tied pubs final report

8/10/2019 Tied Pubs Final Report

1/44

Modellingthe

impact

of

proposed

policies

on

pubs

andthepubsector

AreporttotheDepartmentforBusiness,InnovationandSkills

ProjectReference:008/1314

Preparedby

December2013


2/44

AboutLondonEconomics

LondonEconomicsisoneofEurope'sleadingspecialisteconomicsandpolicyconsultanciesandhasitshead

office inLondon.Wealsohaveoffices inBrussels,Dublin,andCardiff,andassociatedoffices inParisand

Valletta.

We advise clients in both the public and private sectors on economic and financial analysis, policy

developmentandevaluation,businessstrategy,andregulatoryandcompetitionpolicy.Ourconsultantsare

highlyqualifiedeconomistswithexperienceinapplyingawidevarietyofanalyticaltechniquestoassistour

work,

including

cost

benefit

analysis,

multi

criteria

analysis,

policy

simulation,

scenario

building,

statistical

analysis and mathematical modelling. We are also experienced in using a wide range of data collection

techniquesincludingliteraturereviews,surveyquestionnaires,interviewsandfocusgroups.

HeadOffice:7175SheltonStreet,CoventGarden,London,WC2H9JQ,UnitedKingdom.

w:www.londecon.co.uk e:[email protected]

t:+44(0)2078668185 f:+44(0)2078668186

Acknowledgements

LondonEconomics

would

like

to

thank

the

pub

companies

who

supplied

us

with

confidential

data,

Compass

LexeconandFDIConsultingwhohelpedustoaccessthedata,KateNichollsoftheAssociationofLicensed

MultipleRetailersandhermembershipwhoprovidedinsightsintokeyassumptions,AndyTigheattheBBPA

whoprovidedkeyassistance,andPhilDixon fromPICAS/PIRRSwhoseviewswereboth informativeand

veryenlightening.Allerrorsare,ofcourse,thesoleresponsibility ofLondonEconomics.

Authors

RichardHeys,GavanConlon,MargueritaLane,andMaikeHalterbeck.

WhereverpossibleLondonEconomicsusespapersourcedfromsustainablymanagedforestsusingproductionprocesses

that meet the EU ecolabel requirements. Copyright 2013 London Economics. Except for the quotation of short

passagesforthepurposesofcriticismorreview,nopartofthisdocumentmaybereproducedwithoutpermission.
http://www.londecon.co.uk/http://www.londecon.co.uk/mailto:[email protected]:[email protected]:[email protected]://www.londecon.co.uk/


3/44

Contents Page

LondonEconomics

Modellingtheimpactofproposedpoliciesonpubsandthepubsector i

Executivesummary iii

1

Introduction

1

1.1 Context:theBritishpubindustry 1

1.2 Objectives 3

2 Overviewoftheproposedpolicyoptions 4

2.1 PolicyOptionI:AStatutoryCodeofPracticeandAdjudicator 4

2.2 PolicyOptionII:Amandatoryfreeoftieoption 8

3 Researchmethodology 9

3.1 TheBISapproach 9

3.2 TheLondonEconomicsapproach 13

3.3

Datacollection

15

3.4 Modelsetup 18

3.5 Employmenteffectsofclosure 20

4 Resultsandconclusions 22

4.1 Whymightapubclose? 22

4.2 Modelledoptionsandresults 22

4.3 Conclusions 32

5 References 34


4/44


5/44

Executivesummary

LondonEconomics

Modellingtheimpactofproposedpoliciesonpubsandthepubsector iii

Executivesummary

Introduction

ThisreporthasbeendeliveredbyLondonEconomicstotheDepartmentforBusiness Innovation

and Skills on the basis of commercially confidential data that the pub companies (pubcos)

generouslypermittedLondonEconomicstohaveaccesstoforthepurposeofthisstudy.Thisdata

isdesignedforcorporatefinancialpurposes,notnecessarilyforresearchpurposes.Inanumberof

caseswehavehadtotakekeyaggregatedataanddisaggregatethisusingthebestassumptions

availabletodeliverapubbypubassessmentofthetiedpubsector.

This approach delivers a model which we have calibrated to the existing state of the market,

specificallytheexistingrateofclosures,butwhichisthereforenomorethanourbestachievable

estimateofreality.Aswithanygenerateddatatheassumptionsusedinallocatingcoststopubs

couldbe

very

powerful

in

determining

the

outcome

of

the

analysis.

Assuch,whilstwebelievetheconclusionswedrawbelowpresentasignificantstepforwardinthe

debate in terms of explaining in some depth the market dynamics faced both by pubcos and

individualpubs, intermsofthepotential impactofthereformsproposed intheconsultationwe

feelitisnecessarytointroduceameasureofcaution.

Thetiedpubsystemisoneofthemostinterwovenindustrialrelationshipsyoucanidentifyinthe

UK,with multiple streamsofpayments running in both directions, from thepub tenant to the

pubco and vice versa, generally negotiated on a pubbypub basis. Unravelling these streams,

including'specialcommercialorfinancialadvantages'(SCORFA)which,bycommon(dis)agreement

areextremely

difficult

to

quantify,

has

forced

us

to

develop

an

approach

based

on

testing

key

assumptionsthroughrunningmultiplescenariostoproducearangeofoutputsaswedonotfeel

thatanymodelbasedonthecurrentstateofknowledgecouldbetrustedtodeliveravalidpoint

estimate1,especiallyinthelightoffundamentalunderlyingrealignmentsindrinkingbehaviourin

theUK.

Inshort,theseestimatesshouldbeusedto informthepolicydebate,andtoprovide insight into

thefinancialpositionsofpubsandpubcos,butcannotbetakentoprovideacastironestimateof

potentialimpactsofpolicyreform.Oneofourkeyassumptionsisthetransferrequiredtodeliver

thenoworseoffcondition.Thiscannotbeestimateddirectlyso insteadwehavemodelledfour

scenarios that represent the range of feasible possible values. Importantly, this means the

scenariospresented

in

this

report

estimate

the

full

possible

range

of

impacts

rather

than

being

directestimatesofwhatwillhappen.

1A pointestimate isasinglenumberoutputfromamodel,suchas mymodelpredictsateamwillscoreonegoalasopposedtoa

rangeestimate, suchas my model predicts a team will scorebetween zeroand threegoals.A pointestimate reflects farhigher

certaintyinthemodellingthanwefeelwecandeployinthiscase.


