Having been announced last week as Jo Swinson’s replacement as the minister overseeing the proposed statutory code on tenanted pub companies, Jenny Willott tweeted that she has “lots to get my teeth into”.
She’s not wrong. If anyone at the Department for Business, Innovation & Skills (BIS) thought that introducing the code would be relatively straight forward, responses to the consultation have shown the depth of concerns that can’t be ignored.
M&C has reported on a number of the responses from tenanted operators in recent days. Concerns focus on a range of issues and there’s some disagreement around certain aspects, but Shepherd Neame summed up a widespread view that a mandatory free-of-tie option, one of the main bugbears, would “destroy the basis of the traditional tenancy” and would, for one, see a reduced level of investment in pubs
The company said: “The loss of operational support would result in declining loss of sales and viability of public houses. At best, this would result in lesser quality pubs less likely to achieve the licensing objectives and contributing less to the national economy.
“At worst, it would result in large scale closure of pubs and loss of community benefit to the detriment of the social well-being of the nation as a whole.”
Other concerns of operators include the risk of creating a “two-tier” level of support for tenants by introducing a 500-pub threshold (Heineken/Star Pubs & Bars) and “endangering the viability of mid-size brewers through the mandatory guest beer option (JW Lees). Admiral Taverns warned that the code could “fundamentally compromise” its financial position – it estimates that the annual cost to the company, based on the Government’s mid-range estimates of £102m per year across pub companies, would be equivalent to c£5m of EBITDA annually.
There are even fears that the current threshold could, bizarrely, force the likes of JD Wetherspoon to help fund the code arbitrator despite operating an entirely managed business model, although this anomaly will surely be ironed out whatever is decided.
Pubco critics could argue that the companies would naturally exaggerate the negative impact of the code. The most significant response, therefore, may be that from an independent study commissioned by the Government from London Economics that says the proposals could lead to the closure of 1,600 pubs.
Meanwhile, there are question marks over timings. Recent months and years has seen the model evolve at a rate of knots. To give one recent example, last month M&C Report spent time with Chris Welham, MD of Spirit Pub Company’s leased arm, who explained how that firm is trialling a range of innovations including a “co-investment” agreement, whereby the licensee pays a percentage of turnover instead of rent and receives significant help with different aspects of the operation, and a franchise version of its John Barras managed pub concept.
Elsewhere, Enterprise Inns is also looking to introduce turnover-related rents and could even directly manage some of its pubs. Last month Punch Taverns was named Business Enabler of the Year for its Punch Foundation Tenancy, which judges described as a “true innovation in supporting pub entrepreneurs to buck the [downward] trend through up-skilling managers and encouraging differentiation”.
Major operators don’t hide their desire to move away from the traditional tenanted and leased model. Marston’s revealed in November that it now has more franchise pubs than tenanted houses and Peter Dalzell, MD of Marston’s Inns & Taverns, told M&C Report that he expects tenancies to disappear from the estate in two to three years, “possibly longer”. “That’s the direction of travel,” he stated.
With this in mind, the Government must ask serious questions about whether it’s legislating for a business model that’s of dwindling interest, at least to some of the biggest national pubcos. The consultation does ask whether franchise agreements should be included in the consultation, so it will be interesting to see what BIS concludes.
In its submission, the British Beer & Pub Association highlights others concerns over timings. “The consultation fails to recognise the very significant progress made by pub companies over the past four years, not least with the launch of Version Six of the Industry Framework Code earlier this year,” the trade body said.
“Unfortunately the consultation appears designed to present an inaccurate and contrary view, in places grossly over-exaggerating the evidence to support the proposals presented.”
In a similar vein, several pub companies said self-regulation via schemes such as the Pub Independent Rent Review Scheme (PIRRS) and the Pub Independent Conciliation and Arbitration Service (PICA-Service) should be given more time to work.
So what’s the Government likely to do? Willott has given public backing for a statutory code in the past, saying that self regulation “has clearly not worked so far”. But Swinson has hinted that the issue is not cut and dry. Writing for M&C’s sister title Publican’s Morning Advertiser, she said action would be “proportionate and targeted” and spoke of the need to not “rush head first into the issue”.
Labour’s shadow small business minister Toby Perkins has suggested that the Government may choose a compromise option, a statutory code “of some sort” that falls short of a mandatory free-of-tie option. A watered down version is almost certainly one option on the table.
The Government’s response, which was expected this year, has been put back until 2014. One senior industry figure told M&C Report “not to hold your breath” for an early answer, given the weight of evidence submitted. More than 1,100 written submissions were received – one extended to 2,000 pages, Swinson pointed out. There were also 7,000 on-line responses. That’s a lot to digest over the Christmas break.
On the flip side, the Business Innovation & Skills Committee (BISC) is ratcheting up the pressure. In a letter to Cable from BISC chairman Adrian Bailey, he set a deadline of 8 January for a response. Bailey warned that there’s “serious risk” that there will be insufficient Parliamentary time to put the code in place.
Doubtless many tenants will feel differently, but the overwhelming consensus among pub companies is that the statutory code is the wrong legislation at the wrong time. Whether the new minister has the will to stop the plans, or change them significantly, is another question.
