they are considering.
Q26 Mr Walker: You mentioned the PICA-Service and the arbitration process, and I think you gave some figures earlier: 59 cases have come before it. Am I right in thinking you said three had been concluded?
Brigid Simmonds: No, I said there have been 59 inquiries to PICAS, and that three have been concluded and five are in the pipeline.
Q27 Mr Walker: From your perspective and that of your members, how do you feel the PICAS system has worked and performed since its establishment?
Brigid Simmonds: I think the PICAS system is a great system. One of the things that we said we were going to move forward on was an overarching board of governance, which would contain representatives from lessee organisations as well as from the BBPA. In fact, the BBPA is a minority on that board; we are in the midst of setting up that board. That board looks after PIRRS and PICAS, but while the funding comes from BBPA members, it is completely independent. The lessee has the choice under PIRRS-under rent assessment-of which chartered surveyor of a panel considers their particular case. Under PICAS, everyone has to agree, and lessees put forward people who would sit on PICAS. They may be people who are trade accountants; they may have expertise in stocktaking. There is a whole range of expertise. It is very much an independent process. I think this is a question, probably, for your next witness as much as me, because he knows more about it than I do, but I think that PIRRS and PICAS are very low-cost. What other industry offers a low-cost arbitration that costs you £200-and you get that money back if they find in your favour?
Q28 Mr Walker: The figures that you have given, however, do not suggest that it is delivering a lot of successful agreement in terms of what it is setting out to do-bringing people to some form of agreement through arbitration.
Brigid Simmonds: What I think is happening is that there are a lot of inquiries, but the pub company and the lessee come to an agreement. That is how the system should work. That is a great way of dealing with it. We think it is a system that is working. We think it is a system that, again, can evolve. We are already making some changes to the amount of transparency, for example, that is offered by the PIRRS scheme, and that is the sort of thing that we discuss on the governance board.
Q29 Mr Walker: Do you think PIRRS and PICAS will be able to run alongside an adjudicator, or do you think their powers should be moved into an adjudicator, now that that is being considered?
Brigid Simmonds: It depends on how it is going to work. For the moment, we have said very clearly that PIRRS and PICAS will continue to operate. Statutory legislation does take time to introduce. If you had the big companies covered by an arbitrator, there is a question about whether you need PIRRS and PICAS for the smaller companies, given that they have not had any complaints against them, but we have certainly not set our mind against continuing PIRRS and PICAS.
Q30 Mr Walker: As regards the adjudicator, do you think the power of naming and shaming is sufficient, or do you think there should be a power to fine?
Brigid Simmonds: I would have concerns about naming and shaming; I also have concerns about fines. Under PIRRS, there is financial retribution, if you like, that can be made. I think that should be considered by the adjudicator. At the moment, however, my concern about the adjudicator is that it has very much been set on the groceries code. The groceries code is about a competition issue; it is not about fairness. I think the Government has said that it will cost just under £1 million and it is going to look at 15 cases a year. We have a real concern that they have underestimated the costs. Also, it is replicating. They are going to have to find chartered surveyors who are experts in rents, if that is what they are going to consider, just in the same way that we do with PIRRS. There is, then, a question.
The big question about this is: does the number of complaints that we have about this thing justify the actions that the Government is considering taking? We are at a time when the whole of the high street is really struggling. We are closing high-street shops left, right and centre. Are we saying that those concerns are not about their relationship and the high rents they pay? If we move everyone into a free-of-tie situation, there is a real danger that there would be no one between them and their bank, and the sort of discounts in rent, where the pub company comes in to people who are struggling, would just not be there. At the end of the day, the figures show very clearly that we are still closing more free-of-tie pubs than we are those that are tied.
Q31 Mr Binley: Can I check your understanding, then, of why there are so many unhappy tenants out there? You are arguing that the system is, in the main, a good system. You are arguing that it works well for all the people concerned. Do you believe these people are foolish people and their concern is being whipped up? What do you attribute all of those people who are expressing concerns to? There are hundreds upon hundreds of them. Why do you think there is that gap between unhappy tenants and pubcos?
Brigid Simmonds: There are historical problems, and one of the things that we never talk about here is the assignment of leases. I think the longer lease is a great way. You could be running your own pub with an investment of £30,000. If you want to run a major retail franchise, it is £250,000, so it is a low-cost entry. The risk, however, has to be proportionate to the amount of money that you are putting in. If you want to take a greater risk, then you take a longer lease and you have the money to invest. I think it is particularly in those longer leases-particularly historical ones-that have operated in very good economic times, where that lessee has assigned their lease in financial terms and now finds themselves in a much worse-off position. You signed up to a contract that looked like a great contract at the time but is not a great contract in the economic circumstances that we find.
You have to have real expertise, and one of the reasons why we introduced pre-entry training is because the days are gone when you can just sit and expect people to come to your pub. People do not have the money in their pockets. Cheap supermarket alcohol has made it much cheaper to drink at home. People are not going out as much as they did. It is a combination, in some cases, of the long lease and the risk that they have taken, and the fact that it is really difficult in this economic climate.
Q32 Mr Binley: You do, then, admit that there is a serious problem there.
Brigid Simmonds: I admit that-
Mr Binley: I am delighted.
Brigid Simmonds: I admit that there are problems, but I think that the industry, through self-regulation, has a system that can deal with those problems and has a quite clear system through which people can complain.
Mr Binley: Thank you. I think it is there that we differ. I am grateful.
Q33 Mike Crockart: I am just having a bit of a problem with the way that you portray pubcos as being almost the saviour of pubs, standing between them and the banks. It ties in with what you said at the weekend on Radio 4; you said that for paying more for their beer, they pay less for their rent, and you seem to be making that same point. However, the latest benchmarking survey carried out by the Association of Licensed Multiple Retailers looked at rents and made comparisons between tied and free-of-tie pubs. They found that tied pubs’ rents, as a percentage of turnover, were greater than free-of-tie pubs, which seems to fly in the face of what you are claiming.
Brigid Simmonds: I have to be honest and say I have not looked at that benchmarking study, and I think that is a question, probably, for Kate Nicholls. From memory, however, I think that in relation to the number of pubs that they looked at, there was an assumption made by a financial analyst that needs a further way of looking at it. Can I give you a bit more information? We have looked at SCORFA, which is the benefits offered by a pub company to a lessee or tenant, and this can be anything from boiler certification; paying for BII membership; marketing; Wi-Fi and Sky subsidy; food consultancy; and mystery visits. We would say, on average, the sort of support that pub companies give to each individual pub is probably somewhere between £6,000 and £10,000.
On top of that, they are investing in capital infrastructure. A new kitchen costs £50,000. Companies and members of the BBPA put around £265 million on an annual basis into pubs that they own that are part of pub companies. There is then additional direct financial support, which could be discounts or reduced rent. My concern is that that money is not going to be available from a bank if they walk away. The trouble is that, if you become free-of-tie or independent, which is why we are closing more pubs in the independent sector, there is no one between you and your bank. I read somewhere this week that banks were expecting a 40% deposit.
One of the great things about the tied system is that it is a low-cost entry. You can have a minimum of about £30,000 to put in to running your own business, and you can be running your own business at an early age. Yes, we need to do much more on the training side. I think the pre-entry training is absolutely essential. We have done a lot, and these questions again could be asked of the BII, with the business development managers and their training. Behaviour has changed and it will evolve, but I think we would be throwing the baby out with the bathwater if we ditched the tied system. I think it is a great system and it is one assisted by the industry.
Q34 Mike Crockart: I have to say I cannot understand, given the benefits that you are outlining, why anybody would choose not to be a tied pub.
Brigid Simmonds: I think it is one of these things where the grass looks greener on the other side, to a certain extent. You look at another pub and you decide that they can buy their beer more cheaply-
Mike Crockart: Ms Simmonds, you are the one who is painting the grass at the moment.
Brigid Simmonds: You look at a pub and you decide that they can buy their beer more cheaply, but they may be buying from a wholesaler. How cheaply you can get it depends on the turnover of the beer. If you did not have a tied system, you could buy from a company, but you might not get the choice. You could buy from a wholesaler but you might not get the discounts and you are probably going to be asked for cash up front. I am not saying that these things do not work, but I am saying that we just have to be really careful, as indeed there were real regrets that people had about the beer orders when the system was changed in the late 1980s. Was it the right decision to stop breweries owning pubs at that stage? I think there are real unintended consequences that we have to consider in full before we make these decisions.
Q35 Chair: Can I just pick up on a couple of issues? First of all, in your comments, you said that this is unlike the grocery code adjudicator, which was a competition issue. As Chair of a Committee that presided over its pre-legislative scrutiny, it is clear this was not a competition issue; it was an issue of balance of power within the industry and the appropriate balance of risk and reward, which I think is exactly what we are looking at now.
The second point I would like to make comes back to this issue of the code and legality. You have said that it was considered legally binding; does that square with the comments made by the Enterprise lawyers on the "Sunday Politics" show?
Brigid Simmonds: I am afraid I did not watch the "Sunday Politics" show, so I do not know.
Q36 Caroline Dinenage: On my previous question, you spoke to me about the gaming machine tie and the guest beer option. The consultation asks for views on whether the statutory code should include these, but also the right to request open-market rent reviews, transparency, and the flow monitoring equipment. I just wondered if any of these provisions present serious problems to your members and, if so, which ones.
Brigid Simmonds: We have had the open-market rent review for five years. We have some concerns about the definition of what it means when you have an event that means you need a rent review, but actually we do not have concerns about that. Most companies would offer rent reviews, if someone wants it and it is not in their lease, within a five-year period anyway, so that is not a concern.
I am very happy to talk about gaming machines a bit more. There are a lot of companies that offer a free-of-tie option for gaming machines, which means that they do not have to accept the supply agreement. There is, however, potential for free-of-tie machines to have contracts that are onerous and have high fixed-rental costs. As somebody who came from a background where I worked much more closely with gaming than perhaps I do now, it does take real expertise to make gaming machines work. Pub companies set income-target objectives with the suppliers and monitor performance, and I am just not sure that a lot of tenants and lessees would want to take on managing those machines. We would be very happy to offer a proposal that there was an option there; what we would be against is it being taken away entirely.
In terms of flow-monitoring, to me this is like suggesting that technology that was not available 300 years ago should somehow not be permitted now. I think it is disingenuous. It is like suggesting that Hawk-Eye should not be used in tennis or cricket, or tachometers in a lorry. The flow-monitoring equipment is very much a management tool. It can increase your sales of cask beer by about 7%. You can monitor, when you are on holiday, how much beer is being sold in your pub. We made an absolute change in version six of the code that flow-monitoring could not be the only reason for accusing a licensee of buying out, and you had to give other evidence. We would stick by that, but we do not believe in any way that flow-monitoring equipment should be banned.
Q37 Caroline Dinenage: What about the issue of transparency, though? You talk very comprehensively about the fact that people could invest as little as £30,000 to buy a business, but I think in many cases people are not buying a business; they are buying a lifestyle choice. They are buying a dream, and you are selling a dream. If there is not the transparency that allows people to see exactly what they are getting themselves into, you are not properly sharing that risk with them.
Brigid Simmonds: I do not think we could provide much more information. This code is hugely comprehensive. One of the changes we made is that "Prospective tenants must demonstrate they have taken proper independent professional advice prior to accepting a tenancy and that such advice has been used to prepare a business plan, unless a waiver has been applied." We give lots of information about the business plan. There could not be more information. I do accept, however, that it can be a lifestyle choice. I do think that we are getting, through the different range of agreements now on offer, a different type of potential licensee stepping forward, but we have to make sure that they have the right information and training before they take on that choice, because you really do need business skills to run a pub.
Q38 Mr Binley: Could I interject on the question of training? Could you give us evidence that what senior management is saying on this issue is being put into effect by middle management, who need to squeeze out their profitability from tenants? There is, from my experience, a difference between the information we are getting from senior management of pubcos and what middle management on the ground are doing with pubs.
Brigid Simmonds: Let me quote from some of the independent research that was taken out-
Mr Binley: By the way, could we have those notes? That would be very helpful to us. You are reading from notes, I notice. Could we have copies of those?
Brigid Simmonds: Not of my notes; these notes are based on our submission to Government, and I am very happy to make that available.
Mr Binley: Do carry on. I just wondered if those notes could be helpful to us.
Brigid Simmonds: I do not think so. It helps me to know what to say. It is quite, may I say, difficult giving evidence on your own to a Select Committee. It is not something I would choose to do.
Mr Binley: Do continue.
Brigid Simmonds: "The real increase in positive acknowledgement of the performance of BDMs in this particular company, most of whom have now created a BII course"-that came from the tenants and lessees of that particular pub company.
Q39 Mr Binley: Which pub company was that?
Brigid Simmonds: I am afraid I do not know. I am sure I can write to you. I think it might be Punch but I will write to you and confirm.
Chair: If you could write and confirm.
Mr Binley: That would be helpful.
Chair: Caroline, have you finished?
Q40 Caroline Dinenage: If these additional proposals were to be included in the code, how do you think they should be addressed-how should they be included?
Brigid Simmonds: Sorry?
Caroline Dinenage: The transparency and the market-rent reviews: if they are to be included in the code, how do you think they should be addressed?
Brigid Simmonds: If the Government decides to go forward with the statutory code, they will be included. The statutory code is based on version six that we have, but it obviously goes further than that. We would wish or we would certainly be prepared to discuss with the Government the inclusion of some of the changes. We have version six of the Industry Framework Code and there is no reason why there should not be other versions going forward, but we are absolutely against the free-of-tie and the guest-beer option, because we have real concerns about how that will alter the market and close doors.
Q41 Ann McKechin: Ms Simmonds, you have described today the very difficult market conditions that the industry has faced over the last few years since the recession primarily has come about. Could you confirm to the Committee how much, on average, rentals of your members’ licensees have increased over the last five years?
Brigid Simmonds: When I gave evidence to BIS, I said that our rent had gone down to 2010 by about 16%. Rent has continued to go down. I think it went down by about 6% in the last year.
Q42 Ann McKechin: What have been the average rent-review rises?
Brigid Simmonds: I could not tell you what the average rent-review rise is. There are some that are based on RPI, but often RPI is capped. It is often capped at 3%, and RPI has often been higher than that. On the whole, rent has been going down.