6/44

Executivesummary

iv

LondonEconomics

Modellingtheimpactofproposedpoliciesonpubsandthepubsector

Thetiedpubmodel

AlthoughpubsconstituteanimportantpartofBritainssmallbusinessnetworkandarebasedona

longstandingtradition,theBritishpubsectorhasfacedconsiderablehardshipthroughoutrecent

decades. Some of the problems originate in shortterm factors such as the ongoing economic

recession,buttherearealsolongertermfactorsatplay,suchastheintroductionofthesmoking

ban, competition from supermarkets, an increased tendency towards alcohol consumption at

home,aswellasothersocialanddemographicchanges2.Asaresultofthesedevelopments,the

pub industryhaswitnessedasignificantcontraction,fromalmost70,000pubs in1980to51,000

today,with18(net)pubsclosingeveryweekoverthelastsixmonths3.

NearlyhalfofpubsintheUKaretiedpubs;ahistoricifunusualbusinessmodelwherethetenant

landlordpaysalowerpropertyrent(dryrent)totheirpubcompany(pubco)landlord,andreceives

'special commercial or financial advantages' (SCORFA), such as free satellite television or

subsidised buildings insurance. In return for this, they commit to only purchase beer from the

pubco,oftenatabovemarketprices(wherethesurplusislabelledthewetrent).

Reviewsby theOFT4have identified that competition in thepubmarket is sufficient toensure

consumersarenotdisadvantaged,andthatthetiedpubsystembringsadvantages,particularlyin

contributing to improving the production or distribution of goods or in terms of promoting

technical or economic progress, while allowing consumers a fair share of the resulting benefit

through:

Themaintenanceofavibrantanddiversedomesticbrewerysector,particularlyrelatedto

nonlager products, through guaranteed sales leading to economies of scale in

production,

Themaintenanceofsmall,wetled

5pubswhichformacommunityhubandprovidesocial

cohesion,

and,

Themaintenanceofalargernumberofpubstocompetewitheachother.

The proposed reforms aim to deliver a healthy pubs sector, where pub companies treat their

tenants fairly, where fairly is defined in that tied tenants are no worse off than freeoftie

tenants,asmeasuredbytheshareofprofitstheyareabletoretain.

Ourobjectives

Thisstudyhasthefollowingobjective:

Toprovideanindependentanalysisoftheimpactoftheconsultationproposalsongross

andnet

pub

closures

and

employment

levels

within

the

pub

industry,

using

whatever

robust evidence can be accessed, to inform the final stage impact assessment of the

likely costs and benefits of the proposals. In particular, the analysis should model the

2OfficeofFairTrading,2010

3DepartmentforBusiness,InnovationandSkills,2013a

4NotingtheOFTsfindingthatbecausethepubsectorwascompetitivethismeantthatconsumerswerenotfacingartificially inflated

prices(OfficeofFairTrading,2010,sections2.312.33).5Apubwhichreceivesthemajorityofitsincomefromthesaleofalcoholicandcarbonatedbeveragesiswetled.Onewhichreceives

mostofitsincomefromfoodsalesisdryled.


7/44


8/44

Executivesummary

vi

LondonEconomics


Allowingtenantstogofreeoftie,butonlydoingsoifitimprovedtheirfinancialposition6.

Wehavemodelledtheconsultationproposalsusing36scenarios,basedonthekeyvariablesofthe

value of SCORFA, the divisible balance percentage and the dryrent adjustment. The results

presentedprovidetheimpactofthealternativescenariosrelativetothecurrentbaselinescenario.

Table1: Theimpactonpubclosuresandemployment(firstordereffectsonly)

MinmaxrangesOption1no

guestbeer

Option1

guestbeer

Option2

freeoftie(all)

Option2

freeoftie

(optimised)

Percentageofallpubsclosing 514% 1123% 1419% 1420%

Percentageoftiedpubsinscope

ofcodeclosing1136% 2858% 3548% 3550%

Numberofpubsclosing 1,5004,800 3,8007,700 4,6006,400 4,6006,700

Numberof

jobs

lost

7,500

23,700

18,800

38,100

23,000

31,600

23,000

33,100

However,thistableonlyaccountsforthefirstordereffects,orthedirecteffectsofthechange.

Withthisnumberofpubspotentiallyclosing,weneedtoalsoconsiderthesecondordereffects,

or knockon implications of the change. The most important of these is the behaviour of

consumerswhopreviouslywouldhaveusedaclosedpubandwhonowhaveachoice:

Stopdrinking

Stopusingapubanddrinkatadifferentvenue(home,club,baretc)

Visitadifferentpub

Theliterature

on

pub

switching

behaviour

is

very

thin.

We

have

assumed

that

60%

of

customers

whosepub shutsmove toanotherpub.Wehaveadded in this residualdemand (and therefore

revenues)tothepubsmodelledtoseewhatimpactwecouldexpectthistohave.Asshownbelow,

thisactstobringtherangeofpubsestimatedasclosingdownwards.

Table2: Theimpactonpubclosuresandemployment(secondroundeffects)

MinmaxrangesOption1no

guestbeer

Option1

guestbeer

Option2free

oftie(all)

Option2free

oftie

(optimised)

Percentageofallpubsclosing 01.4% 0.93.3% 1.52.6% 1.52.8%

Percentageoftiedpubsinscope

ofcodeclosing05.3% 3.212.3% 5.79.9% 5.510.7%

Numberofpubsclosing 0700 4001,600 7001,300 7001,400

Numberofjobslost 03,500 2,1008,100 3,7006,500 3,7007,000

6ThevastmajorityoffreeoftiepubsareresponsibleformaintenanceanddonotreceiveSCORFA,whichmeanstheadditionalincome

frombeingfreeofthewetrentneedstoexceedthesumoftheseforatenanttowishtousetheoption.


9/44

Executivesummary

LondonEconomics

Modellingtheimpactofproposedpoliciesonpubsandthepubsector vii

Finally,anothertypeofsecondordereffectwhichcouldoccuristhatpubcoscouldreducetheir

managementcostsandmaintenancebudgetsandrefinancetheirdebttoreducetheircostsinthe

faceofthisreform.Weanticipatetheywouldattempttodothis,butgiventhedegreetowhich

the pubcos have faced losses in recent years, we believe they may now find it difficult to go

significantlydeeper

in

terms

of

efficiencies.

As

such,

we

have

not

modelled

this

effect.

In

part

we

havenotattemptedtoestimatethiseffectbecausebothclosureandpubsturningfreeoftiecould

reducetheeconomiesofscalethatpubcoscurrentlyachieve,driving inadditionalcostpressures

onthosetiedpubswhichremain.

