The beer tie: close to breaking point?

04 June 2009
The beer tie: close to breaking point?

The relationship between pub owner and landlord has allowed thousands into the industry, taking on properties that would otherwise cost too much to buy with the help of pubco landlords. But now with many publicans going out of business, and others on poverty-level wages, this "tie" is close to breaking point, says Nic Paton.

As far as it is possible to tell, there is no collective noun for publicans, and certainly not for tenanted publicans. But if the demonstration outside the Houses of Parliamenton 20 May was anything to go by, it should probably be an "insurrection".

What the 140 or so publicans who made it to Parliament (according to the Fair Pint? Campaign, which organised the day) were nominally lobbying their MPs about was the iniquities, as they see it, of the beer tie, the contractual agreement whereby "tied" licensees are obliged to buy drinks from their landlord pub company.

But it is arguable that the tie is simply the most visible symptom of a much deeper fracturing of the relationship between pubcos and tenants, one that has been festering for some years but which the "triple whammy" of the recession, rising rents and the smoking ban has now brought sharply to a head.

As Nicky Francey, a member of the Fair Pint? Campaign, points out, the tie effectively means she earns the equivalent of a sixth of the minimum wage.

"The tie is an easy hook, but the real point is the imbalance in the relationship between the pubcos and the tenants," explains Francey, who runs the Scottish & Newcastle Pub Enterprises-tied Sun & Doves pub in Camberwell, south London.

"When you join, you get all that material about how they will work alongside you and it will be a partnership," she adds. "But when it comes down to it, it is not. They just want to reap the reward. If you are successful, they will just charge you more rent or, if not rent, they will get their revenue from beer. It has been in existence for 200 years and I think it is an old, old system and we need to move away from it."

It is not just publicans who are calling for change, either. A report by the House of Commons' Business and Enterprise Select Committee (BEC) last month called for the tie to be investigated by the Competition Commission (see page 20), blaming it and the wider pubco/tenant relationship for being a key factor contributing to accelerating pub closures and a situation whereby two-thirds of tenants were earning less than £15,000 a year.

Thomas Kilroy, now chef-patron at the Shakespeare Hotel in Bedford, adds that the tie has contributed to increased "churn" of ownership of many pubs, something that is not good for individuals, for customers or the trade more widely.

"It is not just a few disgruntled licensees. We went into it with eyes open and we knew we would have to buy drinks from the tenancy. What we did not forecast was the number of price increases and other stealth costs that have now been passed on," argues Kilroy, who was formerly a Greene King-tied tenant at the Five Bells in Cople, near Bedford.

It's not just the tie that is the issue, he agrees. It can be apparently minor things, such as when Greene King switched to paperless invoices, nominally for environmental reasons, yet with the result being that he found himself at 2am printing off his own hard copies himself because that was what his accountant required. "It is a small thing and seems petty, but when you are already working 70-90 hours a week, it is just another pressure," he says.

"Or take the issue of smoking solutions. I was quoted £8-9,000 to build an outside smoking area. That cost was then built into my rent over the next 10 years, which you could understand. But then, when it was done, they turned around and said ‘Oh sorry, the job went £1,100 over budget' and that was arbitrarily added in, too. It also took 10 months to get it done and, by the end, had becoming a running joke among the regulars in the pub," he adds.

For Kilroy, the recession, the smoking ban, two poor summers and increased competition from supermarkets have combined to lay bare deep-seated problems within the industry. "When times were good, just enough money was going back into the till to keep the landlord happy. But when times are tough, you start to look at your business plan and ask what can you cut back: you look at utilities, energy bills, food costs and so on. Then you cut back on your staff. Even the VAT man says he's happy to be a bit flexible. But when it comes to the brewer and you ask is there anything they can do to help because you need to free some cash just to get you through the next 12 months, there is absolutely no deal on the table," he explains.

