Tuesday, 23 April 2013

17 Questions That Could Secure The Future Of Britain's Pubs...

Warning this post is very long ... 

... but then again so is the pubco regulation consultation document (a hefty 67 page document that can be found here) .The consultation is now underway, so first of all congratulations to the government for listening to ordinary tenants and not being fobbed off by the self-regulating pubcos and their various stooges.

The consultation will last eight weeks, until June 14th, with the government making its response within three months of its completion ... so plenty of time to become involved, be you publican, brewer or even a customer. Before rushing into completing the offline or online response form the Department for Business Innovation and Skills (BIS) has made available, those with an interest in the future of pubs in this country would do well to read the entire document.

Luckily for those that have neither the time nor the inclination, I have had a good look at the consultation document and the 17 questions it poses for our industry. Contained in the 67 pages are the background to the consultation, some very good synopses of various arguments and more importantly some warnings of "unintended consequences" that may form the government's response to this vox populi. To assist your journey through this process, and, who knows, maybe even influence your response to the consultation here are my thoughts ...


Dr Vince Cable's Foreword

On the 20,000 pubs that have closed over the last 30 years and the effect of the world financial crisis : "Whilst the financial crisis has brought into stark relief the slow process of sectoral decline, it is undoubtedly the case that the activities of the major pub companies, with their highly leveraged business model, have intensified the crisis"  Spot on Dr C

On the unwillingness of certain pubcos to adopt swift and meaningful self-regulation after 11 years of select committee hearings and four reports into the pub industry: "After considering the various options, I have therefore decided to consult on establishing a Statutory Code and an independent Adjudicator for the pubs sector to govern the relationship between large pub companies and their tenants. At the heart of this intervention I propose to establish both an overarching fair dealing provision and the core principle that ‘a tied tenant should be no worse off than a free-of-tie-tenant’ ** enshrined in statute.

(** TTNWOTFOT as it's a pain to type out)
I would like to be clear that I am not proposing to abolish the beer tie. When operated as envisaged and fairly, it is a valid business model being used responsibly by companies both large and small. Were it to be removed, the British brewing industry could be significantly disadvantaged. What is clear is that it is the abuse of the tie, like the abuse of rent calculations and other factors, that is causing problems in certain circumstances." Again Dr C, spot on.


Why is Government Considering Action?

The long history of discontent within the industry from many tied tenants at the way they have been treated by some of the pubcos and the lack of progress by those same pubcos to reform their respective business models is the short answer to that. 

The government makes it quite clear that its aims are to force pubcos to treat tenants fairly and equally and not in terms of the (failed) competition issue fought by CAMRA in 2010. It notes that :"Although it is clear that the tie can be a good business model when operated responsibly, abuse of the tie can cause serious hardship." Something that many tied tenants can attest to.

The government has to be commended for not heaping all the blame for this industry's woes on the pubcos and makes the case for blame being apportioned, in some measure, on some tenants:  "This problem can be exacerbated by tenants who go into the pub sector as a ‘lifestyle choice’ rather than as a commercial business decision. Many publicans do not shop around for pubs or invest based on business reasons; rather they choose a pub they like or on the basis of the attached living accommodation. There have also been concerns raised regarding the chronically low levels of literacy and numeracy amongst tenants. The tie gives an additional route of abuse as beer prices are changed more frequently than rents. The tie also complicates the relationship, making it tougher for tenants to know if they are getting a good deal. In one CGA survey 73% of respondents only looked at one pub owning company when deciding which pub to rent."

The document also acknowledges, quite rightly, that not all pubcos or estate owning breweries should be viewed with the same opprobrium as the likes of Punch or Enterprise: "Tied tenants are also more likely to face serious hardship - 46% of tied publicans earn less than £15,000 a year, compared to just 23% for tenants who are free-of-tie. Although the tie is not universally bad – the latest independent annual survey, conducted by CGA strategy, showed 7 out of 10 tenants would sign up again with their pub owning company – the fair working of the beer tie is particularly important because of the hardship many publicans face including the possibility of losing their home (which is the pub)."


Proposals and Impact 

In short the government proposes fair treatment and the over-arching principle that tied tenants should be no worse off than free of tie tenants, by means of a Statutory Code and an Adjudicator to enforce that code. BIS estimates that £102 millions of value within the national tied pub estate would be transferred from property owners to tenants when legislation is enacted. For the 20,000 odd tied tenants this would mean increased profitability (on average) of £5,000 per pub ... which for the 42% of tied tenants who earn less than £15,000 from their pubs would be a very welcome fillip. (Oh, and bohoo, squish, squish, for the poor buggers in Solihull and Burton who would have to foot the estimated cost of the Adjudicator of some £2millions per annum; which, the government intends to recoup from an industry levy).