Conclusions

Thetiedpubmodel isoneofthemostcomplex industrialrelationshipsremaining inUK industry

and aims to deliver a system to ensure floor levels of demand for British brewers, sustaining

diversityandthetraditionalfamilybrewerymodel. Inrecenttimes,thishasbecome increasingly

necessary, as the consumption of beer in pubs has declined, with the numbers of barrels sold

fallingdramatically

as

consumption

patterns

have

changed,

both

due

to

lower

prices

in

supermarketsandtheemergenceofalternativessuchasrestaurants,clubs,andbars.Anumberof

stakeholders interviewed noted that the UK is probably still operating excess pub supply of

approximately6,000pubs,suggestingasustainablenumberofpubsofapproximately45,000.

Thisoversupplyhas ledto lowprofitability,both formanytenantsandpubcos,particularly ina

climatewhereservicingdebthasbecomedifficult.Thekeyfindingofthisstudyisnotthenumber

ofpubswhichmaycloseasaresultofonepolicyoranother,butratherthehighnumberofpubs

that currently appear to be at the margin of viability. Irrespective of what changes may be

proposedor considered, the interlocking nature of a large varietyof revenuestreams, and the

high level of costs being faced by pubcos, suggest that almost any policy reform may have

noticeableand

unpredictable

effects.

Intheestimatesweproduceofthe impactoftheconsultationproposals,eventakingaccountof

secondordereffects,ofthe13,300pubswebelievewillbeinscopeoftheCode,upto2,400or18

percentcouldbecomeunviablefortheirpubcoowners,ontopofthosealreadyunviable(c.1,300)7

within the base case scenario, although we estimate a third of these would reopen under

alternativemanagement.

The threat that the number of tied pubs currently operated by the pubcos may diminish by

between 2530% due to closures, even if these pubs subsequently reopen under a different

owner,anddisregardinganywhomaywishtotakeupthefreeoftieoption,maybesufficientto

eliminatetheeconomiesofscaleinpurchasingthatmanytiedtenantsinthissector(unknowingly)

benefitfrom.Thissuggeststhatthereisarealpossibilitythateachoftheproposedpolicyreforms,exceptpossiblythecodewithoutpermittingguestbeer,insteadofdeliveringthepolicyobjective

ofensuringtiedtenantsaretreatedfairly,i.e,noworseoffthanfreeoftietenants,mayleadto

theendofalargescaletiedpubsystem.

This,however,maynotbeasdisastrousasitinitiallysounds.Thetiedpubmodelisverysimilarto

more standard franchisingarrangement,albeitonewhere thepubco supplies the salesproduct

7Itmustbenotedthatthisfigure isdrivenbyourassumptions inthecalibrationexerciseand isthereforeentirelyanartefactofour

modelling

process.


10/44

Executivesummary

viii

LondonEconomics


and leases theproperty to the franchisee, and thismodel is alreadybeing attemptedby some

pubcosandmaybeworthyoffurtherconsideration.

Intheshortterm,itisalsoworthnotingthatthePICAS/PIRRSsystem,whichisthemostconcrete

element of the current voluntary framework, is now becoming an established part of the

infrastructure,and

appears

to

be

having

some

effect

in

starting

to

address

the

worst

tenant

circumstances8,althoughsomestakeholdershaveraisedthepointwithusthatsometenantsare

wary of taking the PICAS/PIRRS route in case the discretion available ends up increasing their

rental,eventhoughitisrecognisedintheBISCommitteereportthatthereareflawsinthecurrent

systemtoo.

It is our conclusion that the reforms proposed in the consultation will close up to 1,600 pubs,

although there is very great uncertainty about the precise value; In particular, the size of the

transfer from pubcos to tenants resulting from the no worse off principle is very hard to

estimate,ourresultsreflect the impactofarangeofpossibletransfervalues;However,there is

clearlysurpluspubcapacity,inquiteavolatilemarketwhere,withsomanypubsonthemarginof

viabilityit

is

hard

to

determine

which

pubs

will

close.

Stakeholders

raised

with

us

that

that

there

maybeupto6,000surpluspubsintheUKforming12%ofthemarket,andifthispolicydiddeliver

severalthousandclosedpubsitwouldactasasubstantialfractionofthislongtermtrendwhichis

likelytooccurunlessmajorchangestotaxpolicyandsocialnormstakeplace.

Ifoneassumes,aswehavedone,60%ofconsumersmovetoanotherpubthat impliesthat,on

averagepubswhichremainwillseefootfalls7.2%higherthanpresent.Thiswouldbesufficientto

turnapoorlyperformingpub intoamoreattractiveprospect if itcansee the immediate future

out.Assuchitmaydeliverenoughofaboosttootherpubstoreduceclosureratesinthemedium

term.

8 Business,InnovationandSkillsCommittee(2011).


11/44

1Introduction

LondonEconomics

Modellingtheimpactofproposedpoliciesonpubsandthepubsector 1

1 Introduction

1.1 Context:theBritishpubindustry

Although

pubs

constitute

an

important

part

of

Britains

small

business

network

and

are

based

on

a

longstandingtradition,theBritishpubsectorhasfacedconsiderablehardshipinrecentdecades.

Someoftheproblemsoriginateinshorttermfactorssuchastheongoingeconomicrecession,but

there are also longerterm factors at play, such as the introduction of the smoking ban,

competitionfromsupermarkets,anincreasedtendencytowardsalcoholconsumptionathome,as

well as other social and demographic changes9. As a result of these developments, the pub

industry has witnessed a significant contraction, from almost 70,000 pubs in 1980 to

approximately51,000today,with18pubs(net)closingeveryweekoverthelastsixmonths10

.

Within the sector, due to its longevity, community role and close relationship with domestic

brewers,abespokeoperatingmodel thetiedpub hascome intoexistence.Thetiedpub isan

entity where the tenant landlord pays a lower property rent (dryrent) to their pub company

(pubco)landlord,andalsoreceiving'specialcommercialorfinancialadvantages'(SCORFA),suchas

freesatellite televisionorsubsidisedbuildings insurance. In return forthis, theycommit toonly

purchase beer from the pubco, often at above market prices (where the additional surplus is

labelledthewetrent).

Reviewsby theOFT11

have identified thatcompetition in thepubmarket issufficient toensure

consumersarenotdisadvantaged,andthatthetiedpubsystembringsadvantages,particularlyin

contributing to improving the production or distribution of goods or in terms of promoting

technical or economic progress, while allowing consumers a fair share of the resulting benefit

through:

Themaintenanceofavibrantanddiversedomesticbrewerysector,particularlyrelatedto

nonlager products, through guaranteed sales leading to economies of scale in

production,

The maintenance of small, wetled12

pubs which form a community hub and provide

socialcohesion,and,

Themaintenanceofalargernumberofpubstocompetewitheachother.

