There is nothing to fear from a free-of-tie future, argues Fair Pint campaigner Karl Harrison.
Mark Stretton's recent piece — What would free-of-tie pub life look like? — paints a free-of-tie picture I do not recognise.
Whilst I now have a tied lease in my pub group, I've operated in the free of tie sector for around 20 years or so. We know that the industry without the tie can't be as some would suggest because nearly half of the UK pub sector isn't strangled by the tie.
Whilst the main pubcos' beer sales are dominated by the likes of Heineken, Molson Coors, Marstons, Greene King, Fullers and Shepherd Neame, the free of tie sector has a choice of around 2500 real ales alone, including those from over 500 craft brewers that are largely excluded from the tied sector. We know that the claims of unintended consequences from removing the tie are not true because they don't happen where the tie doesn't exist.
The article quoted the views of City analyst Geoff Collyer, a firm pubco supporter at Deutsche Bank, house broker to Enterprise Inns. While other analysts, notably Jamie Rollo at Morgan Stanley along with others at UBS, Numis, Seymour Pearce, and Goldman Sachs have recently been more critical, Geoff continues to support the tied model.
Mark's article talked about the investment from pubcos into their estates. Tied pubs are often recognizable by their poor state of repair when compared to freehouses and managed groups. Tied tenants with thin margins are often not able to comply with repairing obligations and pubcos, cash strapped by debt, don't assist.
On assignment of leases it has been common practice by some tenanted pubcos to try to appropriate premiums being paid to their tenant through the route of dilapidations. At the end of leases it has also been relatively common for schedules of dilapidation to be served and the money realized then seemingly diverted elsewhere.
Property companies outside of the pub world do, of course, more often have strong tenants able to repair their properties on Fully Repairing and Insuring leases or else the property may be repaired through a service charge levied on tenants sharing the same building. The condition of the underlying asset ought to be important to a landlord but these seems not to be the case in the pub sector.
Discounts
The figures for discounts available in the market quoted in the article do not give the full picture. Firstly, let's differentiate between the interests of the pubcos and their tenants. They are not the same thing and as everyone now knows they are not on the same side. There is a strong case to say that pubcos have been contriving for some time to drive up the wholesale list price of beer and using their control of thousands of freeholds to drive up their own discounts achieved at the expense of their tenants. The tenants are driving the volume and the pubcos pocket the cash.
The main pubcos are seeing discounts of up to £250 per barrel — Mark refers to upwards of £150. The artificial inflation of the wholesale list price has enabled them to charge more and more to tenants. It is ridiculous to say that free of tie discounts are restricted to £70-90 per barrel.
Even a low volume single pub operation in the free of tie sector will achieve discounts of up to £180 per barrel. The competitive nature of the free trade has enabled survival in the current downturn whilst the churn in pubco estates has risen to worrying levels. Punch recently conceded that up to 40% of its estate might now be unlet or let on short term arrangements.
Small brewers
Mark claims that many small brewers rely on the tie for survival. This may be true if they have tenanted pubs but many brewers without pub estates are often excluded from their local markets by the tied system and crave a free of tie market where they can establish links with publicans and the consumer.
The Direct Delivery Scheme operated by SIBA has allowed limited access to the tied market for some brewers but the complaint is heard that the pubcos, and Enterprise in particular, demand that an increase in wholesale prices before they will be listed. The pubco can then hike the price to their tenants whilst giving nothing more to the brewer. Chief executive Ted Tuppen has used the DDS scheme to try to argue that his company is not foreclosing the market for beer but in reality the pubcos will always seek to price most competitively those products that they want to sell to tenants - and those will be from the usual suspects.
Consumers continue to benefit from better service and better pricing in the managed and independent free-of-tie sectors; it is difficult to see how anyone can justify the argument that the loss of tie causes suffering to consumers.
The main beneficiaries of the removal of the tie will be consumers, publicans and smaller brewers. The losers ought to be the pubcos and will be. Already debt ridden and reliant on unsustainable rents and wholesale beer prices it's hard to see a reason for their survival in a truly open and competitive market.
Their loss, of course, would be little concern to the pub sector which could then get with promoting the relationship between beer, pubs and consumers. The pubcos of course have made great play of saying that rents will go up if the tie is removed and there is really no evidence for this being the case.
Rents
The recent Brooker judgment against Enterprise Inns in the High Court illustrated the fact that pub rents for the tied premises may already be too high by as much as 50% or more. Investors quite correctly recognized the importance of this landmark case and duly sold Enterprise Inns shares. Whilst RICS guidance has most recently been skewed in favour of pub owners by the careful placement of pubco employees and agents in valuation committees, that looks unlikely to continue and the there will be escalating pressure from tenants' groups, the courts, politicians and burned lenders to make the RICS get its house in order. The argument that "if we don't get you with the gun, we'll get you with a knife" was never a dignified or persuasive argument and now it looks increasingly like the game is up on pub rents in what has become increasingly seen as a scam.
As a long time free of tie operator I'm happy to recommend it to any publican — you and your customers will be better off, you will have more choice of beer and at a fraction of the price. You'll get genuine support from suppliers and not fake support from pubcos.