MPs publish report on pub companies

13 May 2009

A unanimous report today from the Business and Enterprise Select Committee raises a series of questions about the pub company (pubco) tied pub business model and calls on the Government to act urgently, in particular, to refer the matter to the Competition Commission. It challenges the pubcos which operate a tie to prove its benefits by giving lessees the choice between a tied or free of tie lease.

The Chairman of the Committee Peter Luff MP said:

"The report explicitly acknowledges that “not all the problems of the pub industry come from the tied pub model. It is clear there are many pressures on any retail business, and pubs are challenged by changing consumer preferences, changes in the regulatory framework and general economic circumstances. Nonetheless, our inquiry found alarming evidence indicating there may be serious problems caused by the dominance of the large pub companies."

From the start of the inquiry evidence from lessees of many pubcos raised substantial concerns. The Committee recognized however that disputes between tenants and landlords are not unusual and a satisfied lessee would be less likely to complain. Faced with such conflicting views, the Committee commissioned its own independent survey as part of the inquiry, to determine whether the evidence received from individual lessees was typical of feelings in the industry.

The survey results, printed with the Committee’s evidence, underpinned the Committee’s findings. 64 per cent of lessees did not think their pubco added any value and while a fifth had had a dispute with their pubco, few (18 per cent) were satisfied with the outcome. The Committee was astonished to learn that 67 per cent of the lessees surveyed earned less than £15,000 pa and over 50 per cent of the lessees who had turnover of more than £500,000 pa earned less than £15,000 – a 3 per cent rate of return. The lessees may share the risks with their pubco but they do not appear to share the benefits.

The report therefore concludes that problems which were identified by the Trade and Industry Committee four years ago remain. An imbalance of bargaining power between lessees and pubcos persists and the arrangements for assessing rents remain opaque. Rental assessment should be the basis for negotiation, but incumbent lessees often risk the loss of their home as well as their business if they cannot reach agreement, the report says.

Despite the introduction of improved codes of conduct, there appears to be no effective independent dispute resolution system; only now is such a system being considered. While there may be some cases where pubcos have acted fairly and even generously towards their lessees, in many cases they take full advantage of their economic strength, the report says.

Given the industry's inability to reform itself in the past, the report recommends that BERR look urgently at the inequalities of bargaining power between pubcos and lessees. Recommendations to improve the transparency of rent assessment should be implemented. Moreover, the practice of pubcos selling buildings they no longer require with restrictive covenants preventing their use as a pub should, in the Committee’s view, be banned.

Peter Luff said:

"Pubcos do provide services and support to their tenants. There are good Business Development Managers out there. However, as our report says ‘there is a worrying pattern in the evidence presented to us of lack of support for lessees, of verbal agreements no honoured and, on occasion, of downright bullying.’

"It is not clear that the benefits of the tie outweigh its disadvantages. Our report challenges pubcos to demonstrate the benefits of the tie, by offering their lessees the opportunity to run their pubs on a free of tie basis. This can only work if there is a transparent system for negotiating rents.

"But even if the industry took up our challenge, the problems about the imbalance of bargaining power remain. We believe that the Department for Business, Enterprise and Regulatory Reform should examine this issue."

There are also strong indications that the existence of the tie pushes up prices to consumers. The Committee is wary of simply recommending that the system should be abolished, as such a move might simply increase the power of brewers or distributors. The OFT has declined to act in the past: the report recommends that the Secretary of State refer the matter to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position.

Peter Luff said:

"Our provisional view is that the tie should be severely limited to ensure proper competition in the market. Nonetheless, we are aware that interventions can sometimes have unexpected consequences. The Beer Orders led to the emergence of pubcos. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we are recommending an urgent investigation by the Competition Commission, rather than simply making a policy recommendation."

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