George Scott, a Punch Taverns tenant at the Eastcote Arms in Northampton, agrees that more transparency is needed. "It ought to be more apparent exactly what the pubco is making from a barrell and what we are making - we should be genuinely working together to ensure a mutually profitable estate," he says. "It should be equally split, and I think the rental you are paying should also be taken into consideration. The tenants need to be given a decent chance to earn an income."

More and more tenants are rebelling and going off tie, something that, of course, brings them into even greater conflict with their pubco, including the prospect of hefty fines or even a termination of their agreement.

One man heading down this route is Wayne Hodgkins, vice-chairman of the Sheffield Area Enterprise Inns Tenants Group and owner of the Fleur de Lys Hotel in the city. He is unrepentent at his move. "If we buy a 22 gallon keg of Carling from Enterprise it costs us £253.65 but you can go to the wholesaler and get it for £150. If it was a £20 to £30 difference then there would not be much of an argument, but not when it is more than £100.

"The tie, we can see, can have its place. But there has got to be more realistic pricing. If we were still buying from Enterprise, we would not be open," he points out.

ROBUST RESPONSE

While, for many publicans, the arguments against the tie - at least in its current form - are clear-cut, for the pubcos, the arguments in its favour are equally compelling. Although none of the pubcos contacted by Caterer were prepared to comment directly for this article, both Punch Taverns and Enterprise Inns, the two companies most targeted by the Fair Pint? Campaign, responded robustly to the BEC report.

Punch, in its response, stated: "We strongly believe that the tied pub model provides a fair and equitable approach to sharing risk between ourselves and our licensees, represents a low-cost opportunity for entrepreneurs, and has a rightful place in the market."

Equally, Enterprise chief executive Ted Tuppen stressed that the chain went to "considerable lengths to assist and support our licensees, particularly in this difficult economic environment".

The tied model had provided a low-cost entry to the industry for many decades for those who would otherwise have been unable to afford to buy a pub of their own, he argued.

"As with any commercial relationship, there will always be stresses and these will inevitably be exacerbated in times of economic difficulty. However, given the nature of our relationship with our licensees, it is demonstrably in our interest to see them succeed," he emphasised.

The chain had spent more than £20m this year on an entirely discretionary basis to help licensees trade through this recession, he added.

In an interview in the Financial Times in April, Tuppen went even further, robustly dismissing accusations from a bankrupt former publican, Marc Buffery, who had run the Temple Bar Inn in the Herefordshire village of Ewyas Harold, that rent levels were unfair, rent reviews were always upwards and that pubco regional managers did not have enough local discretion.

"We never seek to deceive through painting too rosy a picture; it simply wouldn't be in our interest," Tuppen said.

"We do find that occasionally people simply are not up for what is, after all, a very difficult job. For this reason, every agreement has a break clause, allowing any licensee who is unhappy to leave without penalty during the first six months in occupation.

"I guess it isn't a popular thing to say in the ‘nanny world' that we now inhabit, but what about a sense of personal responsibility, doing proper research before committing yourself, your family and your savings to a serious business project? Most licensees do and most licensees are successful," he added.

The City, which never likes uncertainty, was also shocked by the BEC referral recommendation, points out Mark Brumby, an analyst at Blue Oar Securities. But, as he also stresses, a call for a referral does not necessarily mean it will happen.

"There now needs to be some furious lobbying done by the pubcos. Even if it is referred, that could take a year or a year and a half to happen, which could buy the industry a bit of time to look at this and work with tenants, so there will be less that needs to be rectified," he says.

MP John Grogan, chairman of the All-Party Parliamentary Beer Group, agrees the ball is now very much back in the pubcos' court. "There are quite a lot of ideas floating around for reforming the tie, which is probably what most politicians would be in favour of. If you abolish the tie, you could have rents going up and it could just consolidate the position of the big brewers against the smaller ones," he points out.

UNSUSTAINABLE?

Similarly MP Peter Luff, a member of the BEC, adds: "The tie needs to be severely restricted, but on the question of whether it needs to be abolished, of that I am not sure. The overall picture is very worrying and seems to be deteriorating. The status quo is unsustainable."