As Figure 1 shows, nearly half of pubs in the UK are tied, as opposed to the three main

alternatives;managedpubswhereapubcompanyplacesamemberofstaffinasamanager,ora

freeoftie tenant, where the tenant pays a commercially set property rent and is free to sell

whicheverbeerproductshewishes,or freeholdpubwherethe landlordowns thepropertyand

choosesthe

beer

to

sell.

Within this landscape, the relationship between large pubowning companies and their tied

tenants constitutes an important issue for the Department for Business, Innovation and Skills

9OfficeofFairTrading,2010


11NotingtheOFTsfindingthatbecausethepubsectorwascompetitivethismeantthatconsumerswerenotfacingartificiallyinflated

prices(OfficeofFairTrading,2010,sections2.312.33).12

Apubwhichreceivesthemajorityofitsincomefromthesaleofalcoholicandcarbonatedbeveragesiswetled.Onewhichreceives

mostof

its

income

from

food

sales

is

dry

led.


12/44

1Introduction

(BIS)13

. In recentyears, tied tenantshave filednumerouscalls, including somegrievancesabout

thefairnessofthisrelationshiptotheBritishInstituteofInnkeeping,MembersofParliament,the

Office of Fair Trading, and the Department for Business and Innovation Select Committee.

Reportedmistreatmentsoftenantsbypubcompanies,suchasunannounced largerent increase

demands,areprimarilycausedbyan imbalance in the relationshipbetween these two typesof

market

actors.

In

particular,

pub

companies

are

considered

to

have

access

to

more

information

andtohaveresourcesattheirdisposaltoafford legalandsurveyorfees incaseofdisputeswith

theirtenants,grantingthemthepossibilitytoextract largesharesoftheirtenantsprofits14

. It is

commonplacetohearinthedebatesourcesclaimingtheaverageincometoapubcofromitstied

pubstobe intheregionof60,000.Incontrast,surveys indicatethattheaveragetenantretains

approximately15,000ofprofit.

17%

36%

48%

Managedpubs

Freehousesandfreeoftietenantedpubs

Tiedtenantedpubs

Figure1: ThecompositionoftheBritishpubindustry

Note:Thedatadrawnodistinctionbetweenfreehousesandfreeoftietenantedpubs

Source:DepartmentforBusiness,InnovationandSkills(2013b).

While this discrepancy in resources and information exists between pub companies and their

tenants in general, BIS is particularly concerned about the potential for and repercussions of

mistreatment of tied tenants. Beer prices change more frequently than rents, thus providing

pubcos (whocompeltheirtenantstopurchasebeeronly fromthepubco (thebeertie))withan

additionalrouteofpotentialabuse.Further,thetiecomplicatestherelationshipbetweentenants

and their pub companies by increasing the amount of information to consider in the tenants

decisionmaking process. Finally, recent evidence suggests that tied tenants also face a higher

probabilityoffinancialdistress,with46percentoftiedpublicansearninglessthan15,000ayear,

comparedto

only

23

per

cent

of

free

of

tie

tenants15.

All

of

these

considerations

suggest

the

need

forBIStoputparticularfocusonthefairtreatmentofpublicanswhoarerestrictedbyabeertie.

However,thisdebatehastwosides.Thepubcosprovideanumberofservicestotiedtenantsthat

maybedifficultforthetenanttoobserve,suchasdebtfinancingonthepurchaseofthefreehold

13Managedpubsandfreehousesarenotsubjectedtothedescribedproblemsbetweenpubownerandtenant;therefore,thesetypes

ofpubsareoflesserrelevancetothisstudy.


15

CAMRA

surveys

quoted

by

BIS,

2013a

LondonEconomics



13/44

1Introduction

LondonEconomics


(withoutwhichtherewouldnotbeapub torent),aswellasmaintenanceandsupportsystems

(suchasthosedeliveredviaSCORFA).Theseareeitherunobservedbytenants,ormayindeedbe

entirelyunobservable (examplesofwhich includethedifferential in insurancecostswhenthis is

purchasedcentrallyandinbulkbythepubcoagainstthecostthetenantwouldhavetopaywere

hetopurchasethisinisolation).

Untilrecently,theDepartmentreliedonpubcostogovernthiscomplexrelationshipthemselves,

by implementing voluntary selfregulatory approaches to treat their tenants, specifically tied

publicans,more fairly.Since2004, theBusiness, Innovation and Skills SelectCommittee and its

predecessors have published four pub company reviews16

. The reports have scrutinised the

difficultiesregardingtherelationshipbetweenpubcompaniesandtheirtenantpublicansandurge

pubowningfirmstoimplementmeaningfulreform.BISgrantedafinalchanceforpubcompanies

tovoluntarilymakethenecessarychangesin2011.

Acallforevidenceontheperformanceofselfregulationintheindustryin201217

,foundthatthe

voluntarycodeofpractice(i.e.theIndustryFrameworkCodeofPractice)hadbeenabletoinduce

somemodestimprovementstotheproblematicrelationbetweenpubcompaniesandtenants.In

addition,BIS

acknowledged

the

beneficial

role

of

the

Pubs

Independent

Review

Scheme

(PIRRS)

and itsPubsIndependentConciliationandArbitrationService(PICAS) inprovidingtenantswitha

costeffectivesolutiontoresolvedisputesandobtainredress.However,itwasconcludedthatthe

selfregulatory approachwas not sufficientlyeffective at relieving tenantshardship; it was felt

that thesituationcouldnotbesuitably improvedwithoutasignificantculturechangeandaco

ordinated longterm effort to inform tenants of their rights and possibilities18

. Therefore, in

January2013,theSecretaryofStateannouncedthattheBritishpubindustrywillbesubjectedto

statutoryinterventioninstead.

1.2 ObjectivesThe proposed reforms aim to deliver a healthy pubs sector, where pub companies treat their

tenants fairly, where fairly is defined in that tied tenants are no worse off than freeoftie

tenants,asmeasuredbytheshareofprofitstheyareabletoretain.

Thisstudyhasthefollowingobjective:

Toprovideanindependentanalysisoftheimpactoftheconsultationproposalsongross

and net pub closures and employment levels within the pub industry, using whatever

robust evidence can be accessed, to inform the final stage impact assessment of the

likely costs and benefits of the proposals. In particular, the analysis should model the

potential impact of a mandatory freeoftie option and the impact of introducing a

StatutoryCodeonpubclosuresandemploymentlevels.

To

deliver

this,

the

Department

has

asked

us

to

set

out

an

economic

model

of

the

pub

industry

whichfacilitatestheestimationofthemain impactsofthereformsonthecostsandrevenuesof

pubsandpubcompanies,toallowustoestimate:

Thenumberofpubswhichmightclose,and

Thepotentialimpactonemploymentlevels.