Q43 Ann McKechin: It bears no relation, then, to the actual market conditions.
Brigid Simmonds: Of course it bears relation to the market conditions. If a lessee or tenant has a concern, they have a number of places where they can express those concerns. Those concerns can go to the PIRRS system or to the RICS.
Q44 Ann McKechin: I think it would be helpful to the Committee if you could confirm to us in writing what the average increase has been in rent reviews over the last five years amongst your members. I think it would be helpful for us to have an indication.
Brigid Simmonds: I can certainly do it over the whole period.
Q45 Ann McKechin: Thank you very much. Can I turn to some of the press articles by your members recently since this consultation has commenced? Ted Tuppen of Enterprise Inns stated that it contains "so many flaws, risks and unintended consequences"; "thousands of pubs could be at risk with tens of thousands of jobs being lost"-that is from Mr Paveley of Admiral Taverns. Could you share with us the specific reasoning and evidence that you have to back up those statements, or do you not agree with those statements personally?
Brigid Simmonds: I do agree with those statements. I think there is a real concern that a number of pubs will close, particularly if we introduce the free-of-tie and guest-beer option. I have expressed, I think, to this Committee my concerns about how they will operate in that market.
Q46 Ann McKechin: I think you have expressed your concerns but I am just asking you for the evidence. Have you carried out any market analysis, or used any economic comparators or international comparators? What evidence or research have you carried out?
Brigid Simmonds: We have carried out some economic analysis and we will be presenting some of that to BIS with our report, but I am afraid I do not have that analysis with me. The analysis is not complete. I understand that BIS is also going to undertake its own independent analysis.
Q47 Ann McKechin: Do you have any indication of when that analysis will be complete?
Brigid Simmonds: We will be submitting information to BIS by the end of the week. As a lot of that information is commercially very sensitive, I am afraid I cannot say that I am going to make it available to the Committee.
Q48 Ann McKechin: I think it would certainly be helpful if you could provide us with a summary. I appreciate you might not want to talk about individual members, but I think perhaps it would not necessarily be commercially sensitive for us or for the industry to know the general principles you are relying on for your evidence in making these pretty contentious statements, I think you would agree. If you make contentious statements, people would expect you to produce the evidence. Would you not agree?
Brigid Simmonds: We will certainly be presenting evidence to the Government, and I will see if there is evidence that is not as commercially sensitive that I can provide to you.
Q49 Chair: Before you ask your next question, Ann, could I just come in? A couple of things: the somewhat apocalyptic statements made by the industry will, I think, ring rather hollow in the ears of tenants and licensees up and down the country, and indeed, the public, when they see the number of pubs closing at the moment. Are you saying that, if these changes are not implemented, pubs will not close? Secondly, in your evidence to BIS, will there be an estimate, assuming that pubs still go on closing under the existing regime, of the likely closures in comparison to those post implementation of a statutory code?
Brigid Simmonds: To answer the first question, I have already alluded to the fact that the Chancellor gave us a reduction in beer duty in this Budget. We were expecting a 5.2% increase; we got a 2% decrease. That is a 7% swing, which is worth a considerable amount of money to the industry. What that has done is given us confidence. It has given us confidence as brewers and confidence as pub-owners that we can invest, and we will be demonstrating to the Government that that investment is taking place. One of the reasons why it is so important is that in a pub, seven out of 12 drinks, or 68% of what is sold, is beer. Beer is hugely important to the viability of a pub, and it was particularly small community pubs that were closing, because they do not sell food, they have not been able to diversify and they are still very much wet-led pubs in their community.
I cannot say that we are absolutely going to stop the closure of pubs. We are closing-and these are CAMRA estimates, not mine-about 26 a week. Part of that, however, is the market that we are in at the moment, and the economic situation that we are in, as well as the fact that it is so much cheaper, no matter what you do, to buy alcohol in a supermarket. I cannot talk about that. This is complicated, because there are three options in the consultation and, at each option, there will be different changes. If you go to the worst option, with guest beer and free-of-tie, we will be providing some evidence to BIS, and that is the evidence that I have just been talking about.
Q50 Chair: Are you implying that the current rate of closures of pubs is just because of beer tax and the current economic conditions?
Brigid Simmonds: I think there is a huge other series of things, such as increases in energy costs, and we are all facing these as businesses.
Chair: It has nothing to do with the income that the tenant may have.
Brigid Simmonds: If you are referring to the CAMRA survey, we have written to CAMRA and asked them for details. We do not have the information about exactly what questions they asked. If you asked a lot of people on a gross salary, "What do you end up with in the bank at the end of the year?" the answer would likely be "zero".
Q51 Chair: I do not think that is what they are saying. This and predecessor Committees have drawn on a number of surveys over the years, which have consistently demonstrated a very low income for tenants. That is the point I am making.
Brigid Simmonds: What I will say is that none of the large companies I represent recognise these figures. In fact, at least one of them has written to CAMRA and asked for details, because we would want to be supporting those pubs with discounts and rent reductions, if that is the income that they are taking home. What is not clear, however, is whether this is net cash profit after investment in the business and after living expenses, or whether this is take-home pay. £10,000, as you absolutely rightly say, is below the minimum wage, and I would have real concerns about that, and my members have real concerns about that.
Q52 Mr Binley: Do you recognise the evidence we have that there is a sizeable differential between the expected projected profit on ingoing for tenants and the actual turnout thereafter? All the evidence makes that point. Do you accept that?
Brigid Simmonds: No, I do not accept that.
Mr Binley: I did not think you would, but I just wanted it on the record.
Brigid Simmonds: If there is a concern from those individual lessees and tenants that the deal they have been offered is not the right one, they should be taking it to PIRRS and PICAS.
Q53 Mr Binley: All the evidence we have on this point, then, is totally misleading, untrue and unfair.
Brigid Simmonds: At the end of the day-
Mr Binley: Good-thank you.
Brigid Simmonds: Free-of-tie pubs are closing at a faster rate than tied pubs. That is evidence. It is real evidence. It comes out of a number of surveys taken over a whole period of years.
Mr Binley: It is not evidence to the answer to my question, but never mind.
Q54 Rebecca Harris: We gather Mr Tuppen has said that, if the outcome of the consultation is not, in his view, "sensible, proportionate and for the long-term good of the industry", it would be subject to legal challenge in the European courts. Would the British Beer and Pub Association support that sort of strategy?
Brigid Simmonds: I have to be honest and say that I think you need to check exactly what he said. What he said-and I think all my companies would say this-is that, at the absolute last resort, we look at a legal challenge. There is no plan to take a legal challenge at this stage.
Q55 Rebecca Harris: What do you think would constitute a last resort?
Brigid Simmonds: I think it depends entirely on what the Government does, how the statutory code is introduced and whether it contains some of the provisions that we have real concerns about, like free-of-tie and guest beers. I will absolutely assure this Committee, however, that we are not looking at a legal challenge. We are concerned to work with the Government. We have a number of meetings with the Government. We will be providing evidence and all our members will be providing evidence to the consultation.
Q56 Rebecca Harris: It is, however, an option.
Brigid Simmonds: It is an option in anything where you are threatened by legislation.
Q57 Chair: Could I just put it to you, on that point, that if Mr Tuppen is threatening the Government with legal action-
Brigid Simmonds: I have to say Mr Tuppen is not threatening the Government with legal action. He was completely misquoted.
Q58 Chair: What you have just said is that you are considering going to the European Court.
Brigid Simmonds: No, Chair, I have not said that. As I said to Mr Binley earlier, this is a big industry. It is hugely important, which is why I am sitting here, to everyone in this country. We have 50,000 pubs, which people want to keep. The French President said that the thing he would like most to take back to France is the great British pub.
Mr Binley: We do not take a lot of notice of him.
Brigid Simmonds: We have a unique industry that we want to keep. We are all as passionately keen to keep it as you are, so it is of huge concern to me and my members that these changes are being proposed.
Q59 Chair: It comes back to the point: would you support that strategy?
Brigid Simmonds: Which one?
Chair: Going to the courts.
Brigid Simmonds: I am afraid we have had no discussions on that basis at all.
Chair: You have had no discussions.
Brigid Simmonds: No.
Q60 Chair: Mr Tuppen’s comments, then, were completely misquoted, were they?
Brigid Simmonds: Somewhere in my notes-and I am sorry that I cannot find them for a second-I have a note of exactly what he did say. As I have said and I have explained, for any industry, when threatened with legislation, that is the ultimate action that you should consider. I will, however, be absolutely clear that we are not considering it at this stage.
Q61 Chair: What would precipitate that sort of action?
Brigid Simmonds: As I have just explained, we have to wait and see the response of the Government to the consultation, what action they take, the timetable for that action and exactly what a statutory code would include. Ultimately, the tied system is governed by the European block exemption anyway, so it is tied up with Europe. It is not something that is governed only by British law.
Q62 Chair: Any further questions? Thank you very much. That is very helpful. We will wait and see what transpires. Can I call on Mr Bernard Brindley from the British Institute of Innkeeping?
Examination of Witness
Witness: Bernard Brindley, Chairman, British Institute of Innkeeping, gave evidence.
Q63 Chair: Thank you, and welcome, Mr Brindley. We appreciate you coming to give evidence to the Committee. I will ask you, as I asked Brigid, to introduce yourself for voice transcription purposes.
Bernard Brindley: Yes. My name is Bernard Brindley and I am the Chairman of the BII-the British Institute of Innkeeping. I have been a licensee in the licensed trade for over 40 years.
Q64 Chair: Thank you very much. I will open with a similar question to the one I asked Brigid Simmonds. In your opinion, what were the main reasons for the failure of the Government’s policy for enhanced self-regulation?
Bernard Brindley: I think you need to divide that question into two parts, Sir. On the first part, I do not think we have failed with regard to dispute resolution, with PIRRS and PICAS. I think that has been very, very successful. With regard to what I would call the second part, which is the risk and reward from the licensee’s point of view, as far as I am aware, there has been no consultation since the mediation. That part of the equation has not been addressed.
Q65 Chair: Just on the mediation, in terms of PIRRS and PICAS, there were 59 enquiries, three of which were resolved. Do you think the tenants and licensees would regard that as a great success?
Bernard Brindley: I think what you need to take into consideration is that PIRRS has been around now for just over three years. PICAS is still relatively new; it has been in operation for less than 12 months. We have had three full hearings and one pre-hearing. There is another hearing today, as we speak, and there are five in the pipeline on two separate dates. Getting the PICAS message through to tenants and lessees could be improved, but self-regulation, in my opinion, has not had the opportunity to be seen to be working in the short amount of time that it has had.
Q66 Chair: I certainly agree with the comment you made about the message about PICAS being improved. I saw somewhere in the evidence that one tenant thought PICAS was a Greek island or something, which seems to be symptomatic of a certain breakdown in communication, given the highly strategic role that it potentially plays within the industry.
Bernard Brindley: Can I just explain one thing? PICAS is in a very difficult position. When you bring a case to PICAS, it is never going to win as a body, simply because you have somebody saying, "Something is right and something is wrong." When you make a decision, somewhere along the line you are going to upset somebody. If you take your case to PICAS and you do not succeed, you are going to be disappointed.
Q67 Chair: I accept what you say, but I do not think it is really an answer to the point I was making. We are not asking whether PICAS is popular but whether people understand it and use it.
Bernard Brindley: As I say, it has not had the full opportunity to be used.
Q68 Chair: Can I just go on? Do you support the Department’s declared ambition for an overarching fair-dealing provision and the principle that "a tied tenant should be no worse off than a free-of-tie tenant’?
Bernard Brindley: I have very mixed feelings on that. I could also put it back to you that the free-of-tie tenant would be no worse off than a tied tenant, because there are several companies out there who offer the free-of-tie lease, and those lessees are also suffering. The other thing that I find would be very difficult is how you account for the tied tenant being no worse off than a free-of-tie tenant. In my own personal experience, the only way you can account for that is to take SCORFA into account.
Chair: Sorry, could you repeat that? I did not hear.
Bernard Brindley: You would have to take SCORFA into account and put a value on it.
Q69 Chair: Sorry if I have misunderstood what you say: you do not accept that one is worse off than the other.
Bernard Brindley: No, I am saying there is an argument on both sides. If you ask a free-of-tie tenant-and it has been quoted here this morning-there are a lot of free-of-tie tenants who would rather be in a tied-tenant situation. The equation works both ways.
Q70 Chair: In that case, don’t you think it is a reasonable principle?
Bernard Brindley: I think it is a reasonable principle. The difficulty I have is how you get to the point of proving or analysing the figures as to where a tied tenant should be no worse off than a free-of-tie tenant. It is the equation. I have spoken to several chartered surveyors who have told me that it cannot be done, because you cannot compare apples with oranges. You can compare apples with apples, and oranges with oranges, but you cannot compare the two.
Q71 Chair: In that case, don’t you feel that it is up to the tenant to be able to make that choice, based on their own understanding and their own business instincts, and that, therefore, they should have a free-of-tie option?
Bernard Brindley: That will be the lessees and tenants’ opinion.
Chair: What is your opinion?
Bernard Brindley: Are you asking my opinion of the tie?
Chair: Do you think this should be enshrined in the statutory code?
Bernard Brindley: A mandatory free-of-tie option?
Bernard Brindley: I think the lessee would need to be made very aware of the extra costs that he would be burdened with. If they outstrip the advantage of the discounts, he will make a business judgment whether to go free-of-tie or tied. I have been in both situations. I have been a tied lessee and I have been a free-of-tie lessee, so I understand the equation from both sides. You make a business decision. You work out yourself what your barrelage is and what discount you can get, and you do the equation. It is a business decision and a personal decision that you will make yourself.
Q72 Chair: Two observations: the first is that you said that it is difficult to get the information upon which to make that decision, and certainly one of the problems that this Committee has and predecessor Committees had in these inquiries is getting the pub companies to provide the detailed information that would enable that judgment to be made. Secondly, you seem to me to be agreeing that, ultimately, it is the tenant who should have, if you like, the right to make that decision, based on their own knowledge and their own commercial judgment. Is that a fair summary of what you think?