A Statutory Code & Adjudicator

Whilst self-regulation has resulted in albeit reluctant concessions by the pubcos (PIRRS and PICAS and Codes of Conduct) BIS concludes that "Both pub companies and tenants have now accepted that a self-regulatory code cannot address the fundamental issue of the balance of risk and reward between pub companies and tenants." No rational observer of this long-running saga can argue with that (oh, apart from Enterprise, who even today, was trotting out their tired old mantra of "low cost entry" as justification for their continued abuse of the tied pub system).

The Government proposes an Adjudicator along the lines of the well established Groceries Code Adjudicator; the Adjudicator will have two roles, that of arbiter and that of investigation. Here's my first word of caution on the proposals, page 17, Box 1 outlines a scenario whereby the adjudicator wishes to investigate possible breaches of the Code and samples 200 pubs to see if this is the case. My question, that will form part of my official response to the consultation is: "Who chooses the 200 pubs? The pubco or the adjudicator?"

The proposal for which companies are designated as pubcos bound by the code is for those with estates of over 500 pubs ... apparently this would take care of 90% of pubs that are subject to the abuses of their landlords. Well, I believe that small companies can be just as unscrupulous as their bigger competitors, and that if there is to be a logical and moral consistency to the legislation that it should apply to all pubcos and all brewers. For those acting in the honourable tradition of operating the beer tie as the consultation puts it, there is nothing to fear. It would appear I am at odds with the likes of the Independent Pubs Confederation, CAMRA and the All-Party Save the Pubs Group and, no doubt, Family Brewers, but hey ho I thought the basis of good law was that it was applied evenly and the protections it afforded were equal for all? At least the consultation indicates that this could be reviewed if necessary.

The government proposes that all pubco and brewery tenants (within the scope of the code would be treated the same whether they are a lease-holder or a traditional tenant.) So some consistency there then.

Well done to the authors of the consultation document for spotting that it wouldn't be beyond the wit of pubcos to circumvent the code by packaging their pubs into sub-500 estates as the code will apply "at the level of the top company within a group".

The Future of Self-Regulation

If the 500 floor is enshrined in the legislation then "the Government considers that it would be strongly beneficial if companies with fewer pubs than the statutory threshold continued to operate a self-regulatory regime, in particular with regards to the creation of company codes and their certification by an appropriate body such as the British Institute of Innkeepers. The Government considers that whether or not smaller companies were willing to operate such a regime is likely to influence its decision of whether to set a statutory threshold for the Code of 500 pubs." - a wise precaution in my view.

It puts forward the alternative for smaller groups "to voluntarily commit, in their contracts with tenants, to use the arbitration function of the Adjudicator to resolve disputes."  For tenants of smaller companies this is better than nothing.

Content of the Proposed Statutory Code

To ensure the core principles of fairness and TTNWOTFOT comes about the government is asking some key questions:
  • Whether the overarching principles of the Code are correct;
  • Whether the Code should include a mandatory free-of-tie option;
  • Other possible ways of ensuring tied tenants could be made no worse off than free-of-tie tenants;
If you're a tied tenant you'll also be pleased that the issue of re-balancing risk and reward are firmly on the BIS agenda:
  • The right to request open market rent reviews (if none in the last 5 years, if the price of tied products increases significantly and if something beyond the tenant's control affects their ability to trade);
  • Transparency through the production of parallel tied and free of tie (FOT) rent assessments ; 
  • Outlawing the gaming machine tie and any other non-drink ties; 
  • A guest beer option that can be sourced from wherever;
  • A mandate in the code to prevent flow-monitoring equipment from being used to prove breach of the tie.
I would bring the attention of readers to pages 29-33, which, outline the arguments for and against the mandatory FOT option, having considered this for a long time I would make the response that a mandatory FOT option at this stage and in the current economic climate would result in "unintended consequences". However, once the code has been enacted and a period of adjustment has passed for the industry, perhaps government might re-visit this option? A good point might be at the three year review of the project mooted in the document. So, no to a mandatory FOT option. This may be an unpopular, even heretical view, but better a continuation of a responsibly operated tie than the wholesale decimation of the national pub estate by the likes of Tesco, MacDonalds et al if there is a mass sell-off of pubs, say, due to the collapse of one of the over-leveraged behemoth estates.

Powers of the Proposed Adjudicator

In brief, as I am sure you are as weary of reading this as I am becoming of typing it ... the proposed Adjudicator's role and powers would be enshrined in the Pub Adjudicator Act. Firstly to act as arbiter on behalf of individual tenants seeking redress against their landlord and secondly to act in a prosecutorial and investigative role against pubcos who may be systematically breaching the code. This has to be a good thing, for a guard dog without teeth is no use at all, so my response to the question on powers would be yes, bring them on!

