Pub Companies

Damian Hinds Excerpts

Thursday 12th January 2012 Commons Chamber

[Damian Hinds (East Hampshire) (Con)]

The importance of this subject is clear from the number of Members present for this debate. That is unsurprising as pubs are an important part of being British; they are an important part of what holds us together and of what, literally, brings us together. This has been a difficult time for the licensed trade as a result of Sky TV costs and Performing Rights Society costs, as well as changing social habits leading to a decline in wet sales, combined with the underlying structural problem that prices go up by price inflation but the biggest cost, which is people, goes up by wage inflation. There are clearly far too many pubs closing in our towns and villages, and we need to find ways to stop that. Changing the tie arrangements is not the right way, however.

I should declare an interest: I used to work in the pubs and brewing business, but I no longer do so. The industry is built on partnerships between large companies and individual entrepreneurs. As my hon. Friend the Member for North Swindon (Justin Tomlinson) said, that brings many people into the business who otherwise would have no way in. However, whenever there are two businesses working together there is always potential for conflict, and this business certainly has its fair share of that. We should also make it clear that there are many happy tenants and lessees, however; not everybody is at loggerheads with their partners.

At its heart, the tie is a way of sharing risk between the real estate owner and the individual entrepreneur. Different sectors do that in different ways: they have franchise fees as a percentage of revenue, turnover-related rents or whatever it might be. In this sector, it just so happens that it is done primarily through the tie. Everything that I know about economics and business tells me that loading all cost on to fixed cost and de-variablising it would increase, not decrease, the number of business failures because of the increased operational gearing.

There is a somewhat false impression implicit in much of this debate—in the wider sense; not so much today—that, were the tie to go, everything else would stay the same, so nobody’s rent would go up. Of course, that is not true at all. There is a required return on every piece of real estate; the market expects a required return from quoted companies.

[Martin Horwood (Cheltenham) (LD)]

Does the hon. Gentleman not accept that hardly anybody in this debate has asked for the tie to go? We are talking about rebalancing the power relationship between lessees and pubcos, so that there is greater incentive for pubcos to provide a more generous arrangement for small businesses.

[Damian Hinds]

The motion does in fact specify a “free-of-tie option”. Many pub-owning companies would say that some sites are appropriate for leases—where the partner can build the value of the lease by building up the food business, for example—whereas others are more appropriate for a traditional tenancy-type business. The motion as stated would conflict with that approach.

In addition to that false implicit impression, there is a confusing conflation of tenants and lessees. On the one hand, we seem to be saying that this is only about very large pub companies that run leases; yet a number of those who have spoken in favour of that proposition have referred to the people in question as tenants. I am not entirely sure where the cut-off point of 500 sites comes from. It is possibly intended to target just a couple of companies, but frankly, coming up with a regulatory package for the whole industry is probably not the best way to do that. I fear that that would pull in a couple of other companies it is perhaps not intended to target.

Most importantly, there is little evidence that I know of that traditional, smaller, integrated brewers have any difficulty with the tie, which suggests to me that there is no problem with the tie per se.

[Mr Davey]

My hon. Friend is right, and that is one reason why the Government response made a big distinction between the tied tenancy model and the leasehold model of full repairing and insuring leases, with which most, if not all, of the real detriment and problems have occurred.

[Damian Hinds]

The Minister is correct, and that is indeed in the Government response. Unfortunately, the BIS Committee report, which is a fantastic report and to which we are to some extent referring, does not make that distinction quite so clearly.

What should we do if the tie is not the answer? Let me start with what we should not do. The Government response puts it rather well:

“Government should not intervene in setting the terms of commercial contractual relationships”

where, according to the OFT, there are no competition issues that significantly affect consumers; and

“whether or not a lease or tenancy includes a tie is a commercial decision on the part of both parties.”

[Mr Binley]

Will my hon. Friend give way?

[Damian Hinds]

I am afraid not.

We do need to make sure that there is fairness and transparency and that properly informed people come into this business. On fairness, I welcome the commitment in the new framework code to having no more upward-only rent reviews in full repairing and insuring leases. On transparency, I welcome the commitment to publish national wholesale price lists, although I am not quite clear how that would work. In this business, where pricing is a complex art, wholesale prices are not necessarily that much use unless the actual prices charged and tariffs are known. My hon. Friend the Member for Stratford-on-Avon (Nadhim Zahawi)—he is not with us today—suggested to the Select Committee that, through the medium of the internet and the wisdom of crowds, it might be possible to use these data in ways hitherto not possible.

I also welcome the industry’s commitment to look again at common formats for shadow profit and loss accounts to make it easier to compare different pub owners. I agree with the predecessor Select Committee’s finding in 2009 that all the information on a pub’s trading history should be available to the potential licensee. However, it is also important that we understand the limits of that. Pub companies will say that they would love to know a lot more about the trading history of various sites, often having limited sight of that information. We need properly to inform people who are going into the business. I welcome the pre-entry awareness training, but I also agree very much with the Committee’s judgment that we need deep vigilance on its quality. None of that invalidates the tie.

If we want to be totally focused on keeping pubs open, as I believe all hon. Members do, we have to address two fundamental things. The first is pubs competing on price, partly against the supermarkets, but also, as some hon. Members have said, against managed houses, particularly urban “vertical drinking establishments”, as they are known in the trade, which often severely undercut the traditional tenanted trade. The second is alternative usage value, as one way of keeping pubs open is to make it harder and more expensive to secure a change of use for these premises. That will focus minds on making sure that companies are supporting sustainable businesses.