Bernard Brindley: That is a fair summary. When the tenant first wants to enter the industry, he should be very careful about which company he selects to do business with.
Chair: I do not think anybody would dispute that.
Bernard Brindley: Unfortunately, however, the tenant does not see it like that. It is the "roses around the door", and this is what we are trying to prevent. We are trying to equip people with more knowledge of the industry before they enter into it.
Chair: I do accept that a lot of would-be tenants choose the pub rather than the pub company, but I think Brian wants to intervene.
Q73 Mr Binley: Are you happy with the information given by pubcos in order to make the sorts of judgments we are talking about?
Bernard Brindley: One of my main concerns is the initial rent. That is the most important thing to me: when you first enter into that pub, get that initial rent correct, because that is your benchmark going forward. I have reservations as to how fair maintainable trade is assessed, and I think a lot more work and clarity needs to go into fair maintainable trade. If that figure is the correct one going forward, what I would then propose is that the fair maintainable trade should be capped throughout the entirety of the agreement. If you have a 10 or 15-year agreement, the fair maintainable trade figure should not be able to go upwards, apart from inflation or any exceptional circumstances like the building of a housing estate near you. To me, that underpins what fair maintainable trade is all about: we will not penalise you for your success.
Q74 Mr Binley: I am grateful for that, but isn’t it often distorted by what we used to call-and I am not sure we still do-discount on barrelage? Can’t it be distorted? Don’t those two work together? Aren’t they tools to alter the fairness, even if you get that rent right at the beginning? Isn’t that a danger that happens as time goes on?
Bernard Brindley: Yes. To me, as an operator, I will like to know what my costs are going to be. That is the benefit to me. If I have my rent set and I go into my business and exceed in it, why should I be punished?
Mr Binley: Absolutely. Thank you.
Q75 Rebecca Harris: The Government highlights the number of calls and complaints to your website as evidence of the need for statutory intervention, so I wonder if you could just give the Committee a bit of a breakdown of the level of calls and the nature of the complaints.
Bernard Brindley: The nature of the calls? I have a document that is in the consultation document. The nature of the calls varies from rent reviews, dilapidations, licensing and HR. It is a whole multitude of enquiries.
Q76 Rebecca Harris: I really wanted to get a bit of an assessment from your perspective of how big a problem we have out there and what it is particularly focused on.
Bernard Brindley: The bulk of the calls relate to dilapidations, rents and the tie itself.
Q77 Rebecca Harris: This might be a difficult question to answer, but how well do the calls that you receive reflect the level of concern and complaints out there, given that we have already established that not everyone necessarily knows to come to you?
Bernard Brindley: I am sorry. I am not quite sure I understand the question. Are you asking me to say how many calls we have with regard to rent?
Rebecca Harris: It is really whether, given that the Government has highlighted how many complaints you have had, you think that is telling the whole story. How much of an issue do you feel there is out there?
Bernard Brindley: Could I just correct one thing? In the document, it refers to complaints. They are not complaints; they are enquiries. As I said, we have a very broad range of enquiries. Most of them are around dilapidations, the tie and the rent-the bigger majority.
Q78 Paul Blomfield: If I could turn to the same issue I raised with Brigid Simmonds, which is the threshold for the code, which is set at 500, in your opinion is that the appropriate level?
Bernard Brindley: No.
Q79 Paul Blomfield: Why?
Bernard Brindley: As far as our members and I are concerned, there should be no threshold. If legislation is good enough for one, it is good enough for everybody. We would certainly not want to split our membership into those who are legislated for and those who are not. We would be coming from the point of view that the threshold should be zero.
Q80 Paul Blomfield: You would not accept that there is any different case to be made from the perspective of smaller companies.
Bernard Brindley: The smaller companies have little to fear from this. If you operate a good business, you have nothing to fear. If you go beyond, then you do.
Q81 Chair: Just before I go on to our next questioner, in terms of the question that Rebecca asked about the breakdown of the level of calls, I do not have the nature of them but I do have the figures. I think the crucial figures are 37% to Enterprise Inns and 24% to Punch Taverns, which are by far the two largest. 51% are to those particular pub companies.
Bernard Brindley: I think that is a very fair assumption, bearing in mind that those two large companies have more than 50% of the tied properties. Let us be fair about this: one would expect them to have far more calls than the smaller companies.
Q82 Chair: Would you say that that balance is fairly reflective of the number of properties that they have?
Bernard Brindley: Yes.
Q83 Mike Crockart: I do not think there is any point asking my question. I was going to ask Mr Brindley about whether it was practical to have a statutory code for large companies and self-regulation for small companies, and I think you have answered that already by saying, "No, it is not," because you would prefer the limit to be zero, so it would just be one code and that would all be dealt with by the new Adjudicator rather than having any small code of practice.
Bernard Brindley: Yes, it is one for all. It has to be the only way.
Mike Crockart: I do not think there is any point in carrying on with that line of questioning.
Q84 Mr Walker: The Chair has raised the performance of PIRRS and PICAS already. You have set out that you feel that the dispute resolution to date has been very successful, but we are also looking at the figures and there seem to be a relatively small number of cases that have reached some form of resolution. If we were looking as a Committee at a Government initiative and we were seeing those kinds of figures, I think we would be quite critical of it. What period of time should we be looking at to see whether this works?
Bernard Brindley: Let’s be fair about this: it is new, as I have already said. I do not think it has been given enough time. It is still working and it is still in operation. The onus is now upon the licensee and the tenant. If they feel they have a dispute against their pub company, the onus is upon them to bring that dispute forward, and we need to get that message out perhaps more than has been done up until now. It is about getting them engaged in the fact that there is now a dispute resolution system out there for them to use.
Q85 Mr Walker: At what point, however, should they be expecting that that dispute resolution will bring them to some form of resolution within a reasonable period of time? That ratio of roughly 5% of cases being resolved through the current arbitration system, surely, is not reassuring to someone who is thinking of bringing a case forward.
Bernard Brindley: Sorry, could you repeat that?
Mr Walker: You say the onus is on them to bring their case to the resolution system, but surely they will be more encouraged to do so if they see a higher proportion of cases being resolved.
Bernard Brindley: We would love more cases-actually, we do not like the disputes in the first place, but we do want more people to use the service. What we have to bear in mind is that PICAS is now having a very similar effect to what PIRRS had, which is that pub companies do not want to go before PIRRS or PICAS, so they are settling their cases beforehand. They are not getting as far as PICAS or PIRRS because they are determined to settle beforehand.
Q86 Mr Walker: Do you have any figures for cases that have been settled?
Bernard Brindley: I think it is about 16 cases. It is difficult for us to know when a case has been settled. From an enquiry to going live, as soon as the pub company is aware that PICAS is involved, they then start sorting these issues out. It is difficult to qualify those numbers, but we know it is working.
Q87 Chair: Could I just intervene at this point? I accept that it may be difficult to give an answer off the cuff, and it may, in certain circumstances, be difficult to even know if an issue has been resolved because of it. Could you, however, do a little bit of research and write to the Committee with the figures as best you can?
Bernard Brindley: Most definitely.
Q88 Mr Binley: Could I just ask what you see the role of the BII being if we have a statutory code and an adjudicator?
Bernard Brindley: You say "the role of BII". Are you referring to the role of PIRRS and PICAS?
Q89 Mr Binley: If we have a statutory code and adjudicator, what will the role of the BII be? What role will it play?
Bernard Brindley: BII runs PIRRS and PICAS. It administers them but they are controlled by a separate board completely.
Q90 Mr Binley: I would, then, assume that the role disappears, does it?
Bernard Brindley: Most certainly not, no. BII is an educational organisation. We are there to support-
Q91 Mr Binley: What, then, will it do?
Bernard Brindley: We are an awarding body, so we design qualifications for the licensed industry. We also have a membership.
Mr Binley: That is helpful, thank you.
Bernard Brindley: We support our members in various different ways. Being part of PIRRS and PICAS is just something else. We are there to represent our members.
Mr Binley: That is helpful. That is on the record and I think that is helpful, thank you.
Q92 Mr Walker: You alluded to the fact that you felt that companies were settling more. It would be very interesting to have any statistical evidence on that, so if you are able to look into that and provide any more detail on that front, I think it would be very useful for the Committee’s sake.
Bernard Brindley: I hope you appreciate that the numbers are difficult to qualify, because we do not know what cases are being resolved, but we will do our best to get that information to you.
Q93 Chair: Just before I go on to Ann, you have talked about supporting your members. One of the complaints that I have seen is that it is almost impossible to find details of the Industry Framework Code from your website. I went on to that website and I have to concur that I could not find it. Do you not feel that, if you are supporting your members as, if you like, a vital underpinning of the PICAS service, your organisation should have this more readily available?
Bernard Brindley: I will ensure that it is on the website. I cannot say whether it is or is not. It could come under different sections. It could come under BIIBAS or it could come under PICAS.
Q94 Chair: Wherever it is, I would have thought that, as you are supporting your members, it should be very readily available.
Bernard Brindley: It should be prominent. I have no problem with that at all.
Q95 Ann McKechin: Mr Brindley, if the Department decides to create such an adjudicator, should PIRRS and PICAS be housed in that office with the adjudicator rather than under your umbrella? Do you have any particular views on that point?
Bernard Brindley: I see a benefit of PIRRS and PICAS working with the adjudicator, and I will clarify that. I do not like the expression that is in the consultation document, because that says that PIRRS and PICAS should be in competition with the adjudicator. That is not a word I would use. I do not think they should be in competition. If the statutory code does come in and there is a threshold, I think there should still be a service there for those who fall below the threshold. I also think the adjudicator, if there is going to be one, would want to adjudicate on the bigger issues and not so much the smaller ones, which PIRRS and PICAS are capable of doing. I also think PIRRS and PICAS are a lot more affordable from the tenants’ point of view. We do not have or know a figure, but I should imagine that, as a tenant or lessee, if you take a case to an adjudicator, it is going to be far more expensive.
Q96 Ann McKechin: If that was the type of set-up that was established, do you think the adjudicator would have the ability to have access to your caseload to examine whether there were any particular trends or issues of concern?
Bernard Brindley: No problem at all.
Ann McKechin: That is helpful
Bernard Brindley: There are two other issues I would like to bring forward, and this supports PICAS. Both things would affect the adjudicator. They are that, within PICAS and the Industry Framework Code, we also look at whether the company has acted within the spirit of the code. That is a very valuable tool to PICAS. It is not just a black-and-white, "Has a pub company breached its code of practice?" If the PICAS panel find that the pub company has not acted within the spirit of the code, they will award for the tenant.
The other thing with PICAS is that we have managed to avoid solicitors, lawyers and barristers. A pub company cannot come to a PICAS panel hearing with a barrister, solicitor or lawyer. If the licensee wishes to employ a solicitor, barrister or lawyer, the same will be awarded to the pub company. In other words, the pub companies cannot come in heavy-handed because they can afford it and the lessee cannot.
Q97 Ann McKechin: Thank you for that. If I could ask you one further question: what are your views on the proposal for the adjudicator to have the power to fine? Would you have liked that sanction in relation to your own responsibilities?
Bernard Brindley: I fought for it and lost it is the simple answer, because I think, if the PICAS panel had the ability to penalise, it would be a great advantage to it. It is something that I did recommend right at the very beginning of the PIRRS board meetings, and it was vetoed.
Q98 Ann McKechin: Is that on the basis that you have witnessed cases where you think the behaviour of a licence-holder or a landlord has been very unhelpful or has been manipulating the market?
Bernard Brindley: Sorry?
Ann McKechin: From your own experience, given that you wanted the power to have fines, is this on the basis that you have witnessed what you believe are companies trying to manipulate the market?
Bernard Brindley: No. My belief is, if you are culpable, you should pay for it. To me, the only way you are going to stop the pub companies from abusing the system or breaching their code of practice is through their financial balance sheet.
Q99 Chair: Interestingly, arising from your comment, you say that you were in favour of the power to levy fines. Who stopped it?
Bernard Brindley: It was vetoed. It was a decision taken by the PIRRS panel. Let’s get this absolutely clear now: the panel is in favour of the tenant and lessee, the same as the new regulatory board. There were four tenant/lessee organisations and the BBPA.
Q100 Chair: Can I get it clear: who stopped it?
Bernard Brindley: It was the whole of the board. One member cannot stop it.
Q101 Chair: No, but there must have been some vote on it and, presumably, BII was not in favour of it.
Bernard Brindley: I am going back 12 or 15 months ago, or maybe 18 months ago. All I know is it was a proposal I put forward and it was not accepted. As to an individual or the whole of the board not accepting it, it was not accepted. It was not accepted by the whole of the board.
Q102 Chair: Are there any minutes?
Bernard Brindley: There would be, yes.
Q103 Chair: Is it possible for us to have them?
Bernard Brindley: Whether it would be minuted, I do not know, but if there are minutes, I can make sure that they are available to you.
Q104 Chair: Thank you. That, I think, concludes our questions. Can I thank you, Mr Brindley, for your contribution? We are slightly ahead of schedule. I just reiterate what I said to the previous witness and, indeed, others: if you feel that, in retrospect, there are one or two things that you should have said but did not, please feel free to write to us with supplementary evidence. We have asked you for further evidence on several points; we will be grateful to receive it.
Bernard Brindley: Can I just make one point before I do go?
Chair: Yes, certainly.
Bernard Brindley: There has been some criticism as to the independence of PICAS and the new regulatory board. I chair those and there is complete independence. Everything is in favour of the tenant and lessee, even on the new regulatory board, where there are 11 directors. The Chairman does not have a vote, and there are 10 other directors. Six will be tenants and lessees, and four will be from the pub companies. The balance is always in favour of the tenant and lessee.
Chair: Your comments have been noted. Thanks very much.
Bernard Brindley: Thank you.
Chair: I believe that all the next panel of witnesses are present, so would they like to come in?
Examination of Witnesses
Witnesses: Simon Clarke, Independent Pub Confederation, Kate Nicholls, Strategic Affairs Director, Association of Licensed Multiple Retailers, Martin Caffrey, Operations Director, Federation of Licensed Victuallers Associations, and Peter Bradley, Tenant, Enterprise Inns and Representative for Licensees Supporting Licensees, gave evidence.