16Tradeand IndustryCommittee,2004;BusinessandEnterpriseCommittee,2009;Business, InnovationandSkillsCommittee,2010;

Business,InnovationandSkillsCommittee,2011

17DepartmentforBusiness,InnovationandSkills,2012

18

Department

for

Business

,Innovation

and

Skills,

2013a,

2013b


14/44

2Overviewoftheproposedpolicyoptions

LondonEconomics


Finally there is a requirement to test the sensitivity of modelling results to changes in key

assumptions.

2

Overviewoftheproposedpolicyoptions

InApril

2013,

the

Department

initiated

aconsultation

among

main

stakeholders

in

the

British

pub

industry on the policy measures available to address the perceived problematic relationship

betweenpubcompaniesandtheirtiedtenants.Thissectionwillprovideadetaileddescriptionof

thetwomainsuggestedpolicyoptions,whoseimpactconstitutesthefocusoftheanalysisathand.

2.1 PolicyOptionI:AStatutoryCodeofPracticeandAdjudicator

2.1.1 ContentsoftheStatutoryCode

The introduction of a Statutory Code, along with an independent Ombudsman to enforce it,

constitutesthefirstpolicyoptionputforwardbyBIS.TheStatutoryCodeisintendedatgoverning

therelationship

between

pub

companies

and

their

tenants,

putting

particular

emphasis

on

the

issuesofriskandreward,whichshouldbesharedappropriatelyamongthetwopartiesconcerned

in order to ensure the fairness of their agreements. Recognising the continuous change of

conditionsand requirementsof thepub industry in theUnitedKingdom,BISproposes that the

newCodewillbesubjectedtoperiodicreviews.

ThemostrecentversionoftheIndustryFrameworkCode(Version6),whichhasbeenestablished

for pub companies in the industry as part of its selfregulatory approach, constitutes the

envisioned basis for the new and legally binding Statutory Code of Practice. However, BIS has

identifiedtwoareasforthepotentialstrengtheningofthiscurrentFrameworkCodeofPracticeto

includetwocoreprinciples:

1. Anoverarchingprincipleoffairandlawfuldealingaimsatwarrantingthatpubcompanies

treat allof their tenants19

fairly, i.e. that risk and reward are shared to an appropriate

extent between themselves and their lessees, as well as lawfully, implying that any

unlawfulbehaviourbythepubcompanytowardsatenantconstitutesadefactobreachof

theStatutoryCode.Thisprinciple includestheunderstandingthatpubcompaniesshould

conduct its relationships with tenants in good faith, without duress, and without

distinguishingbetweenformalandinformalarrangements.

2.

Theprinciple that the tied tenant shouldbenoworse off than the freeoftie tenant

relatestotied lesseesmorespecifically,postulatingthe lattermaynotbedisadvantaged

comparedto

those

tenants

who

are

not

subjected

to

atie

by

their

pub

company.

BIS

recognisesthatcompliancewiththisprinciplerequiresprecisiononhowthisprovision is

tobeappliedtorentalcalculationsoftenants,consideringthebalancebetweenwetand

dryrent as well as SCORFA. It is currently envisioned that this second overall principle

shouldimplythattheprojectedpostrentbalanceofatiedtenantshouldbeatleastequal

totheprojectedpostrentbalance,whichthesametenantwouldreceiveunderafreeof

tielease,assumingthesameleaseortenancyconditions.

19

This

includes

both

tied

and

free

of

tie

publicans.


15/44


LondonEconomics


Puttingparticularemphasisonthesecondof thesecoreprinciplesBIShasbrought forward two

suggestions on how to achieve the equal treatment of tied tenants as compared to freeoftie

lessees.

For the Code to require that higher beer prices due to the tie must directly be

compensated

for

by

lower

rents

and/or

genuinely

quantifiable

countervailing

benefits

provided through SCORFA, thusmaking thepostrentbalance of a tied tenant at least

equaltowhatheorshewouldretainunderafreeoftieagreement,allelsebeingequal.

Theadditional introductionofamandatory freeoftieoption,which isamore rigorous

measuretoachievefulfilmentofthesecondcoreprinciple.Thisproposalconstitutesthe

second policy option in its own right and will be outlined in more detail in the next

section.

In addition to the two major principlesjust outlined, BIS suggests further areas in which the

current selfregulatory Industry Framework Code should be strengthened to establish the new

StatutoryCodeofPractice.

1.

Itis

proposed

that

the

new

Code

should

stipulate

aright

to

request

an

Open

Market

Rent

Reviewtoforalltenants,independentoftheconditionsoftheircurrentleaseagreements,

inordertoensuretheirfairtreatmentbytherespectivepubcompany.Theconditionsfor

atenanttorequesttheOpenMarketRentReviewarethatheorshehasnotbeensubject

to a similar rent assessment throughout the last five years; that their pub company

recentlysignificantlyincreasedthepriceoftheirtiedproducts;ortherecentoccurrenceof

aneventwhichwasoutsideofthelesseescontrolandwhichwasunanticipatedatthelast

rentreview,butwhichinvolvesasignificantimpactonthetenantsabilitytotrade,suchas

theclosingofa largeemployernearby,dramatically reducing footfallandcustom in the

area.

2.

The

new

Statutory

Code

should

include

provisions

that

increase

the

transparency

of

the

relationship between pub companies and their tenants, requiring pub companies to

providepotential lesseeswitha rangeof relevant informationon the costsand risksof

trading before a tenancy agreement is made. Of particular relevance, pub companies

should calculate tied and freeoftie exante rent assessments, using the same set of

assumptions for both, and explicitly stating the turnover, gross profit, costs, divisible

balanceandSCORFA,thusdemonstratingtoeachpotentialtenantthatheorshewouldbe

atleastequallyaswelloffunderatiedagreementthanunderafreeoftielease.

3.

The Government has, on several previous occasions, proposed to remove the gaming

machinetiecurrentlyinoperation,andreinforcesthisproposalbysuggestingtheinclusion

ofaprovisionstatingthatnoproductotherthandrinksmaybetiedbythepubcompanies

intheStatutoryCodeofPractice.Thisproposalhassincebeensupersededbychangesto

theVoluntaryCode, such thatwewill thereforeconsider the impactof this in thebase

caseforouranalysis.

4. BIS is considering the introduction of a guest beer option in the Code, granting tied

tenantstheoptiontopurchaseandsellonedraughtbeerfromanysupplier,withoutany

controlsorrestrictionsimposedbythepubco.