Even if Business Secretary Peter Mandelson does refer the tie to the Competition Commission - with a Government response expected before the July summer recess - the time-scale of any commission investigation means that the wider political landscape, with a General Election due next year at the latest, could yet become a factor.

The Fair Pint? Campaign is arguing that, irrespective of any commission referral, what the government should be looking at is whether the contract model between tenants and landlords can be reshaped, whether and how more transparency can be created on pricing, how rents are calculated and whether there might be mileage in allowing tenants to go free of tie when leases are being renewed.

It will therefore be up to pubcos to decide whether they want to use the time to try and gain a more workable consensus on the way forward or to create a model for a reformed tie, or whether they decide to sit it out and argue their corner in the hope that a Conservative administration might take a different view.

As Francey points out, the removal of the beer tie, even if it were to happen, would just be one part of the picture. "I would like to see the tie removed, but that has to go hand in hand with other things. We need to look at the way rentals valuations operate, for example. I think that model has to be addressed.

"The main problem is that there is no trust left and the model needs to be changed. It is not good enough for the pubcos just say they will be nicer to us; there needs to be a radical rethink," she adds.

HOW PUBLICANS ARE SUFFERING, IN NUMBERS

  • l 753,000 fewer pints served in the UK every day
  • l 1930s - the last time beer sales in pubs were so low
  • l 18 - the amount, in percentage terms, beer duty increased in 2008
  • l 1 in 10 - the proportion working in pubs predicted to lose their jobs in the next five years
  • l 39 - pubs closing each week

British Beer and Pub Association figures, April 2009

WHAT THE COMMONS' BUSINESS AND ENTERPRISE COMMITTEE'S REPORT SAID

The imbalance of bargaining power and information between pubcos and their lessees has produced a system which is biased against lessees, and needs to be examined in depth.

Without transparency, rental calculations are open to manipulation by the pubcos, in particular by systematically underestimating the costs for a lessee of running their pub. There should be industry guidelines on the costs of running a pub.

A system must be put in place to allow lessees to assess whether their rent is fair and in line with similar businesses.

If the interests of the pubcos operating a tied system and their lessees were truly aligned, one would expect pubcos would want a system in which the combination of rental costs and beer costs enabled their lessees to supply beer at a price which was competitive with other pubs. This does not seem to be the case.

It is seriously misleading for any pubco to promote to potential lessees that a pubco has benefits from "purchasing power" when that benefit is not passed on to lessees.

Pubcos may offer a lower-cost route into the industry. However, this benefit is accompanied by uncertainty about the value of the asset and the extent to which that value can be maintained. The attraction of low-cost entry should not be overstated, as lessees often choose tied pubs simply because they are what are available in their preferred location.

There are still too many business development managers who offer lessees little or no support, and some who bully or intimidate them.

Pubcos are helping their lessees with financial assistance, but there are many lessees who appear to be eligible for aid but do not receive it.

Every lessee could be offered the choice of being free or being tied. Each and every existing lessee should, in a phased programme, be offered this choice and the same choice should be offered to every new lessee as he or she takes on the lease.

The supply ties operated by pubcos may well be anti-competitive and may have a detrimental effect on the public house market, and should be referred to the Competition Commission for a market investigation.

The Caterer Breakfast Briefing Email

Start the working day with The Caterer’s free breakfast briefing email

Sign Up and manage your preferences below

Check mark icon
Thank you

You have successfully signed up for the Caterer Breakfast Briefing Email and will hear from us soon!

Jacobs Media is honoured to be the recipient of the 2020 Queen's Award for Enterprise.

The highest official awards for UK businesses since being established by royal warrant in 1965. Read more.

close

Ad Blocker detected

We have noticed you are using an adblocker and – although we support freedom of choice – we would like to ask you to enable ads on our site. They are an important revenue source which supports free access of our website's content, especially during the COVID-19 crisis.

trade tracker pixel tracking