Leading sector analyst Douglas Jack has said the Government’s plans to intervene in the tenanted pub sector could increase pub closure rates or cause pub companies to reduce their product ranges to tenants.
Jack, of Numis, was responding to the Government’s new consultation on implementing a statutory code of practice and adjudicator for the sector, and enshrining the principle that the tied tenant should be no worse off than their free-of-tie (FoT) counterparts.
Jack said the transfer of value to tenants should be much smaller than the estimated £4,000 per pub, a figure that is half the value of estimated tied wet rent (£15.5k) less half the estimated value (£7k) of tied tenant support.
“We estimate the £15.5k wet rent differential is based on an average FoT buying discount of £130/barrel, which is arguably not comparable as it would result in an inferior product range to what the pubcos offer.
“The impact assessment also fails to reflect higher rents in the FoT market, as reflected by Wellington (a FoT company) charging an average rent of £33k versus Punch Taverns’ £27k and Enterprise Inns’ £31k. Given the relative quality of these estates, this is consistent with the Office of Fair Trading’s (OFT’s) conclusion (in 2011) that tied tenants are no worse off than FoT tenants.”
Jack said that if a statutory code is implemented to the detriment of the pubcos, “which currently offer the widest selection of beers in the market”, pubcos “could recoup some lost income by reducing product range (to be in line with the market) through removing lower discount ales”.
If a mandatory free-of-tie option with an open market rent review is introduced, “the pubcos could restore profits by moving all pubs to FoT rents and removing all support and investment.
“Unfortunately, this would also increase the pub closure rate, which was 5.0% for FoT pubs vs 3.5% for tied pubs in the 30 months to September 2012.”
Jack added: “Operators have until 8 June to state their case. Any changes would require the approval of the Chancellor and Prime Minister.
“Given this, the OFT’s conclusions and the operators’ compliance with the existing Code, financial risk should be limited, but these reviews are never good for sentiment.”
Share prices of the two biggest tenanted pub companies, Punch Taverns and Enterprise Inns, both dipped slightly yesterday. Punch’s shares closed down 0.5p to 9.25p and Enterprise’s dipped 0.25p to 102.5p.
However, for Greene King and Marston’s, both of which have significant portions of their businesses that won’t be affected, shares closed up 3p and 0.4p respectively to 669.5p and 136.4p.
Spirit Pub Company’s shares fell 0.25p to 59.25p. Fuller’s, which has fewer than 500 non-managed pubs so won’t be subject to the proposals, saw its share price decline 34.5p to 775.5p.
Speaking to the Financial Times, Ted Tuppen, chief executive at Enterprise Inns, criticised the proposals. “Leased and tenanted pubs are surviving because of the support of the pub companies. Why would I want my good pubs to shut? It makes no sense.”
He told the FT that Enterprise earns about £9,000 less per pub a year than it used to because of cuts it has made to rents and beer prices.
Writing in the Telegraph, Punch executive chairman Stephen Billingham defended the beer tie and its relationship with its tenants.
“The ‘beer tie’ is at the heart of objections to the sector. Put simply, the tie is a promise by the tenant to buy beer through a pub company so the company can benefit from bulk purchasing. In turn, we give them the chance to set up a new business with no capital investment and a lower market rent. Without us, a new pub operator would find it almost impossible to set up a new business, given the difficulty of borrowing from the banks. Landlords also benefit from our advice and support.
“At Punch, we have a balanced relationship with our tenants: we give them an option of buying beer at market prices but without a subsidised rent; tenants no longer face upward-only rent reviews. There has been a marked decline in complaints; the performance of our pubs is stabilising and, in many cases, improving. Vince Cable’s proposals would create a state-backed quango with the power to interfere with long-standing contracts.
We are concerned he may have made up his mind to abolish the tie, which, we believe, has protected pubs, not accelerated their decline. The government has previously acknowledged that, since 2008, free-of-tie pubs have been more likely than tied pubs to close so we cannot understand why the Business Secretary is keen to further expose pubs to this tough environment. It would be a great pity to see government red tape lead to more closures.
“For the sake of the great British pub, we hope more sober heads will prevail.”
Other trade reactions
Brigid Simmonds, chief executive of the British Beer & Pub Association, said: “It is vital for our members that the tied house model works well for both partners, so we are fully prepared for the model to be tested. It is one of the best small business partnerships, for shared investment, shared business development, and job creation, which makes it good for the pub sector and Britain’s pubgoers.
“BBPA members are determined to tackle problems where they exist, as we have been doing, through the system of self regulation that the industry has set up.”
Kate Nicholls, strategic affairs director at the Association of Licensed Multiple Retailers, said: “We welcome the publication of the Government’s consultation. What the sector as a whole needs more than anything is certainty and stability going forward if we are to secure long term investment and sustainability. It is vital that this issue is grasped and dealt with as quickly as possible to deliver a once and for all solution to something which has bedevilled the industry for too long.
“We have been warning of the need to properly rebalance the risk and reward element of the model since 2008 and have worked tirelessly to try to achieve that - through mediation, through tough negotiation and through self-regulation - but were frustrated in our attempts to deliver real and meaningful change until the 11th hour. While some pub companies and brewers have responded positively and work hard to support their tenants, collectively they delivered too little too late. Today’s announcement could have been avoided if they had heeded our advice and taken more note of lessee proposals for reform.
“Some of these issues are by no means unique to the pubco sector - upward only rent review, quarterly advance rent payments, conflicts of interest at rent adjudication and contracted out terms are also frustrating investment in the high street and eating and drinking out more generally. We will be working to get a fairer deal for all lessees to unlock the potential for wider growth.”
Mike Benner, Campaign for Real Ale chief executive, said: “It is fantastic news that the Government is pushing ahead with these desperately needed reforms. Introducing guest beer and market rent only options will deliver fair market rents and ensure licensees are able to buy beer at competitive prices. These reforms, coupled with an industry watchdog with real teeth, are urgently needed to help safeguard the future of many thousands of valued community pubs.
“The large pub companies have been given repeated opportunities to deliver effective self regulation but have failed to do so. CAMRA is delighted that after nine years of self regulation failure the Government has decided to act.
“Guest beer and market rent only options promise to be a major boost for Britain’s thriving independent brewery sector as well as the pub sector. Over 1,000 small brewers who are currently locked out of supplying local pubs will now be able to make their beers more widely available to pub customers.”