5. Finally,the installationofflowmonitoringequipmentbypubcompaniestocontroltheir

tenantscompliancewithpurchasingobligations remainsasubjectofcontroversywithin

the British pub industry. It is currently suggested that the Code should restrict the


16/44


LondonEconomics


potentialforuseofdatacollectedwiththehelpofthisequipment,byincludingaprovision

statingthatsuchinformationmaynotbeusedtodeterminewhetheratenantiscomplying

with purchasing obligations, or considered as evidence for the enforcement of such

obligations.

2.1.2

Threshold

of

application

In spiteof itsproposals to intervene in the industry,BISaims to complywithbetter regulation

principlesandminimisethepolicyimpactonthosepubcompaniesthatalreadytreattheirtenants

fairlyandare complyingwith theVoluntaryCode,butobliging those firmswhich exploit their

tenants to make fast and significant improvements. In accordance with this objective, it is

currentlyperceived that thenew StatutoryCodeofPracticeoutlined above should apply to all

Britishpubcompaniesthatownmorethan500pubs.Oneofthejustificationsforthisapproach

concerns the Governments overall intention to reduce regulation and grant more influence to

market forces, thereforeminimising theburdenon smallerpubcompanies thatappear tohave

actedresponsibly. Inaddition,thethresholdtargetsthesuggestedpolicymeasurestothosepub

companiesthathave thegreatestmarketpowerwithinthe industry,with500pubsconstituting

approximately1%ofthemarket.Finally,itisarguedthatbiggerpubowningfirmswillfinditeasier

thansmallcompaniestobearthecostsoftheircompliancewiththeStatutoryCode. Inorderto

limitpubcompaniesabilitytocircumventbeingrestrictedbytheCodebysplittingupintoagroup

ofsmaller firms,thethresholdof500pubswillbeappliedatthetop levelofagroupofrelated

companies.

ForthosecompaniesproposedtobecoveredbytheCode,thenewrulesandregulationswillthen

applytoalloftheirtenanted(i.e.nonmanaged)pubs,fortworeasons.First,thisistoensurethat

afairtreatment isgrantedtobothtiedaswellasfreeoftiepublicans.Second,ascenariowhere

the Codeonly applies to tied pubs couldprovide pub companies with an opportunity to avoid

regulation by removing the tie and instead increasing freeoftie pubs rents beyond current

marketrent

values.

BIS

prescribes

that

the

Statutory

Code

will

be

incorporated

in

all

lease

and

tenancyagreementsbetweenpubcompaniesand theirpublicans, towarrant that the latterare

awareoftheirrights.

2.1.3 AnindependentAdjudicator

InordertoensurepubcompaniescompliancewiththeStatutoryCode,anadditionalcomponent

ofthepolicyoptionconsideredbytheDepartmentforBusiness, InnovationandSkillsconsistsof

anindependentombudsmanresponsiblefortheenforcementofthenewrulesandregulations.It

is suggested that the roleof theproposedAdjudicatorbebasedon themodelof theGroceries

CodeAdjudicator,postulatingtwomainfunctionsforthepubindustrysnewombudsman:

1. Arbitrationfunction: Inthecontextofthisfunction,theAdjudicatorwillhavethepower

todeliver redress to individual tenants in their relationshipwith thepub companies. In

particular, theAdjudicatorwillhave theability todeliverOpenMarketRentReviews in

accordancewithguidancepublishedbytheRoyalInstitutionofCharteredSurveyors(2010)

and thenewStatutoryCodeofPractice, thusestablishing thatrent levelsarecalculated

fairly and not artificially inflated. The tenant can thus approach the Adjudicator for

arbitration,provided that the respective tenanthas given thepub company21days to

resolve the dispute to the tenants satisfaction. While this possibility is granted to any

tenantwhoisdissatisfiedwiththecalculationofhisorherrent,theCodeprovidesforthe


17/44


LondonEconomics


possibility for theAdjudicator to impose fineson those tenantswhose complaintshave

beenfoundtobevexatiousorentirelyunmerited.

2. Investigatory function: This second main function allows the Adjudicator to undertake

proactive investigationsbased on reasonable groundsof suspicion that a pub company

was

acting

in

breach

of

the

Statutory

Code

of

Practice.

In

the

course

of

such

an

investigation,theombudsmanwillhavetheabilitytodemand information fromthepub

companies, and to impose a range of sanctions on them in case that the result of the

investigationevidencesanactualbreachoftheCode.

Notethat,inadditiontothesetwomainfunctions,theAdjudicatorwillprovidegeneraladviceand

guidancetopubcompanies(toensuretheircompliancewiththeCode)andtenants(tokeepthem

informedabouttheirrights)inordertoencouragetheoveralleffectivenessoftheCode.

The investigatory function of the Adjudicator is particularly important in ensuring that pub

companiescomplywiththenewrulesandregulationssetoutintheStatutoryCode,bygivingthe

AdjudicatorthepossibilitytodetectandtacklemoresystematicbreachesoftheCodethatwould

notbe

resolved

by

individual

tenants

through

the

means

of

arbitration.

For

example,

in

case

that

thepub companydoesnotprovidepreparatory training to its tenants, the lattermight notbe

informedabouttherightswhichtheCodegrantsthem,andwouldnotoptforarbitrationoftheir

own accord. Such a scenario would require the Adjudicators power to investigate and impose

sanctionson the respectivepub company. In addition, it appearspossible that apub company

mightoverestimatetheprojectedturnoverofan individualpubduringarentreview inorderto

generatehigher rent from thegivenpublican. In thiscase, the single tenantmight refrain from

approachingarbitration,sinceactualturnoverisinfluencedbyavarietyoffactorsandaconscious

artificial inflationofsalesvolumesbythepubcompany isdifficulttodetectatthe individualpub

level.Incontrast,anAdjudicatorwiththeabovepowerstoinvestigatewouldbenefitfromamore

holisticlevelofinformation,obligingthepubcompanytosupplyrentassessmentinformationona

largenumber

of

pubs,

and

thus

being

able

to

detect

systematic

breaches

of

the

Code

more

easily.

ItissuggestedthatthenewAdjudicatorwouldhavearangeofsanctionsathisdisposaltopenalise

pubcompaniesthatarefoundtobeinbreachoftheCode,providingthemwithflexibilitytotailor

theirpunishmentstotheseverityofthebreach.First,theAdjudicatorwillhavethepossibilityto

advance recommendations regarding the treatment of a given tenant by the respective pub

company,whichwouldbeimposed incaseofminorbreachesofincombinationwithmoresevere

punishments.Secondly,theAdjudicatorwillbeempoweredtorequirepubcompaniesinbreachof

theCodetopublish information20

abouttheoffencetothepublicthroughappropriatechannels.

Thissanctionwouldservetowarnstakeholdersinthepubindustryaboutthecommittedbreachof

theCode,and thusactasadeterrentby influencing future interactionsbetween the respective

pubcompany

and

other

players

in

the

industry.