Q105 Chair: Good morning and welcome. Thank you for agreeing to give evidence to our inquiry. Some of you are well known to us from previous inquiries, but a particular thank you to Peter Bradley, who has come along at very short notice-we do appreciate that. Can I just make a point that I always make to panels when we have got several members on them? Please do not feel that you have to comment on every question if the points that you would wish to make have been made by a previous speaker. Obviously if you wish to demur from what another speaker has said or add to it, then feel free to do so. Most of our questions are fairly general; I am conscious of time constraints, so please try to be disciplined. Before we start, please introduce yourselves, going from Martin, on my left, for voice transcription purposes.
Martin Caffrey: My name is Martin Caffrey, and I am the Operations Director for the Federation of Licensed Victuallers Associations.
Kate Nicholls: I am Kate Nicholls. I am Strategic Affairs Director at the Association of Licensed Multiple Retailers.
Peter Bradley: I am Peter Bradley. I am Enterprise Inns’ tenant for seven years. I am also here representing Licensees Supporting Licensees.
Simon Clarke: I am Simon Clarke, publican and surveyor. I am here today representing IPC.
Q106 Chair: Thank you very much. I am going to open with a fairly general question. When the Government announced its plans for enhanced self-regulation, it predicted, as you may have heard, a quick resolution to the problems with the existing framework code. From your perspective, why couldn’t you come to an agreement with the pub companies? Who would like to lead on that?
Simon Clarke: The fundamental issue was and always has been the issue of rebalancing risk and reward. We have a situation where the contract terms in tied agreements are very unique to tied agreements, and they allow a pub-owning company full control over product price and product mix. It is these terms that are most exploited, and there is nothing in the Industry Framework Code to recover over that. When Ed Davey, shall we say, struck a deal with the BBPA, he probably was persuaded that he was delivering something meaningful, but in retrospect the immediate improvements that were listed were pretty well already in place-delivering the abolition of upward-only rent review clauses has been around since 2004, with the Trade and Industry Select Committee. The further improvements were a commitment to discuss areas, not necessarily to act on them.
We had discussions with the BBPA and other parties regarding rebalancing risk and reward, and I am afraid to say the negotiations more or less collapsed on the basis that they were not prepared to talk about any of that.
Chair: Does anybody wish to add to that, or would they agree that summarised it effectively? Martin?
Martin Caffrey: I would like to add, if I may, it is not purely and simply the Code of Practice that has necessarily failed. Going back to December 2011, the proposals put forward by the BBPA under a document called the "Tie Code of Governance" had four sections to the solution. There was PIRRS and PICAS, which are operational. There is BIIBAS, the accreditation body, which is operated through the BII to ensure that the individual codes operate to the central voluntary code. The element that is obviously missing is PAS-the pubs advisory service-which is a body that the BBPA committed to, to the Government, which would give advice to tenants to find their way through what is the nightmare of this industry. That never happened.
We have pushed constantly for that body to be formed; we would still wish that body to be formed, and it has a massive role to play in solving the issue for individual licensees, who are principally our members-individual licensees rather than large companies or pressure groups. They can come to a friendly, knowledgeable voice that is not specific in terms of accountancy, stocktaking, surveying, or whatever it may be, to find their way through and have their rights under current legislation explained to them. I would like to see that under the voluntary code now, and I would like to see it under the statutory code when or if that comes forward. That is another reason why the position has failed at the moment.
Q107 Chair: Can I just clarify something? You have referred to the PAS, the pubs advisory service. I have received submissions from an organisation calling itself the Pubs Advisory Service, which, given your questions, raises the issue of what its status is. I understand the pub companies were trying to set up an alternative organisation, but could you clarify for me what status the organisation known as the PAS has?
Martin Caffrey: Currently PAS is an organisation that we are not involved with, so I am perhaps the wrong person to ask that question of. As an association, we wanted to take it slightly further and produce an advisory and support service. The question you asked Mr Brindley was: how many results have been brought about through PIRRS and PICAS prior to that resolution for the individual tenant? Mr Brindley could not answer that question, because, having given the advice, the tenant goes away and takes his own course. We would like to see support of that tenant, and for the pubs advisory and support service to have ownership of that problem and to see it through to its resolution.
Q108 Chair: Could anybody else enlighten me as to the role and possible fate of PAS?
Simon Clarke: I am connected with PAS. Chris Wright set it up. The whole purpose of the exercise was to come up with something that was deliberately tenant-orientated. There is no involvement by pub companies and brewers at all, so you could argue that it is not independent in the sense that it is very dependent, and it is all to do with tenants and licensees. There are several opportunities within PAS to go to lawyers, stocktakers, accountants and surveyors-I am one of the surveyors that might get a referral-and that is certainly something that we would like to develop more. As you can imagine, it is not meeting with a great deal of acceptability with our friends on the other side.
Chair: I think I am a little clearer.
Peter Bradley: May I just add one quick thing? The Pubs Advisory Service is very active in Licensees Supporting Licensees, and we are in contact with Chris on a daily basis; he offers an excellent service and excellent advice.
Q109 Chair: You have probably pre-empted my next question: was there a fundamental disagreement or specific areas of difficulty with the BBPA? Simon, you described it as the issue around the balance of risk and reward. Is there anything you would wish to add further to that?
Kate Nicholls: Can I come in on that? We were quite closely involved in negotiations with them. We had to accept at the outset that, if we were going to talk about version six of the code and what should come in with it, we were not going to be able to cover the commercial issues that are so pertinent and have been so intractable for so long. That was one of the problems that we identified of going through the self-regulatory regime. We negotiated in good faith with them on other issues to get the rest of the framework code as good as it could be.
The most intractable issues were the ones that were identified by your Committee: it is regulation of the rent assessment process; the commercial lease terms as to the nature of the buying obligations, the dilapidations, the schedule of conditions-all of those issues. We had to fight long and hard, which is why it has taken so long, for every small step of progress along the way.
You asked at the start why the Government’s deal fell apart when they were agreeing version five of the code in 2011. One of the key reasons why it fell apart was that the attention had to be given to revising the code and what became version six. The commitments that were delivered to Government were not delivered on paper in version five of the code; we spent six months of last year unpicking what was supposed to be delivered for the Government, and ensuring that it was written down properly in a code that was enforceable and delivered what was supposed to happen.
As a consequence of that, there was no attention diverted and given towards implementing and delivering on the Government’s commitments. You have heard one of them was PAS, but all the attention was focused on getting version six of the code right. Nothing was focused on getting version five implemented and enforced, nothing on joining up all the different elements of self-regulation-and there are a lot of them-and most importantly nothing was done about informing tenants of their rights under the new regime, how to use them, and how to work to their advantage, and that is still an issue of concern with version six.
Chair: That clarifies some of my earlier questions on the reason for the delay, thank you.
Q110 Paul Blomfield: I return again to the question of the threshold for the code, which I have raised with both previous witnesses and got very different views. I wonder if you could share with us your views on whether a threshold of 500 is the appropriate level for the code to bite? You may, indeed, have a different view altogether.
Martin Caffrey: I would certainly say that there should be no threshold, and echo the previous comments from other panel members. Good legislation is good for all; it is our belief that a good company should wish to be covered by that and be measured by that. We fully understand that, should certain freedom-of-tie options become available within the statutory code, perhaps the sub500 outlets may be relieved of that onus, but in respect of the rest of the code, there should be no limit of 500.
Kate Nicholls: Can I just come in on that? We support a threshold. We think the threshold is important-not necessarily for the code per se, and I agree with you that the code provisions should and could apply to all, depending on how they are selected-in determining the ability to comply with the code, the cost of complying, and enforcement costs, which are not inconsiderable when they are set out. The cost of the adjudicator, the cost of the levy, and the internal compliance are significant. The threshold is good in determining who can afford to bear that cost, and it will undoubtedly be a cost for the smaller operators below that-we do have to be cognisant of that.
From our perspective, and it is just an ALMR position, we believe that the threshold has to be defined according to the number of leased and tenanted outlets, not pub ownership per se.
Martin Caffrey: I should say, if I have misled, I equally agree with that. It would be slightly over the threshold of 500. I would only look at that in terms of leased and tenanted as well.
Q111 Paul Blomfield: You would agree that the threshold would be at 500?
Kate Nicholls: The threshold would be defined by leased and tenanted properties, and agreements that are issued. It depends on the content of the code as to where that threshold would be set, but you do need a threshold.
Peter Bradley: I agree to a degree, but I would also like there to be a provision, if there are instances where things are going wrong within pub companies that are below the threshold, for it to be measured in some way or to have it reintroduced at a later stage. Some tenants that I speak to in pub companies with fewer than 500 pubs are wondering if this is a "get out of jail free" card. We support the 500 threshold, but we would like to see that there is something robust in place that could still be attached to the smaller number, if it is found to not be working.
Simon Clarke: I would pretty well echo that. When the IPC first started off, we had a 500-threshold provision within our manifesto-that was specifically referring to the free-of-tie option to be offered by companies with more than 500. Our position remains the same-that a 500 threshold is required. What Peter said was very important; one of the failings of the beer orders was that there was no swift method of review and amendment to what was going on at that time. This situation and this proposal is that the adjudicator potentially would have the opportunity to review what has been going on over a period of time, and potentially alter the statutory threshold-higher, lower, whatever it may be-and equally alter the terms of the statutory code itself.
Kate Nicholls: I am sure it is one thing that this Committee would want to return to; if a threshold were introduced and you found that people below it were abusing it, I am sure that you would be looking at it again in due course.
Paul Blomfield: I am sure we would. Thank you very much.
Q112 Mike Crockart: Can I ask what we could term the no-brainer for this panel? We have asked all other witnesses this, so forgive me. Do you support the Department’s ambition for an overarching fair-dealing provision and the core principle that a tied tenant should be no worse off than a free-of-tie tenant?
Kate Nicholls: Yes, wholeheartedly. It is what we have tabled and have campaigned for not just in negotiations with the BBPA over the last 18 months but since we started mediation in 2008. It has been one of the most intractable issues. We have got it slightly included in version six of the code, but it is by no means clear, and it is not acceptably clear enough in our view. Yes, it is a fundamental premise that those two principles are written in; that is what we told them in 2008.
Simon Clarke: I would like to say that absolutely the IPC are behind those two commitments and, indeed, they were part of IPC’s manifesto in some shape or form; it may not be in exactly the same words, but that is exactly what we were seeking to achieve. What is interesting and worth while pointing out at this stage is that I wrote three weeks ago to PICAS asking the very same question: would PICAS or the new overriding regulatory board have those same commitments that Government have outlined? Three weeks later, I have got the response: no-not in so many words; it was sort of yes and no, so I am taking that as a no. I have got the letter; I am happy to share that with the Committee. I only got it on Friday.
What I find concerning about that-and now we address the issue of independence, if I may, that Bernard touched on earlier-is that we have a board with five panellists’ organisations: the ALMR, FLVA, GMV, BII and BBPA. As far as I know, four of them would be quite keen to go on the record and say they are for fairness and the tied tenant being no worse off. There is only one organisation, it would seem to me-I certainly have no evidence of it-that might have a problem with that, and it seems that one organisation has had the overriding veto on giving a straightforward "yes".
Q113 Mike Crockart: I do not know if you were present when Brigid Simmonds from BBPA was here giving her evidence, but she outlined a glowing upland, where tied pubs live protected from the realities of difficult trading conditions by the pubcos. That does not seem to be the picture that you are painting of the reality of the situation. I particularly asked her about the benchmarking survey that you have done, which looked at rents as a percentage of turnover, because the argument seems to be that, if you pay more for your beer, you pay less for your rent and everything evens out; that gives you the principle. She suggested I ask you about that, so I am going to do that.
Kate Nicholls: Yes. The figures that you are quoting were from our benchmarking survey, which we do every year and have done for the past six or seven years. I am afraid I do not have the exact figures, so I am going from memory, but I will write to the Committee to ensure you have the exact figures in front of you. Last year, for the first time, rent as a percentage of turnover in the tied estate overtook the free-of-tie estate. The gap had been narrowing between the two. The average for the whole of the leasehold sector-and we have to remember that about half of the outlets covered in our survey are commercial leaseholds, so they are set on completely different rental terms-is about 11%. Last year the figures were around 12% of turnover for tied rents, and about 10.5% of turnover for free-of-tie rents.
Some of those free-of-tie commercial rents will include peppercorn deals and reductions in the first year, which will distort that average, but as a percentage of turnover, and as a benchmark, that is what the results were showing us. I can write to the Committee with a full detailed explanation; I believe you have had it in our previous submissions, but I will write again separately to make sure you have the exact figures.
Q114 Mike Crockart: Playing devil’s advocate-not that I am using that word for any particular reason-they would suggest that that is because of the package of support, and they outlined a large list of things that pubcos offer as cut-price support. I think she put a figure of between £6,000 and £10,000 per year on it.
Kate Nicholls: Our members do not recognise those levels of figures for SCORFA, which is what you are talking about there. There will be a number of reasons why rent as a percentage of turnover could go up, even if rents themselves are coming down, which is what the pubcos have said to you in this Committee before. If you are in a declining market-and I do not think anybody would dispute, or I hope nobody would dispute, that we are not in a declining beer market-and you have a time of economic uncertainty and a pub’s turnover goes down, its fixed cost, which is its rent, as a percentage of turnover will inevitably go up. There will be a number of reasons why those figures come out as they are; they are only an indicative average benchmark, but there will be a number of reasons behind it.
Q115 Mike Crockart: But in your opinion, and the opinion of the panel, that difference is not made up for by the £6,000 to £10,000 of support in other ways.
Kate Nicholls: No. Those rental figures are for your pure dry rent, which is your fixed overhead; that is what we look at in our benchmarking survey. It is no fixed overheads at a site level, so you would leave aside all of the other offsetting benefits when you look at any SCORFA that is applied, any support package that is supplied, or any discounts that are applied for your beer; they do not get taken into account. You just look at that raw figure of rent as a percentage of turnover. It gives a good benchmark when you work through the Government’s rent assessment statement in the back of their consultation document. Is that rent at the bottom coming out roughly fair? Is it in that general ballpark?