The proposed incremental sanctions the Pubs Adjudicator would have at their disposal range from the "lightest touch" of recommendations; a requirement to publish information about a pubcos breaches of the code, the so-called "name and shame" option; and, finally, financial penalties. Although no details of the fines tariff are contained within the consultation document I would strongly urge them to be stiff enough to act as a deterrent, yet be proportionate to the breach in question. One thing I shall add to my response on this is that pubcos, when found to be in breach, should be forced to make financial restitution to their "victims".

Funding & Accountability

The proposal is an industry-wide levy against the pubcos and brewers with estates over 500 (i.e. those that fall within the scope of the code) ... yes, make the polluters pay, as long as pubcos are prevented from passing this and other code compliance costs on to tenants, then subsequently to their customers. After all we've seen the gouging pubcos indulge in over such things as "licensing costs". What is pleasing is that after a flat rate dependent on estate size in the first year is the proposal to charge those pubcos with the worst record of breaches more in the second and successive years.


The Code

This runs to many pages (pp40-56) and in the main seems to be a balanced and proportionate solution to the current inequalities in the tied pub sector, however, the devil is in the detail and here are a couple of things you might consider in your response to the consultation:

(p45) Should pubcos insist, rather than encourage, prospective tenants thoroughly inspect the premises they are looking to take on? In my opinion, with their lamentable track-record, some pubcos will use any wriggle room they can find to circumvent regulations if it's in their own best interests. Simple solution ... allow pubcos not one nanometre of wriggle room.

(p48) The draft code calls for pubcos to publish their national price lists for tied products ... the only question is "Which national price list?". Would that be the brewers' with no discounts or the net price the pubco pays? Of course both parties will resist the latter option on the grounds of "commercial sensitivity", but in my opinion unless the latter is disclosed there can be no transparency for tenants trying to work out whether they are getting a good deal. So if you're making a contribution to the consultation I'd recommend highlighting this issue.

(p50) deals with the roles of Business Development Managers (or whatever title each company gives them) and calls for BDMs to be trained before carrying out rental negotiations. My questions on this would be "Trained by whom?" and "Trained to what level?". Again in terms of wriggle room the code should stipulate a level of training commensurate with a full and proper understanding of current (and future) RICS guidlines by an approved RICS trainer.

(p51) The miscellaneous provisions call for the code to be incorporated into new lease and tenancy agreements, which, is fair enough. It also proposes incorporation at the next rent review for existing agreements? Why the wait, which for some tenants, depending on the enactment could be as much as five years? A side-letter attached to existing agreements within, say, 28 days of legislation coming into force would be a suitable way to ensure all tenants were aware of the new code and they could rest assured they were protected by its provisions from the outset.

Buidlings Insurance has always been a bone of contention for tenants and the code makes some sensible proposals for dealing with this in an open and transparent manner. The only thing missing from the disclosures required of pubcos is the amount of commission they receive from their insurance brokers in return for placing their business with them. I shall be making a specific response as to my certain knowledge (from a previous incarnation as a national estate manager) that commission rates as high as 25% of the premium charged to tenants is quite the norm. You might wish to raise this matter in your submission too.

(p53) Back to wriggle room again, the code says designated pubcos "may" produce their own Company Code of Practice ...why not "must"?

The remaining provisions seem adequate to me, which, brings us to one of the main issues the code seeks to address ... rent assessments. I really have no quibble with this section save the "sample rent assessment statement" pubcos have to produce to prove TTNWOTFOT . The accompanying guidance notes make mention of "trade insurances", "regulatory compliance costs" and "licensing & social responsibility costs" ... yet they do not appear as cost lines in the sample statement. Why not? While we're on the subject of licensing costs there is no mention of the two TV licence costs, PRS for Music or PPL licensing costs, why are they not included?

Then there is the age old problem of "special commercial or financial advantages" (SCORFA) ... for once the pubcos will be required to fully list all the "benefits" they bring to the business relationship with their tenants and have to justify and quantify these costs in advance of any rental assessment ... this should prove very interesting as pubcos seek to quantify these benefits.

Well, there you go folks, apart from one thing, one of my recommendations to compliment the many industry benchmarks the code seeks to incorporate into the process of rent assessments is that pubcos should be mandated to give any prospective tenant a copy of the current RICS Pub Benchmarking Survey. This would allow prospective tenants to not only understand where their rent, turnover and more importantly rent as a proportion of their turnover sits within the national picture, but also within their respective regional marketplace.

I'm sure you'll all have your own views, perhaps you'd like to share them in the comments box? I'm always happy to take on new ideas and thoughts and if they make sense to me I shall include them in my responses.

In the meantime ... I'm going to lie down in a darkened room ...

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