Finally,

in

the

most

severe

or

in

case

of

repeated

offences,theAdjudicatorwillbeableto imposefinancialpenaltiesonpubcompanies,whichare

consideredastrongdeterrenttotheoffendingfirmandtoothercompaniesintheindustry.

The fundingneeded for the introductionandoperationof the independentombudsmanwillbe

guaranteedthroughafinancialindustrylevy,witheachofthecoveredpubcompaniescoveringa

shareof theestimated totalannualcostof theAdjudicatorof900,000.21

Toensurea fairand

20ThissanctionisalsoreferredtoasthenameandshamepoweroftheAdjudicator.

21BIS(2013b)


18/44


LondonEconomics


effectivestructureofleviesonthepubowningfirms,eachcompanysfirstyearsharewillbebased

ontheproportionofallpubswhichtherespectivefirmowns.Incontrast,inthesecondyearand

onwards, those firmswhohavebeendetected tobreach theCodemore frequentlywillhave to

payaproportionatelylargershareofthecostsoftheAdjudicator.

Finally,

as

a

means

to

ensure

the

continuous

accountability

and

effectiveness

of

the

Adjudicator,

he will be required to report on the investigations and arbitrations conducted and evidenced

breachesoftheStatutoryCodeofPracticeonanannualbasis.Further,theSecretaryofStatewill

implementa reviewof theeffectivenessofand thenecessity for theCodeand itsenforcement

authorityeverythreeyears.

2.2 PolicyOptionII:Amandatoryfreeoftieoption

Themandatory freeoftie option is defined as an option in which the tenant is subject to no

purchasingobligationsofanyformandthereforetheonlysumpaidtothepubcompanyisthedry

rent22

. As addressed above, the additional introduction of a mandatory freeoftie option

constitutes

the

more

rigorous

alternative

among

the

two

policy

options

to

ensure

the

fulfilment

of

thecoreprinciples,particularlythesecondone,tobe included inStatutoryCode.BISrecognises

theparticularuncertaintiesinvolvedinthispossibleremovalofthetie,whichconstitutesthebasis

ofpub companiesbusinessmodel,and, if removed,might increase thepotential for instability

within the industry. However, albeit more rigorous, it is argued that this second suggested

measure involves lesscomplexity for tied tenants,whomight find itdifficult todecidewhether

theirpub company is inbreachof theCodeunder the firstoption (i.e.whether theirpostrent

balance isat leastequaltowhattheywouldretainundera freeoftieagreement,allelsebeing

equal).

Themandatory freeoftieoptionwouldbe included in theStatutoryCodeandenforcedby the

Adjudicator described above. BIS (2013a) acknowledges the particular importance of the

Adjudicatorssufficient

enforcement

of

the

Codes

principles

under

this

option,

since

it

is

expected

thatpubcompanieswillincreasetheirtenantsrentunderthefreeoftieoptioninordertomake

up for their reduced profit levels on pubs for which the beer tie is removed. As a result, the

introductionofthissecondoptionwouldrequiretheAdjudicatortoensurethatfreeoftierents

willnotincreasebeyondfairopenmarketlevels(i.e.complywithRICSguidance).

22

Department

for

Business,

Innovation

and

Skills,

2013a,

p.29


19/44

3Researchmethodology

LondonEconomics


3

Researchmethodology

3.1

TheBIS

approach

The consultation document issued by BIS provided a worked example of how to carry out the

calculationstoderiveanoworseofftiedrentcomparedtothesamepubinafreeoftieposition.

In this section we describe this process in some depth because it is worth understanding the

concepts indetail,andwhereandwhywehavedeviated fromsuchanapproach,mainlydueto

dataissues.

ThissectionisnotacritiqueofBISsapproach;insteaditismerelyanattempttoclearlyelucidate

wherewehavebeenconsistentwiththeapproachas initially laidoutbyBISandwherewehave

implementedchanges. It isworthexplicitly stating that thereareanumberofkeyassumptions

thatmust

be

made,

which

we

have

found

almost

impossible

to

validate

in

aconsistent

way

across

therangeofstakeholders(oftensimplybecausenoauthoritativedatasetexists,hasexistedor is

subjecttoanycurrentplanstocollect).Toadegreethisdata,beingonlyrequiredforthisexercise,

would be a waste of public funding to secure, as the proposed Code itself recognises that

assessmentwillneedtobecarriedoutonapubbypubbasis,whichwouldnotnecessarilybenefit

frominformationonnationalaverages.Itisnonethelessakeyweaknessofanyandallattemptsto

analysethisquestion.

The BIS approach takes a rent assessment on a tied pub and creates a hypothetical rent

assessmentifthesamepubwerefreeoftie.

3.1.1 PubincomeintheBISModel

IntheBISapproach, inboththe tiedand freeoftiescenarios, revenue isbrokendown intothe

followingheadings:

Variouscategoriesofalcoholicandsoftdrinks

Food

Accommodation

Other

Net

machine

income

Gross profit to the tenant after the costs of purchasing these items is identified. These costs

includethewetrentpaidtothepubco.Theresidualisthegrossprofit.

Itshouldbenotedthatnoeffortismadetoidentifywhetheratiedtenantmovingtoafreeoftie

situation, and benefiting from a higher income (because the wetrent is removed), might pass

someofthesebenefitsontoconsumersintheformof lowerpricesbecauseofthepreviousOFT

workwhichdemonstratedtheconsumermarketwascompetitive.


20/44


LondonEconomics


3.1.2 Othercosts

The BIS approach then identifies a number of cost categories23

, assuming these are constant

across the two scenarios. To these, in the freeoftie option, are added the value of SCORFA

payments,which inthetiedscenariorepresentsgoodsandservicesthatarereceivedforfree.In

essence,

the

idea

is

that

the

costs

of

operating

remain

constant,

but

that

these

costs

are

shared

in

thetiedscenario,whereastheyarewhollythefreeoftietenantsresponsibilityinthisscenario.

The key issue here is how to value the SCORFA in the two scenarios, when the pubco will

demonstratesignificantlymorebuyingpowerthananindividualtenant.Ifcostistakenasaproxy

forvalue(andindeed,inreality,howdoweexpectthepubcotoprovideanassessmentofwhatit

wouldcostsomeoneelsetopurchaseequivalentserviceswithoutbenefittingfromtheeconomies

of scale of the pubco), then this implies that the value of the SCORFA added to the costs of

operatinginafreeoftiescenarioneedstobehigherthanthoseusedinthetiedscenario.Inline

witheconomiesofscalewehaveobservedinotherindustrialcontexts,weconsideritlikelythata

pubcobuying services for severalhundredpubs shouldbeable to securepricesat leasta third

lower than each individual pub making their own arrangements. For example, the BBPA have

quotedtousthatwheretheaveragecostofprovidingSCORFAforoneoftheirmemberstoatied

pubisaround13,000,thecosttoanindividualtenantofthesameservicesintheopenmarketis

estimatedataround20,000,whichisbroadlyinlinewiththis.