Chair: I know there are more legs in this particular issue. However, I know Robin has to go in a few moments, so I am going to invite him to ask his question and then I will come back to it.
Q116 Mr Walker: Apologies for not being able to stay till the end of the panel; I have to step out to a meeting. PICAS was established under the Government’s self-regulatory framework, and members of this panel represent organisations that are part of the service: the FLVA and the ALMR. Can you describe how it works and what level of engagement you saw from both sides?
Martin Caffrey: In terms of PICAS?
Mr Walker: Yes.
Martin Caffrey: Quite detailed discussions took place as to what could be taken on board and what could not; the imbalance between the potential evidence that an individual tenant could bring against that of a large pub company; trying to rectify that balance so that it was equal and fair; and the point that Mr Brindley made regarding any legal assistance. It has a very low-cost entry for somebody to come in. The PICA-Service is restitution only, and that is where we believe that the adjudicator could-on the continued referral of any individual company that was found wanting through the PICA-Service process-have the tools or the arms to start to bring in punitive areas, if that answers the question.
Kate Nicholls: My involvement in PICAS is only at the board level; we do not get involved in the day-to-day cases. It has been in place for just over a year. It has dealt with a significant number of cases, whether those are inquiries or cases that are taken further forward-there is a differentiation between the two-but there is no doubt that some cases are being resolved postinquiry stage. It is having a beneficial effect in those particular instances, in mediation and in helping people to resolve their differences, and its primary objective is to help resolve differences. I appreciate it will not be appropriate for all.
One thing it is important to note is that those cases that it is looking at, and those inquiries it is getting, are not just from companies that would be regulated by the proposed statutory code. I do not have the exact figures, but there are quite a large number-about 20% to 25%-of inquiries and cases taken by PIRRS and PICAS from companies that fall below that statutory threshold. That is why it is quite important that those options for alternative dispute resolution-and I emphasise that they should be just options-remain in place for those thousands of tenants who may otherwise be unprotected.
Q117 Mr Walker: Just very briefly, we heard evidence from the BII that a number of cases have been settled. Do you think there has been a change in approach by the pub companies as a result of the work that PICAS has been doing?
Kate Nicholls: There is a greater willingness to come to the table and engage in dialogue. There is awareness, when a case goes live, that they need to be demonstrating that they are trying to look at it, trying to resolve it, and to look at alternatives for a resolution. Not all of those cases will therefore go all the way, because some pub companies are better than others at reading the writing on the wall and seeing that they need to deliver cultural change within their organisation. PICAS and PIRRS only tend to kick in once you have exhausted other dispute resolutions within the company. Some companies will be better at dealing with that in-house; others will be prepared to let it go to an independent dispute resolution, but there is evidence from within the case histories that you have got from the PIRRS and PICAS annual reports that they are having a beneficial effect in helping people to resolve their differences. I stress that it will not be right for all.
Martin Caffrey: Could I make a point? It was a specific question you asked earlier, Mr Walker, about whether the effect that PIRRS has had outside the process could be quantified. We can put a figure to that: in our last financial year, with the benefit of the transparency that the voluntary code P&L has had, and the sword of Damocles of PIRRS hanging above the pubcos’ head, we have been able to save £1.15 million for our membership. One has got to assume that if that is operating within the PIRRS model, exactly the same must be operating within PICAS, which is the same-it is dispute resolution, but a different area of dispute.
Q118 Mr Walker: We have had evidence-I think it is in the written evidence from the IPC-that there is a very low level of recognition among lessees. The Chairman alluded to the comment "Is PICAS a Greek island?" earlier, which is pretty striking. Do you want to expand on that?
Peter Bradley: From the perspective of licensees I represent, a lot of them initially did not know about the service. There has to be confidence that, if you are taking a breach against your pub company, against its code of practice, the code of practice is recognised as legally binding. That is certainly an issue for some tenants who perhaps refrain from going through the process; they think the outcome is not going to go their way, because in some cases it has been announced that the Code has not been legally binding. There is a situation where tenants are thinking, "What is the point? I am going to fight this; I am going to put a lot of time into it."
It is a low-cost way of taking a complaint forward, but they have to have confidence that the outcome is going to be enforced. Certainly from the statutory adjudicator point of view, the tenants would welcome that, and some clarity around the code of practice and its legality, which we had at the weekend from Brigid. If there is confidence in the process, then the tenants would be far more willing to use it.
Simon Clarke: I would echo the issue of awareness and confidence in the system. One of the fundamental flaws-and this is not so much criticism of PICAS as a weakness of it that is not deliberate-is we have, as Bernard mentioned earlier, a term that is a very important term and needs to be in the statutory code-that all contracts should be fair, reasonable and comply with legal requirements. That has been in the framework code as a minimum obligation since its inception in January 2010; it has not found its way into any company code thereafter that has been accredited, which is a bit of a worry. Bernard has very kindly confirmed that henceforth they will ensure it goes into every company code, which is good news.
My problem with it is that PICAS itself cannot deal with legal issues; it is in their own service procedures-1.4 as it happens. If I had an issue with a contract being unfair, unreasonable or not complying with legal requirements, it is not in the gift of PICAS to deal with that. If they could, then their only sanction would be a penalty-financial compensation I think is a better term for it-and what we need there is somebody, which I hope will be the adjudicator, with some powers to render an unfair contract term unenforceable.
Q119 Chair: I am going to bring in Ann, but I am conscious of the fact that Simon wished to comment further on the rents issue as raised by Mike Crockart.
Simon Clarke: Yes. One thing I would say is Kate mentioned that tied tenants are paying more, not less, and that is completely contradictory to what we heard Brigid Simmonds saying on TV the other day. Leaving that aside, it is just commercial rent, and I need to spell that out, because there is also a wet rent attached to a tied tenancy. You have a situation where you are talking about a free-of-tie operator; his rent as a proportion of sales will be around 10.7%, from memory-I read it yesterday-and that is their entire rent. With the tied tenant, their dry rent is more, 12.3%, and they have the wet rent on top, which means that their total rent is probably approaching 20% to 25% of sales.
Peter Bradley: I once had a divisional director of Enterprise tell me in a particularly difficult trading period that I had the advantage of my wet rent decreasing. I said, "I am not quite sure how you see that as an advantage. That means I am not selling any beer, so I don’t have to buy any more beer, because the punters are not buying it." As Kate alluded to, your overheads are the same: you have fixed overheads in terms of your utilities, your rent, your rates, your council tax. All of those things have to be paid whether you are busy or quiet. Your staffing is pretty much the same; you can let people go early, that kind of thing, but there is certainly no advantage to your wet rent decreasing when you are going through a quiet period.
Q120 Mr Binley: It is a combination of rent and discount, isn’t it, as we said? I was interested in your figure of 25%; I would like to ask Kate whether she has any information on that especially. Secondly, I would like to point out that CAMRA’s survey in 2009 would have us believe that 67% of all tenants earned less than £15,000 per year, but the latest survey states that it went up to 80% of all tenants. Are those figures credible? Do they relate to what seems to be an increase in joint and wet rent? Finally, do you see any relationship between that and the financial model of the large pubcos, particularly with regard to their debttogross-profit ratio?
Simon Clarke: If I could just answer the first bit of that particularly, I am a tied tenant with Enterprise Inns. We have a pub that does well over the national average turnover and I am on £10,000 from that pub, so I can vouch for those figures pretty well. I would imagine there are an awful lot of people on less. I have to say that whilst the numbers are shocking, they have hardly been a great surprise to me.
Mr Binley: Anybody else like to comment?
Peter Bradley: I have been in my pub seven years. I have been in "CAMRA’s Good Beer Guide" for six years running, and have been nominated for the seventh. I have not made a profit on any year I have run it. I run at a loss every year. I sold a property to buy my lease. I sold a second property to keep the pub open. I put those figures to my pub company and said that I was running at a loss consistently every year. I do not get any discounts on beer at all, whatsoever. My rent has run as high as 15% of turnover, at its highest, and when I put the figures in front of the pubco and said, "This is the amount of loss I am running at each year," they put my rent up £5,000 in response. I challenged it, and I did get it reduced, but I got it reduced by saying, "I am going to close." It is as simple as that. Certainly on behalf of Licensees Supporting Licensees-there are 200 tenants in our group, and there are five other groups that have about 200 tenants each-we cannot find a tenant who is making decent profit. It is just not happening.
Mr Binley: Any other comments?
Martin Caffrey: I cannot comment on the actual figures. I have not seen the source data, but we as an association recommended to this Committee in the last submission that we made that there should be a minimum wage, if you wish-a minimum salary-that is retained within the equation irrespective of what the other figures may be, and we suggested that that figure should perhaps be linked to a minimum wage or minimum earnings.
Q121 Mr Binley: This decrease in income, increase in rent, both dry and wet, to put it that way, has to be related to something. Do you see it being related to the situation that the large pubcos find themselves in, in relation to their debttogross-profit ratios?
Peter Bradley: Oh, absolutely. If you look at their net income for the last two years, it is fairly consistently around about £65,000 per pub, and if you compare that with the figure that has been announced by CAMRA of how much the tenants are actually earning, it shows you where the profit is going to. If you look at the example of a keg of Fosters, when I opened my pub, it was £77 in the free trade. It is now £90. That same barrel was £109 from Enterprise; it is now £151. The increase is three and a half times as much, to the tied tenant, for the same product. When you are told it is the beer duty escalator, the distribution costs, rising overheads, manufacturing costs, etc., you think, "Well, that affects both sides, tied and untied, so why has the price gone up?"
Q122 Mr Binley: So when the pubcos tell me that there is no relationship there, you would disagree.
Peter Bradley: Absolutely.
Simon Clarke: Absolutely. I can give you the figures; they are there.
Martin Caffrey: To echo the point there, we believe that the brewers’ increase, if you wish, each year has become distorted, in that the free trade market is not reliant upon any volumes. If you just take a wholesaler and some of the major brands, the pubco’s trade price prediscount has gone up by sometimes three or four times what it has gone up, net price, in the wholesaler-in the increase. We do not know the figures-it is commercially sensitive, we are constantly told-but we believe the margin the pubco started with, if you wish, at the concept of pubcos post beer orders, was probably in the region of somewhere between £80 and £90 per barrel-their wet rent. We now believe that that is probably in the region of £260 to £270 a barrel. Now, we are not averse to that buying power.
Q123 Chair: Can you give us any statistical evidence on this?
Martin Caffrey: Yes.
Chair: Could you send it in?
Martin Caffrey: Yes, I will indeed.
Q124 Ann McKechin: Should the proposed independent adjudicator take responsibility for the PICAS and PIRRS process?
Simon Clarke: I would say yes. At the very least, I think if the process is to continue, there should be an opportunity to appeal to the adjudicator, kind of like an overseeing appeal body.
Ann McKechin: You think they should be integral, then.
Simon Clarke: Yes. One of the dangers, as I mentioned before, is if they have not got the opportunity to deal with legal issues, that needs to go straight off to the adjudicator. There is no point in us taking a complaint to PICAS if they cannot deal with that sort of thing.
Kate Nicholls: I would agree with Simon in the sense that the adjudicator can act as an ombudsman or a final court of appeal on a lot of these issues. I do not necessarily think that PICAS and PIRRS need to sit within the adjudicator. I do think that they need to have very close liaison. The adjudicator can provide a sort of over-layer of scrutiny to make sure that PICAS and PIRRS are delivering what they need to be doing, but as I say, PIRRS and PICAS provide an option, and although Bernard disliked the term "competition", I think the Government is right that you would need to be introducing choice for the lessee in where they go when they want to have redress, as to what suits their case and what suits their circumstances. If you give them more choice, that has to be good.
Ann McKechin: Does anyone have any different views?
Martin Caffrey: I agree with that, but I would just add one further thing: an individual licensee is more likely to have the confidence to come forward to a body such as PIRRS and PICAS, because they are administered by people within the trade, shall we say-and by that I do not mean the pubcos. I think they are far more likely to make an approach to that body than they are to a Government official right at the very top of the tree.
Peter Bradley: I would just echo what I said earlier about the confidence in the code of practice and the legality of the code, whoever the adjudicator is. If you have confidence in the process, I think the licensees would be likely to use it.
Q125 Ann McKechin: The consultation offers three levels of powers to the adjudicator: recommendations, naming and shaming, and the power to fine. Would you advocate one or all of these?
Simon Clarke: All of them. All and more.
Peter Bradley: All, yes.
Kate Nicholls: I think the key power the adjudicator has that is lacking from what is talked about in the consultation document is providing redress and restitution to the tenant. It is one thing to fine a pub company. We have all seen fines that have been levied on banks. It becomes a cost of business if we are not careful. The key issue that we must not overlook is that any redress mechanism we put in place has to deal with restitution of the tenant’s problem.
Ann McKechin: This goes back to the part about legal contracts and the ability to enforce them.
Kate Nicholls: Yes.
Ann McKechin: Thank you very much.
Q126 Chair: Just before I leave this subject, can I come back to a point made by Martin then? I am not sure if I understood it properly. Were you saying that a licensee or a tenant would not submit a complaint to an adjudicator?
Martin Caffrey: I am not saying he would not. There may be more reticence on his behalf. We try to level the playing field in many, many ways, to take away the fright, the trepidation, of approaching a larger body where you are an individual guy who has perhaps gone into the business following his heart rather than his head. You may not be capable of putting too much of the formal evidence together. Both the PIRRS and the PICAS bodies assist in that role by allowing the spirit of the code to be taken into account, etc.
Simon Clarke: I differ on that opinion from Martin, because I think that the adjudicator would be seen very much as somebody who is entirely separate from the industry. There are no potential conflicts of interest in the minds of a lessee. It would be somebody seen as extremely independent and, as I said before, this is something that I have found talking to all licensees that I have come across with issues and complaints. There is not that perception of independence. If it is there, fine, but I just think the perception of it is not there in the minds of tenants. If you give them something that is perceived to be independent, there is a far greater chance that they will make a complaint. The very fact that we have only had three go through the system to their natural conclusion, out of, as you said, Brian, hundreds of people you know of in your constituency alone, tells me that there is an issue there where people have just not got the confidence to have a go.
Mr Binley: Let me clarify that: it is hundreds of people generally, not all in my constituency.
