Vince Cable’s announcement on 8 January 2013 of a consultation with a view to there being a Statutory Code and an adjudicator will have taken many by surprise. 

In view of the fact that the press release indicated that this will not apply to pubcos with less than 500 pubs it would appear that 3 of the 6 targets (Punch, Enterprise and Admiral) are, themselves, companies whose owe their existence to Government intervention.

Previous intervention

There have been numerous enquiries into the brewing and pub industry and it was the Beer Orders in 1989 (specifically the Tied Estate Order) which engendered the large pub companies.  The Government clearly wanted to break the stranglehold that the large brewers had on the retail market (Bass had 7,000 or more tied pubs) and introduce greater competition and greater choice for customers.

The result of the Tied Estate Order was that Bass, Imperial Brewing, Grandmet, Whitbread and Allied Breweries sold their breweries and, in most cases, their pubs. Of the large brewers today, only Heineken UK are owners of an estate of public houses.  This led directly to the formation and growth of the large pub companies (and at their peak Enterprise and Punch owned respectively circa 8,000 and 7,000 pubs – somewhat reduced now).  What an irony that Government legislation created the circumstances for the pub companies to be created and which now they want to control!

This has led to some spectacular contradictions – and there are many – but consider these:

  • Why is there a limit of 500 pubs? You can forget the Statutory Code and adjudicator if you have less than that number.  So if you own 490 pubs you are not subject to these controls, yet may operate in exactly the same way as an operator who owns 510.
  • In November 2011 the Government said the “distinction should not be primarily by size, but by of lease or tenancy” and now they say the dividing line is 500 pubs.

The Beer Orders – and beyond

The Beer Orders did break vertical integration within the sector and did give the consumer more choice but the unintended consequence was the creation and prospering of large pub companies with great purchasing power and an ability to set prices that, seemingly, now work against the public interest.

It must be obvious to anyone that the Beer Orders engendered changes in the sector which were not foreseen.  What will be the effect of the statutory code and all its likely constituent elements?  What about these for starters:

  • The fact that the Code of Practice has a statutory foundation should not, of itself, worry most operators as most (if not all) will already be complying with their own voluntary framework code of practice.
  • Pubs which have been invested in will outperform pubs which have not been invested in.  The same goes for the people who operate them.  Whether all pub companies can afford the property investment and the people investment that is required looks unlikely and this will lead to continued disposal programmes.  These will be particularly the public houses in, say, the bottom quartile within an estate where the house location and profile may not be suitable for investment and the ability to recruit a partner or operator to run the outlet and who has the aspirations, aptitude and potential for successful pub operation may be limited.  After all, if you have an operator who is content with the sorts of returns and profits highlighted in the recent parliamentary debate would you want to invest in their future?
  • There is no legal principle that a tied tenant should be in no worse position than a free of tie tenant.  Every pub company knows that tenants take pubs for a whole range of reasons and attempting to equate returns is a thankless and, potentially, impossible task.  Inherent in the tied system is the fact that the pub company takes some pain in poor trading conditions as well as the tenant and this is point regularly ignored.  How do you value that?  Similarly the fact that free of tie tenants have been failing at a higher rate than tied tenants (as highlighted in the Government’s November 2011 report) does make you question the logic of all of this.
  • The overarching fair dealing provision could be given a very wide interpretation.  Previous BISC reports have edged around the issue of the supply arrangements of pub companies and the large discounts which they are reported to receive.  There have been hints that some of these benefits should be shared with tenants.  This is likely to be an extremely sensitive issues and any attempt to equate, in any sense, pubco returns with tenant returns is likely to make pub companies wonder what the point of it all is and, for the reasons given above, encourage divestment.

Success driven by viable returns

The underlying point is that there has to be enough return it for the operator to make it worth their while and you can add this up in any way that you want.  The challenge for the industry is to attract a breed of operator who will be able to drive business to a much more profitable level.  Spending time on what might be described as bottom end pubs is probably not the way to do it.  Furthermore, it cannot be assumed that the consequences of Government intervention can be correctly anticipated and the government’s track record on this, is not one of overwhelming success.

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