Q127 Caroline Dinenage: Simon, do you then recognise what was discussed earlier, which was that a number of people do not know where they can go to-that they do not recognise the appeal channels that are open?
Simon Clarke: Absolutely. We mentioned earlier, and somebody asked Bernard about it, where do you find the framework code? There are five bodies involved in that process. In actual fact, if you do have smartphones and you do a search on the Industry Framework Code, version six, you will find it on the BBPA’s site. That is about the only place it is readily available. It is on the BIIBAS site, but you need to know where to look. It took me a while but I found it. We are dealing with people who have probably never been in business before, and they are desperately keen to be independent. The idea of preentry training is essential, and is at the moment desperately lacking. At the moment, it is a two-hour course, £20, online. You can go and do it yourself if you want; I have done it. For me, pre-entry training should be coming with a health warning right at the beginning.
Peter Bradley: I think it is interesting that one of the first things that a lot of new tenants are asked now is their source of income. The first thing they have to show is their proof of income, and for me it was "produce a business plan; argue with the business manager about what he thought was reasonable, and what you thought was reasonable". I am not stupid: I have worked in local government for years; I have done finance; I have a fairly good brain. There are a lot of licensees for whom this is not their thing at all. They would not know how to go through the process. They would look at it and think "wow". There is also the issue of the burden of proof, because a lot of the stuff that happens, happens in meetings where you are on a one-to-one basis. One of the first meetings I had with my divisional director was a threat of a court action: "We will take you to court if you fight this." I said, "Bring it on"; it does not faze me, but a lot of licensees would be instantly terrified of that. They then look at something as simple as PICAS. If they are having that kind of discussion with their divisional director, they are going to look at PICAS and think, "What do I do? How do I prove this? Is it possible? Do I have the evidence?"
Kate Nicholls: I think this goes back to one of the points I made earlier, which was that a lot of attention is being spent on talking about what the content of the code should be, and we have lost sight of the fact that we need to be communicating to tenants and lessees what their rights are, because there are an awful lot of them. Version six of the code is immeasurably better: if you know how to use it, you can use it to great effect. It does not cover a lot of the core issues-there is a big hole-but it is immeasurably better. We need to be going out collectively telling people how they use their new rights, how they exploit them, how it applies to them, and how they can benefit from it. That has not been done in any concerted way or effort. It was only at the beginning of this year that we had the discussions on the PIRRS and the PICAS boards to say that we need to do much more about publicising what the service offers and how it can be worked and accessed. We still have much more to do, and we as lessee groups should be doing that collectively together.
Martin Caffrey: I would echo that, and go back to one of the first things I said: it is that service and support that PAS would promulgate throughout the trade-or should.
Q128 Mike Crockart: I have one quick question on arbitration before we go on to talk about the details of the consultation. One of the things that we talked about lots when we were looking at the groceries code adjudicator was whether there needed to be a third party route for referring complaints, because it was felt that people were suffering from uncompetitive practices, and might not want to raise their head above the parapet for fear of what that would do to their relationship with the supermarket they were dealing with. Do you think that is a similar worry in your industry, and would any of your organisations be looking potentially to take uncompetitive practices generally to a pubco adjudicator?
Kate Nicholls: I think the investigatory power that is in there is helpful. I see it as being akin to the OFT’s market investigation power. There is not much detail in the consultation document at the moment that tells us what would be the trigger for it-what the evidence requirement is, how you complain and how you make that case-for us to determine whether it would be truly effective, but we as an association in the past have taken cases to the OFT, to Ofcom, about a number of uncompetitive practices, so if that was there, that could act as a very real deterrent.
Q129 Mike Crockart: I am going to move on now to the detail of the consultation, because it does ask for views on whether the code should address very particular things. You mentioned that version six of the code had big holes within it. Perhaps we could investigate whether the big holes are the same types of thing. It is things like the right to request open market rent reviews, transparency, the gaming machine tie, a guest beer option and flow-monitoring equipment. Are those the types of things that you mean?
Kate Nicholls: Those are the types of things that we would say are down. We would define them loosely as the commercial terms and the rebalancing of risk and reward, and that has been the intractable issue that has prevented us from making any progress substantively in bringing the whole of the industry with us, because all sides acknowledge those issues cannot be addressed by an Industry Framework Code, a voluntary code. Those were the issues that the ALMR tabled in 2008 in mediation and have been successively rejected.
Simon Clarke: I would absolutely go along with that. The only thing they do not mention in the issue of risk and reward is the possibility of the free-of-tie option, which of course is also an IPC manifesto cornerstone, I suppose. We see that as actually the mechanism of delivering fairness for the tied licensee-we know it is open for free of tie-rather than the formulaic approach that has been put forward by Government. I am not saying that formula does not have a use-in fact we are partially to blame for its creation-but it is more a tool of transparency so that you are in a position to consider your circumstances and profitability, tied and free of tie, and therefore it is a negotiating tool at the outset. You can then use that with the pub company and say, "It seems to me this is where I would be if I was free of tie; this is where I would be if I was tied." That is the point at which they could then introduce, "Ah, but we have got all these SCORFAs," or whatever they are, "And they actually save you money, so you might actually be prepared to pay a little bit more rent in tied rent and get these benefits."
What I would say about those benefits-if I can call them that, as I am a tied tenant and I am aware of none of them, but let us assume they are there for the moment-is they need to be quantifiable and they need to be contractually binding. It is no good having a benefit today that can be lost tomorrow. If I have agreed a rent of £50,000 on the basis of a benefit that they can then withdraw discretionarily later, it has no value. It has a notional value you might consider, but that is all.
Q130 Mike Crockart: Would the rest of you agree that the mandatory free-of-tie option is the key one?
Martin Caffrey: We are concerned about some of the potential consequences of that. We like the buying power that the pub companies have, or the brewers. We are very concerned that if that absolute freedom of tie were to be diluted down for the individual small licensee, not the large operator, they would not be able to command the discount that is currently available or should be made available through the tied model. It is a case of getting the profitability through the tied model, rather than risking being able to get it as a sole operator within the open market trade. It has the distinct possibility of bringing about, instead of a monopoly of five or six pub companies, a monopoly of two brewers, and those two brewers may say, "You want our product? Of course you can have our product, Mr Individual Licensee, but there is a price for that product, because it is the market leader." We would cite as evidence of that southern Ireland, where there is no tie at all. Every single licensed premises is free of tie. There is also no such thing as discount. The brewers have shut shop. I am not saying that would happen, but I put that as a potential.
Q131 Mr Binley: Can I just ask what the relationship is between price to tenant in that respect? If there is no discount, what is the relationship with the price going out to the tenant?
Martin Caffrey: In southern Ireland? There is a trade price that is uniform.
Q132 Mr Binley: Yes, I understand that, but how does that relate to the average price that we could expect on a discount, if there is such a thing?
Martin Caffrey: I think it is akin to it, and I would gladly get some information for you on the specifics of that.
Mr Binley: If your evidence is relevant, we need to know that.
Martin Caffrey: Yes, I will do that, but my belief is, talking to our colleagues within UKILTA, that the start price, the trade price, in southern Ireland is akin to that which is the starter/trade price within the UK, but I will provide you with that information.
Kate Nicholls: Can I just come back to Mike’s point, because you asked this particular question of what is the key, what is the crux, that will be beneficial? From an ALMR perspective, we believe that it is the regulation of the rent assessment process. Brian was absolutely right: the reason we have got into the problems we have now is overinflated projected tenants’ earnings, which is to do with the ability to manipulate the rental variables, namely fair maintainable trade and operating costs. That produces the disparity between what you think you are going to earn and what you might actually earn, and in some people’s cases it is a big disparity, and in other people’s cases it is not. From our perspective, you have got to regulate-and it has got to be tightly regulated-the rent assessment process, not just when you are setting initial rents, which is in the consultation document, but any time a rent is discussed. You need that dual rent assessment statement to be produced when it is initial rent setting, rent reviews, and lease renewal; any time you talk about a lease, that tenant and lessee should be equipped with the best possible information to go into a genuine commercial negotiation, and we cannot get away from the fact that at its heart, however we try to resolve it, this is going to be a commercial negotiation. It is going to rub, and there are going be tensions. We have to remove the ability to abuse, and that is done through the rent assessment process, in our opinion.
Peter Bradley: I think if you look at the net income per pub-I gave the example of Enterprise earlier-with the tied estate, compared with Wellington, who are also part of the consultation with you, their net income per pub for the same period was £19,000, compared with £65,000 for the tied pubs under Enterprise, so three and a half times again the amount of net income per pub. If the tie and, as I think Martin mentioned, the large discounts that the pubcos are able to negotiate on behalf of their tenants remain, and they feel that their contracts are fair and reasonable, and they are negotiating these discounts and they are passing them on to the tenants-I would dispute that personally and on behalf of other landlords-I do not think they should have anything to fear from the tie. It should work to their advantage if they are fair with the pricing.
Martin Caffrey: I did not wish to suggest, and if I did I am wrong, that that currently is passed on. It is not; I do not believe it is, but it should be.
Simon Clarke: I think the crux of that for me particularly, and I think it echoes what you say, Peter, is that the free-of-tie option allows us a situation where the tied model actually can continue on the basis of fairness-the basis it was designed on in the first place-rather than survive as it does now on the opportunity to exploit these terms. It becomes effectively, as somebody said earlier, the swinging sword of Damocles, because the tenant is always in that position: if they are not being treated fairly-if they feel that the case is that they are not getting the return that they would do if they were free of tie-they could choose that option. It is very much a matter that the future of the tied model would be determined on whether the terms are fair or not.
Peter Bradley: It has to be consistent. Kate mentioned startup costs, low rents and people coming into the industry, and the lowcost entry that we hear talked about from other players. One example near me is a pub run by a couple who could not make it work, and they are leaving the pub in a lot of debt. They have moved on, and the pubco approached the manager to take over the pub. When you see that he is being offered peppercorn rent and discounts on his beer, and initially that is denied to you, you find the proof and then present it again and then it is admitted, and you say, "Well, I’ve been here seven years. I don’t get discounts." If the rent is low and the discounts high, you can make it work. If your rent is high and your beer is high as well, you cannot make it work. I initially said, "Why is he getting these opportunities? Why am I not?" Incidentally, the bailiffs were there on the day he was being offered this tenancy to collect money from him. They were actually trying to get it from the predecessors. He was not the poor operator; he was actually the manager of that pub and he was being offered a TAW, with cheap rent and cheap beer. I asked why I was not allowed to have that, and it was initially denied until I produced the proof, and the response I got was that "we are allowed to do what we need to do to protect the commercial viability of our businesses". I said, "What about my commercial viability? I am your pubco partner, allegedly. You have set this guy up on a low deal; I do not get that deal. There are a number of pubs where I come from that are all on those deals." You work your socks off for seven years and you are not making any money, and you see somebody coming into the industry given those advantages. There is something fundamentally wrong there.
Q133 Mr Binley: From the other perspective, are you saying that a good tenant who improves his pub gets penalised for that very improvement?
Peter Bradley: The way I would word it is that there is no reward for working hard. I have grown my business consistently over seven years. My rent has gone up; the price of the beer has gone up. I am asking, "Where is the concession to help me? You have seen my figures, and I am still running at a loss. How can you help me?"
Simon Clarke: There is no incentive to improve upon what you have done before.
Peter Bradley: You are earning the kind of money that CAMRA revealed last week. I spoke to my business manager and said, "I am in the Good Beer Guide. The pub is well looked after. The staff are happy. The customers are happy. The food is good. We are doing really well, but I am not making any money." His response was, "Well, that’s not what you’re in it for, is it?"
Q134 Chair: Can I just pick up a point that was made some time ago by Martin? I am not sure how relevant it is to this enquiry but I am intrigued. You talked earlier about breweries not offering a discount in the event of an independent pub free of tie. In that case, given the big increase in the number of microbreweries, do you not think that that framework could encourage microbreweries, or the expansion of existing microbreweries?
Martin Caffrey: In terms of the individual microbreweries, potentially, yes, but where we perceive a difficulty is that, to maintain and get the best terms from the majority supplier at the outlet, the tenant would have to potentially give solo supply to that brewer, and thereby preclude some of the smaller brewers. "Yes, you can have a discount-you can have a higher discount if we have 100% of the volume." That is standard free-trade practice. The actual inroad for some of the smaller brewers at an inflated price has been through the pubcos. That is undeniable. Is it a fair price that is charged for that product? That is up for negotiation and discussion, but has it given an inroad to that major brewer to a large estate? I would say definitely it has, and the removal of that may be to the detriment of the individual microbrewers.
Peter Bradley: I am not sure I agree with that entirely. I could buy a barrel of beer from my local brewer-I am not allowed to, but I could-for £62. He is paid £64 by the pubco and they charge me £120.
Martin Caffrey: I agree totally on pricing. I have no issues with the pricing.
Peter Bradley: A good example is Simon Moore’s position. He was the tenant who was in David Cameron’s constituency. He could not buy beer from the brewery behind his pub with whom he shared a wall, because there was no distribution channel. I accept to a degree what Martin is saying, but there are also issues you need to look at: giving the microbreweries and breweries the option. There are certain beers I can buy from Caledonian in Scotland, because the supply chain is there, but I cannot buy a beer from somewhere in Dorset, which is my neighbouring county. I think it is hypothetical, but if the individual brewers have the distribution chain available to them, some will bring one barrel if they want to get their product out, but at the moment they do not even have that choice unless they join a scheme where they have to pay a fee for it and I can buy three of their beers but not the other two. So why does the distribution chain exist for three but not the other two? I do not see that as an open market.
Q135 Mike Crockart: The last thing I want to do is discourage you from buying beers from Scottish brewers. One of the options within the consultation is the guest beer option. Do you think that is something that could potentially give microbrewers some assistance to get into pubs, or do you think it will just end up increasing the volume of lager that is sold in pubs?
Peter Bradley: I think it could work, but there is an issue at the moment of Brulines being used to monitor what goes through that line. If the line is free of tie, why should it be monitored? Is there going to be a penalty if you start to sell everything through that one line but not through your other two, three or four pumps? I think that would need to be clarified.
Simon Clarke: I think it would encourage the microbrewers. I have got a real ale pub, and we can acquire some microbrewers’ beers through the SIBA scheme. Again, contrary to what Martin said, I have got a bit of an issue with that. Yes, it is their route to market, but that is because it is the only route to market, and if it was a free-of-tie market, they would have absolute freedom to go into any area of that. Equally, the big brewers do not actually dominate the third of the market that is free-of-tie now, so I cannot really see why they would start to overnight when and if tenants found that they were being treated unfairly and chose to go free of tie. I can get beers from small family brewers; I can get beers from some microbrewers as well. The microbrewery beers are more expensive, so we are actually almost put off buying them, even though they would be cheaper if we went direct, but the point there is that we still serve, and concentrate on serving, microbrewery beers. That is our USP, so we would not, if given a guest ale right tomorrow, necessarily just go with the cheapest beer we could find.
Kate Nicholls: That to me is key. I do support a guest beer right, but we have to be careful about it, and we need to look at the reasons why we are introducing it. This is about freedom and fairness for lessees, and it is about rebalancing the risk and reward. It is not about delivering a market for smaller brewers, and it is not about delivering enhanced consumer choice. The legislation cannot be drafted in that way; we know to our cost, from what happened with the beer orders, that you cannot draft legislation in a way that means that that guest beer right is only exercised to allow you to get a locally sourced product that is crafted or brewed by somebody else. There is no other way, legally, I can see of drafting it other than the way it is set out in the statutory code, and that hands the choice over to the lessee. If you are Simon and your USP is for craft beer, you are going to of course use your guest beer right to get a nice niche product. If, however, you want to use it to get the cheapest price that you can on the most profitable barrel of lager, that is what you are going to do, and that is what the guest beer right did under the beer orders.
Actually, since that guest beer right was removed, we have had greater diversity because you have the freedom and flexibility to do it, so Punch and Enterprise can set their guest beer provision so that it is locally sourced SIBA members-small brewers. You cannot do that in legislation. If we are giving the lessees the choice of having a guest beer right, you have to accept that they will not use it in the way that some people might want them to use it. We are supportive of a guest beer right; we just have to accept that you cannot dictate how it will be used.
Simon Clarke: Let’s not forget that lager volume sales are dropping and cask ale sales are increasing. It seems to imply that that would be the choice of brew to me.
Kate Nicholls: Choice of brew-whichever is the most profitable.
Martin Caffrey: We also have to be conscious of which the pubcos would perceive to add the most value. Simon may wish from the point of view of unique selling to take on a microbrewer; the pubco may say, "No, the financial incentive is to take on the 200 barrels of session lager, and by the way the rent is going to be calculated on that discount." We would have to be very careful that both sides interpret it in the same way, otherwise there is a potential problem.
Kate Nicholls: That is why you have got to get a rent assessment process regulated and tightly bound down. That is the most critical thing that the Government can do. They need to get it right and implement it as quickly as possible. They need to get on with it.
Q136 Chair: Thank you. I think that concludes the evidence from this particular panel. I will just repeat, as I have said to other panellists, if you feel in retrospect that you wish to add to the evidence that you have given us today, please feel free to submit further written evidence.
Simon Clarke: You did ask a question of Brigid Simmonds about the possibility of a legal challenge by Enterprise Inns. It does not surprise me that she may or may not know their plans, but it seems to me a prequel to such a challenge might be to serve an FOI on BIS, and I was advised of exactly that on Friday last week. There is an FOI on BIS right now, so I would suggest that is starting to dig for a bit of evidence.
Chair: Thank you very much for that.
Examination of Witness
Witness: Phil Dixon, independent pub adviser, gave evidence.
Q137 Chair: I was going to say good morning, but I think it is good afternoon now. Thank you for agreeing to address the Committee. As you can see, there is a certain attrition of members because of the pressure of other business, so I will get on and would be grateful for brevity on your part. First of all, just for voice transcription purposes, could you introduce yourself?
Phil Dixon: I am Phil Dixon and I am here as an independent adviser to the industry. I have also had a change of circumstances since I last gave evidence to you, which in view of the exchange that is about to take place I ought to bring to your attention. In October of last year I was the recipient, as chairman of my local cricket club, of the Worcester county league fair play award. There are lots of fair play awards, but very few finish up with Yorkshiremen, I think it is fair to say.
Q138 Chair: Thank you. I open with a question you may have heard: when the Government announced its plan for enhanced selfregulation, it thought it would have a quick resolution to the problems of the framework code. From your perspective, why did this not happen and why are we now looking for a statutory code?
Phil Dixon: I think the conclusion was reached before the evidence had been provided. At PICAS today there is a BIS official attending for the first time, so it has hardly been given a chance to prove itself. Selfregulation has worked, Chairman, in the areas we were asked to make it work in. It has not worked in that it has not addressed the issue of the tie and the prices licensees are paying for their beer. It has not worked in terms of the way rents are being set by RICS guidelines. RICS guidelines are not fit for purpose. Licensees are exploited when they are put into pubs, but they walk into the interview, in fairness to Mr Binley, with a rather big badge on saying, "Please exploit me, because I am desperate to have this pub." Selfregulation has worked. Incidentally, I have listened carefully this morning and Mr Crockart made reference to the George Scott case in Towcester, so that gave Punch a reference. When anyone else has mentioned a pub company, have you noticed it has been the same one? I think we have an issue in our industry, but whether it is an issue across the board, I am not sure.
Let me give you one example of how selfregulation works, with the worst case I know of-and Mr Binley will not be shocked to know this is an Enterprise Inns case. It was Russell Stone at the George at Holyport. Russell was paying £30,000 rent and Enterprise suggested a fair rent for the pub should be £80,000, in a recession. Russell took the George to PIRRS and the rent was set at £38,750. Now, before somebody behind me whispers, "That is probably more than it needed to be," that was £3,250 less than he had offered to settle it at. In fairness to Enterprise, Simon Townsend reviewed this case, went into the pub, apologised, and paid all his PIRRS costs, but PIRRS worked, with the value of his choice, setting that rent fairly. Russell then took the case to PICAS, because although he accepted Simon’s apology, he thought the seven months of purgatory he had been put through by Enterprise warranted some retribution, and PICAS awarded him compensation and named and shamed Enterprise. So, selfregulation works in that area.
Where it is not working is in the price that licensees are paying. You have just listened to two intelligent gentlemen-although I still do not know why, if they are that intelligent, they finished up buying an Enterprise lease-who are right in bringing to your attention that they are paying far too much for their beer. What we have seen in the last three years has been the growth in overheads. Government does not help with business rates. They are charged business rates on trade they are not doing; business rates are based on trade before the smoking ban. Beer sales have dropped 54% since 2000, so they are all struggling, but they need to make margin to pay overheads, and they need to make margin to make a profit and a decent living, and they cannot make those margins on the prices they are being charged. That is the problem, so we need reform on the beer tie, or we need legislation.
Q139 Mr Binley: Can I thank you for your comments about Simon Townsend going in and the situation changing? I will refer to the question I asked earlier about whether there is a difference between what the national board of a given company sees as the way it is working and the way it actually is working at district level, as it were. It seems to me that the BDM set the original thing; in goes Townsend and the thing is changed. That is a totally unacceptable way for this industry to work.
Phil Dixon: Well, Brian, the bigger you are, the more mistakes you get. You have got to remember that it was Government intervention that actually stopped breweries owning more than 2,000 pubs and created two massive property companies with 17,000. What is that old Santayana quote? "Those who forget the mistakes of the past are condemned to repeat them."
Q140 Mr Binley: Phil, I understand that. I just wonder whether we are speaking with two tongues-that there is a particular objective that a board likes to see to be said, but when it is put in operation by middle management, they have different pressures applied to them, and that creates part of this problem.
Phil Dixon: I am cynical when the BDM takes the blame. I remember a number of cases, when I used to look after all the tenants in the Midlands, when they crossed the line and it was "overenthusiasm" on the part of the area manager.
Mr Binley: That is my concern.
Phil Dixon: No, it comes down from above. It is the culture from above. Simon Townsend is a brewery man. He has got a degree in brewing. His father Patrick ran Matthew Brown’s. He is immensely respected. Simon is a pubs man. Where the accountants rule, that is where we might have an issue-where it is all about profit and finance and shareholders. The companies are too big; in fairness, I think Punch would recognise that, and they are trying to get themselves down to a reasonable level.
Mr Binley: I think you have made my point, and I am grateful.
Q141 Chair: Coming back to my original question, I think you have probably partly preempted my supplementary, which is basically why is there the need for statutory intervention?
Phil Dixon: Well, there is not if you give us the opportunity to address the issues of the tie, because I think the regulatory board, which as Mr Brindley has pointed out to you has a majority of licenseetenanted reps on it, could actually look at that. The issue, frankly, in this paper is there will not be any need for statutory regulation because the tie gets abolished by this recommendation, and Mr Crockart was right on the point there. If you look at the guest beer suggestion, it is a guest draught beer of any sort-of any type. Now, Mr Clarke will try to tell you that he is interested in cask beers and community. Let me tell you exactly what guest beer the licensees will go for: they will go for the one they can sell the most of and they can make the most money on, and they will not go for the one with the very limited shelf life. The impression given to you Members of Parliament is they will go for their local microbrewery and get some beer with a quirky name, probably related to some animal’s reproductive organs, and that is the one they will choose. They will not, because they have only got four days to sell that. They do not even know if they are going to sell it. They will go for their biggest seller, and that is standard lager.
Now, it is true that cask ale in the free trade is 11.7%. I think it is on page 26, and Kate Nicholls is right: you cannot legislate for good old English cask ale, much as we would love to see it. Cask ale in the tied lease and tenant trade is 17.8%, so there is plenty of cask ale there. That is a misnomer, trying to make you think there is a need for cask ale. It is the price they are paying that is the issue. However, they will go for standard lager. Standard lager is about 55% in the pubcos. In the family brewers it is less: it is 40% in Hall & Woodhouse; 41% in SA Brains in Cardiff; it is mid40s for Shepherd in Kent; it is 47% for Robinson’s in Cheshire. It is 50% St Austell, 51% Charles Wells, 54% Daniel Thwaites, and it is 60% when you get over the border. If this regulation allows tenants to buy their lager from whoever they want, you completely undermine the tie, the tie goes and then what will happen? Is this about creating unemployment across Britain to favour international global brewers? If you increase employment in the finance offices of the suppliers of Carling and Heineken, then you actually increase employment in Warsaw and Bratislava. This needs to be thought through, Mr Chairman. This is a camouflaged time bomb, and if the idea is to abolish the tie, fine, but that is what this will do.
Q142 Mike Crockart: It is a question that we have asked all the other panels, and it is to do with the threshold at which the code should kick in, because at the moment what is proposed is the ownership of 500. In your opinion, is that an appropriate level?
Phil Dixon: I think in all such things people have to start somewhere; you have got to. I am not sure it should be zero. I think the poor old Bathams family in the Black Country, with 11 pubs with one tenancy, will probably think they do not deserve this. The issue should not be about numbers; the issue is about the agreement. The onerous agreement with the imbalance is the full repairing, fully insuring agreements. Agreements that are short-term-three-year tenancy agreements where the tenant can give six months’ notice to leave at any time-are completely and fundamentally different from the full repairing, fully insuring agreements, and that is where the problem and the imbalance lie.
The Fuller’s leaseholder should have the same right to redress as the Punch and Enterprise leaseholder in my opinion, so it should be about the agreement. Admiral Taverns would get included in this, because they have got 800 pubs. Admiral Taverns do not like full repairing agreements. They let them change to tenancy agreements overnight. We have not had one PICAS or PIRRS case from Admiral. They have held their prices for two years. I have had cases on the BII-and I have provided that evidence from the BII helpline, and they were not complaints, Mr Chairman, but calls to a helpline-and I remember one Admiral case I had where the lady did not like the way she had been spoken to, and she was upset, crying and she had been in the industry 30 years. I phoned Kevin Georgel and said, "I think this is a bit poor, Kevin. Could you look into it for me? I do not think this guy is buying into your culture." Next thing I knew, the lady phoned to say she had had an apology in writing from Kevin Georgel with a cheque for £1,000. And this is a company that has just been given the title of best pubco and brewery in Britain. Now, why do they deserve statutory legislation? I do not know.
Mr Binley: I might try that technique with Ted Tuppen.
Phil Dixon: We come back to this, don’t we? Is it just me or has Ted Tuppen discovered a flair for public relations we have not seen since Marie Antoinette? When Enterprise say their average earnings are £30,000 to £40,000, it is nonsense. I mean, there is a freedom of information request, so my column that says it is around £15,000 will have to be disclosed. It never went on the website, for a number of reasons I am not sure of. However, the problem we have in our industry is everything is about estimate. I had a complaint from an accountant to the BII; it finished up on my desk. An accountant could not understand a brewery’s letting terms in terms of the VAT. Was it net of VAT or was it including VAT? I investigated; I googled pub vacancies within 10 miles of my house in South Staffordshire. I got 27 pubs. I went through them all and, yes, the accountant had a point. It was not clear and the brewery straight away made it clear, but I analysed every one of those 27 pubs, and they were very transparent: "This is what they are doing; this is what we believe it can do." The difference was £2,000 per week per pub. That is £2.8 million a year difference between what those licensees will need to take to pay those rents and what they are currently doing. Now, Kinver, where I live, Mr Chairman, is the last place in Britain where people lived in caves, in the rock houses, up until about 1962, but there is not £2.8 million worth of trade hiding in caves in South Staffordshire, waiting for those licensees. The system is wrong; the rent system is wrong, and chartered surveyors do not know that. I think chartered surveyors with their £250-an-hour fees are, frankly, there to legitimise and maximise revenue for the property companies. That is a problem for our industry. I have no faith in this document putting confidence in the guidelines of the Royal Institution-it is an Institution, by the way, not an Institute, as it says in here-of Chartered Surveyors.
Q143 Mr Crockart: Moving on, the overarching principle-presumably you agree with this, and I think everybody does-deals with the fair dealing provision that a tied tenant should be no worse off than a free-of-tie tenant. It is kind of a given. Do you think that is something that can be enshrined in a statutory code?
Phil Dixon: The problem is it might be a given, but it is also an ambush. If you actually say that you agree to that, then do you agree that Simon’s rent of the Eagle in Battersea should be zero, like it says in his newsletter? When he puts this calculation into effect, you come up with a zero rent for a pub in London taking about £8,000 a week, so you have got to be careful about this one. You have to look at each area. Tied tenants are treated far better in a number of areas than free-of-tie tenants. Free-of-tie tenants have no preentry training. Free-of-tie tenants do not have any price match on buildings insurance. There is a gentleman behind me who is a director of Fuller’s; he charges his tenants £1,000 for building insurance. At Wellington Pub Company, it is £4,500, minimum. When it gets to rent review, if you are free of tie, it is upwards only. I do not agree at all with Brigid Simmonds saying it is a standard commercial lease. These are pubs. If it is the Baker’s Arms next to the bakery, and the bakery closes, that affects the pub, whether it is tied or free of tie. Upwards only has no place in any pub rent review.
When it comes to PIRRS, you can go to PIRRS for £1,000 or £2,000 to have your rent set if you are tied. If you are free of tie, it is the full £20,000 scale of arbitration. So, in a number of areas, Bernard Brindley was right. The argument is, "Should the free-of-tie tenant be no worse off than the tied tenant?" The overriding principle should be that all tenants should be treated fairly, and I really welcome some of the stuff in this discussion document.
Q144 Chair: Thank you. I was going to bring in Robin there, but he has gone, so I think I will be holding the fort on the final questions. Can we go back to arbitration? PICAS was established under the Government’s selfregulation framework. Do you think it has been a success, and what about the level of engagement from both sides?
Phil Dixon: I have got to disclose an interest here, because as the official adviser to the PIRRS board, I helped set up PIRRS and PICAS, although not PICAS so much. Where it has been a success is the question of where the licensee can challenge on the spirit. I had a case where a terminally ill licensee wanted to be released from his pub, and the company’s code of practice said that they would consider an early release in such circumstances. They then refused the release, initially, on the grounds that they would not be able to get that rent off anyone else in that part of Merseyside. Do not worry, Brian, a full and frank discussion took place. Well, there were a lot of words beginning with "F" in it. I do not know about "full" and "frank", but the person was released. So we have made PICAS where you can challenge the spirit. It makes it quite open. It is £200; you get that back. As Bernard said, they cannot turn up with their lawyers to intimidate the licensee. It is licensee versus BDM. In the case of Peter, if Peter had a dispute, the idea is that it would be the BDM.
Now, as for this idea that it has been secretive, Punch dragged me around Britain. I even got to go to Hampden Park. Punch dragged me all around Britain to talk about self-regulation and PIRRS at all of their roadshows. Punch’s roadshow in the Chester races last year had an 82% turnout. That is not evidence of a company that is not trying to work on its relations. I do not know about you, but when seven out of 10, Mr Chairman, say they would like to renew their agreements, that seems reasonable. I do not mean to be disrespectful, but if you as MPs went back to your constituencies this weekend and your local paper has done an opinion poll rating, and you have got a 70% approval, I am not sure that you would think that unreasonable.
Mr Binley: We get it all the time.
Phil Dixon: So PICAS has worked. What will happen with PICAS is, once they have been named and shamed, which they are by the fact that it goes public, then-you know the industry like I do, Brian-they do not rush back. No family brewer is going to let the name that has been around for 200 years be made public. Now that there is PICAS and PIRRS, if someone has got a grievance and a dispute, it gets resolved. I sat in on one, in Otley of all places, recently. The pubco-you will have to guess which one it was-paid a lot of money to resolve the case, far more than I actually thought was fair, to be reasonable, so that it did not go to PICAS. I think the fact that the Member for Leeds West was in the background may have helped. PICAS and PIRRS are working very well, and you should not be concerned by the number of cases that get to the very end. It is the fact that they are there that resolves them. Rents have been settled, and they are coming down. If the lady was still here from Glasgow, I would tell her that they are coming down in the tied trade, because PIRRS is there.
Q145 Chair: Should the proposed independent adjudicator take responsibility for PICAS and PIRRS?
Phil Dixon: He or she will have to, because they will disappear if they do not. There is no way that Britain’s pub companies will pay twice. They are not going to pay for selfregulation and regulation, so unless the adjudicator takes it on board, they will disappear, and that will be a very sad day.
Q146 Chair: I was going to ask you if they could run in parallel, but I think you have answered that question.
Phil Dixon: They will not.
Q147 Chair: The consultation offers three levels of powers: recommendations, naming and shaming, and the power to fine. Would you advocate one or all of them?
Phil Dixon: All of them, without any question whatsoever. Naming and shaming we do anyway. It has got to be transparent, so if you have a case, then yes. If the pubco takes into account the fact that, if you have been in the public arena, it is going to damage your recruitment tenancies, then you have to name.
Q148 Mr Binley: The consultation also asked for views on whether the code should address a number of contentious issues, including the right to request open market reviews; transparency; the gaming machine tie; guest beer option, which we have talked about; and flow-monitoring equipment. Should it do so, in your view, or should it not?
Phil Dixon: Having had licensees who have been given my home number crying their eyes out because of Brulines, I am sympathetic to the view that if Brulines are going to be used, they have to be in trade and subject to weights and measures, full stop. You cannot have people being fined for something that is not subject to weights and measures.
Should Brulines be there? Actually, you will find that the top end of licensees actually quite like them, because they use them as a management tool. The problem, if you want to be truthful, about Brulines is that it has actually made pubs at the lower end unviable. I am really going to have to tell you the truth here, because before Brulines, on the council estate, the licensee would have a keg of beer on a Saturday morning from a white man van, and that money would actually keep that pub afloat. By making the pubs operate strictly by the tie, that has made them unviable.
As for machine ties, licensees would love to have the keys. If you asked licensees, "Would you like to have the keys to your machine?" it is a bit like asking, "Would you like to be returned at the next election with an increased majority?" I know you will be, but it is a daft question. "Would you like to have the machine income, and pay more rent for it?" is the true question, and licensees will say yes or no. They should be given that option. It is not necessarily a good thing, Chairman. Machine income has fallen since the recession, and if a licensee had agreed to pay extra rent and take the keys for the machine, then he would be paying more rent per se because machine incomes have fallen. They also do not manage them very well, which is the other issue. Publicans are not naturally good machine managers, and Star Pubs and Bars Heineken have a league table where, if you are a supplier and you do not give a good service to the tenants, you are taken to task. If you said to the pubcos, "Would you give a mandatory machine-tie option?" I think they would definitely agree.
I like some of the stuff on the rent review, Brian, where you can apply for a rent review if there is a change in circumstances. PICAS could adjudicate whether that was genuine. However, I remember a case where the Cannock pit next to the Miner’s Arms closed, and the Bass lease company-later Punch-told me it would not affect the trade of the pub. How nonsense was that? I think that is good.
Q149 Mr Binley: So you are suggesting that we need a much more flexible situation with regard to rent review? If you have a factory built next door to you, one assumes your midday trade will increase, and so forth. It works both ways, doesn’t it?
Phil Dixon: Well, if anybody was building any factories in Britain at the moment, it would.
Mr Binley: We are starting with that.
Phil Dixon: Going back to Bernard Brindley’s point about the FMT, it is a nonsense that they can change the FMT with no justification just because they may have got it wrong. They have not. The problem we have in our industry at the moment, if I may-I want to really highlight this-is that the best licensees are being penalised and discriminated against. The best licensees, and Peter may well be one-I do not know him-are paying full price for their beer.
I will just give you some proper figures, to the penny. We know from the ALMR benchmarking and the BPPA that costs in a full repairing lease are around 38%. I have taken a case study in Sheffield. It is not in Mr Blomfield’s constituency; it is in the posher part of Sheffield. There, a very good licensee selling the local Farmer’s Blonde at £3 is making 39%. That is 1% more than his overheads, probably. His Carling is making 38% and he is charging £3.45. Staropramen, a fine beer from Prague in the Czech Republic, is £3.85 and he is only making 33%. It is a farce, Mr Chairman, at the moment. On a busy, hot summer’s day, somebody walks into a pub and they say, "I am really thirsty. I want a pint." You have got the licensee fantasising, "Make it Diet Coke. Please make it Diet Coke. I will get 80% on Diet Coke. Don’t have my beer."
I did some numbers for that pub company-no guesses for which one. To give that licensee 50% margin on his beers, they would have to give him a £77 discount on his bitter, £103 on their lager, and I think it was £140 on their premium. They are getting twice those discounts, so to share them is the right thing to do. The pubcos need to give more margin to their tenants on the beer type, or they need to risk losing it.
Q150 Mr Binley: Can I ask a final question? You may have heard me asking about the relationship between what appears to be good practice being squeezed and rents and wet rent increasing, and between the gross profit of large pubcos and their indebtedness. I am now getting to the nub of the problem with regard to the sustainable financial models of our biggest pubcos. If I am right in that view, what is the answer? Is it downsizing? Is it selling off? Is it splitting up? Have they got too much debt? Could you tell us the answer?
Phil Dixon: I am not a financial expert. I see Punch’s share price has gone up to 13p. They must be delighted, because it was only 8p recently. I am not an expert. I think they will refinance. Mr Blomfield’s question was about what will happen if these proposals come in. If they come in, they will find reasons to actually do away with their tenancies. They will put things to franchise. Punch are applying to the British Franchise Association for accreditation. S&N and Stars and Bars are there. Greene King have started talking about franchising. Marston’s have got 500 pubs.
I once tried to complain against Ryanair. I look at Ryanair’s attitude to a statutory regulator as just going through the motions and finding any excuse, and I worry for my industry that this might happen. In fairness to Enterprise-and they have got a bit of stick today-they are trying, somewhat belatedly, to improve their relations. 20 years ago, if you had been talking about any company-Bass, Whitbread, etc.-the tenants’ leaders would have been there to champion the cause. After 20 years in existence, where are the Enterprise champions? I have not met anybody. I think what you get from licensees is them saying, "They are okay."
Q151 Mr Binley: Are we talking about the Licensed Victuallers Association in its prior-?
Phil Dixon: I am talking about when all the British brewers had their own committees. If you go to St Austell Brewery today, to their awards night, you will find that St Austell licensees will champion the relationship. The pubcos and Punch have dramatically improved their relationship in the last five years, and Enterprise have now belatedly come to their party. In fairness, I attended a roadshow recently at the Motorcycle Museum, and there were lots of Enterprise licensees, all saying that this is the best thing they have done for them for a while. Could we, as an industry, put the matters right? I think we should be given the chance, and I do not think that in the areas of pricing and profitability, we have been given the opportunity.
Q152 Mr Binley: A final question, if I may, Chair. You mentioned the question of franchising, which is relatively new to the sector. How might that affect those people who want to come into a business that offers a relatively low price of entry, which has always been one of its advantages? The fact that they do not have enough training and information is one of the downsides to that, but that needs to be dealt with, and we have mentioned that. If franchising does take a grip in the way that some people think it will, how in your view will that change the business over the next 10 to 20 years, and how will that impact on the wellbeing of the tenant? Will we still be able to have those low-cost entry channels with a franchising scenario? How will it change the business?
Phil Dixon: I have always been dubious about this argument on low cost. I am here to give evidence for myself today, and I have always been dubious about this low-cost entry argument. I think that if you can have a pub for £1, you will get people who will take a pub for £1, and that is a problem. We pay lip service to preentry training. If you want a McDonalds franchise, you have to do nine months’ training-self-funded, I think their phrase is; in other words, you pay for it yourself-and I do not know why it takes nine months.
Mr Binley: And you have to pay £250,000 or so.
Phil Dixon: Yes, but your average earnings are about £106,000. You can see the Domino’s Pizza argument there. In the West Midlands, the market leaders are Marston’s. They have got 500 pubs, and you take a pub and you get 20% of the income, and then you have to pay your staff out of that. I was critical at the start; I said that, on lowturnover pubs, you are asking people to work for the sort of remuneration that Spartacus launched the slaves’ revolt about. However, they have actually moved, and they have accepted that. They are looking now at £5,000 or £6,000.
What I like about franchising is that the licensee does not lose his life savings. You know that you have had cases where people lose the lot, but let me just tell you that Wellington pubco, which is free of tie, had 78 repossessions in the last 12 months. That is far higher than any tied pubs, in terms of ratio. Life is tough out there, full stop. So the franchise model, I think, will take off. If the franchise model gets you out of all this, then it will definitely take off, but Marston’s are not doing it for lip service in the West Midlands. They are actually doing it because they believe it is the right way forward, and they are investing the money. However, they are a brewery. They have got five breweries, so they need to keep those going. There is a bit of that there, Brian. If you are a pubco with no brewery, then franchising does not necessarily have the same appeal.
Similarly, the ones who are trying to replicate the Marston’s franchise are playing at it; they are trying to keep the rent and call it a franchise. That is a problem, and the biggest problem for licensees is the question of what happens to their local customer. Mr Walker has rejoined us, and I can think of two in his constituency-two pubs where they have got Marston’s franchises open. It is the same Marston’s sign above the door as the one that the tenant and lessee has, but suddenly they are selling the same great Marston’s beer at £1 a pint cheaper. Those licensees actually then get some abuse from their customers, thinking that they are somehow ripping them off. They are not.
I will be taking my cricket club to Tewkesbury on Saturday for tea, and on the way back the 18 to 25yearolds will start lobbying me not to go to the Mug House at Claines, one of the great pubs of Britain, because it is £3odd a pint. "Dixie, can’t we go to one of the cheaper Marston’s pubs?" That is the problem in our industry. The point I was making about pricing and margin needs to be addressed.
Chair: Thank you. I think that concludes our questions. I will repeat what I have said to other panellists: if you feel there is any further evidence that you would wish to send the Committee, then we would be grateful to receive it. Can I thank everybody for participating? It has been a bit of a marathon, but I think perhaps it is fair to say publicly before I close that this meeting is part and parcel of a scrutiny process by this Select Committee that will not end until we are satisfied that the industry has sorted itself out. If it means holding further inquiries, then we will hold further inquiries. Can I thank everybody for their help and participation? Thanks very much.