SCORFA is an incredibly contentious figure, with a wide variety of estimates from different

sources,whichprobablydifferinalargepartaccordingtowhichelementsofthepubcossupport

areincluded.Wehaveidentifiedthefollowingestimatesinourstudy:

In2009,anumberofthesmallerbrewingpubcompaniessuggestedvaluationofSCORFA

of 15,000 per pub (Independent Family Brewers of Britain submission to European

Commission DirectorateGeneral for Competition, cited in Department for Business,

Innovationand

Skills,

2013b)

In2009, ina submissionbypub companies to theOFT in response toCAMRAs super

complaint, an estimate of 6,0008,000 on average per pub per year (quoted in

DepartmentforBusiness,InnovationandSkills,2013b)

IntheOFTsfinaldecisiononCAMRAssupercomplaint24

,SCORFAwascalculatedonthe

basisof including itemssuchasbuyingdiscounts (for itemsotherthandrinks),business

development assistance (such as training and legal support through business

development manager), investment and centralised technical and compliance services,

including business planning, development and marketing advice, and training but

excluding costs related to building repairs (which is in line with our inclusion of these

costs

in

the

capital

expenditures).

The

OFT

estimated

that

the

average

costs

to

pub

companies ofproviding this support is1,500per year25

, although theynote that this

mightbesubstantiallyhigherinindividualcases.

23Wages,salariesandotherstaffcosts,rates,utilities,repairs,maintenanceandrenewals,buildinginsurance,marketing

andpromotioncosts,telephony,consumables,cleaning,professionalfees,bankcharges,depreciationandinterest,and

miscellaneouscosts24

OfficeofFairTrading,2010

25

See

paragraph

5.154,

p.

123

of

Office

of

Fair

Trading

(2010).


21/44


22/44


LondonEconomics


profitwhichthepubcoreceivesfromthepubinquestion.Ifitreducesprofittoapointthatitis

negativethenthepubisnolongerviable,evengiventhesamelevelofoperatingmargin.Wecan

illustrate this in the following simple example based on the worked example in the BIS

consultation27

:

Table3:

Example

balance

sheet,

based

on

BIS

sample

rent

assessment

statement

Costs/Revenuecategory

Revenue

/profit

Costs

Commentary

Salesrevenue 265,000

Salescostsexcludingwetrent (93,500)

Operatingcosts (85,065)

Operatingmargin 86,435Thisisthesumsharedbetweenthe

pubcoandthetenant

Corporateoperation&management

fees(includingSCORFA)(14,500)

Indicativeestimatebasedonaverage

ofdatasuppliedbypubcos.

Maintenancecosts

(10,000)

Indicative

estimate

based

on

average


Debtservicingcosts (30,000)Indicativeestimatebasedonaverage


Overallmargin 31,935Thisisthetotalprofitafterthetotal

costs

Tenantprofitshare 28,518

Pubcoprofitshare 3,417

Note:LondonEconomicscalculations

Whilstitisimportanttonotethatthesebroadaverageshavebeensimplyappliedtoapreexisting

examplefrom

the

BIS

consultation,

that

is

not

to

say

that

this

pub

is

necessarily

aperfect

average

pub in termsof its incomeandoperatingcosts.Theworkedexample fromtheBISConsultation,

whichproposed forthispubatransferof10,875fromthepubcotothetenanttodelivera no

worseoffoutcomewould involvedriving thepubco intoa lossmakingpositionon thispub.As

such,theviewthatthepubcotakesxthousandpoundsoutofapubhastobemeasuredagainst

thecosts they face fromthispub.Oneshould look toestimatetheprofit theymakeperpubto

determinewhetherthetenant isbeingtreatedfairly.Nevertheless,whenpubsbecomeunviable

forthepubco,itisnecessarytopresumethatatleastsomeofthosepubswillshut.

Thepubcowillnecessarilyneedtotakealongtermviewinthistypeofsituationonapubbypub

basis,takingaccountoflongtermprofitability,butalsoalternativelandusagevalues,particularly

ifapub

becomes

loss

making,

and

looks

likely

to

remain

loss

making

for

the

foreseeable

future.

In

thisexample,atransferofthistypeinamediumtermtenancy(suchasweseeinthetiedsector),

would result in this pub becoming unviable for the pubco to continue to operate unless the

existingdebtservicing,maintenanceandcorporatecostsfacedwerereduced.28

Apubbecomingunviableforthepubcohastwoeffects:

27DepartmentforBusiness,InnovationandSkills(2013a),p.48.

28Primaryamongstthese,andonaveragelargerthantheothercostscoveredbythepubcocombined,isthecostofservicingthedebt.

Whilstsomeofthepubcoswehavetalkedtoarecurrentlyintheprocessofrefinancingtheirgeneraldebtportfolio,weanticipatethat

thisis

likely

to

make

adifference

of

at

most

afew

thousand

pounds


23/44


LondonEconomics


Pubcosare likely todivest themselvesofapub theydonot findviable,but itdoesnot

necessarilyshut.Itmayinsteadbetakenonbyadifferentorganisationorindividual,who

maybeable toaccess favourabletermsonthedebtrequiredtopurchasetheasset.To

maintain consistency and comparability with previous studies, we have assumed that,

about twothirdsofdivestedpubsendup leaving the sector.However, this sectorhas

been

through

a

period

of

divestment

for

those

pubs

where

revenues

have

not

been

sufficient to cover total costs (includingdebt servicingandmaintenance),whereas this

policy compels pubs to devote a greater share of their revenue to profit rather than

coveringcosts.Assuchtherehastobeanexpectationthatopenandhonestnegotiations,

basedon the transparent sharingofdatawill lead tomoderated requests for reduced

rentalsby tenants in the faceofanexpectationofclosure if theypush too far in their

request.There isclearlyamiddleground formanypubswhere profits couldbemore

equitably shared, although one must consider the profit made by the tenant and the

pubcointhesamelight;afterthefullcoverageofcosts.

Theshuttingofpubsforcesconsumerstomovetoadifferentvenue.Thesemayinclude

anotherpub,analternativevenue(e.g.club),orthehome.Alternatively,pubclosuremay

resultin

the

individual

stopping

drinking

entirely.

Despite

these

numerous

leakages

of

demandfromthepubsector,itisstillnecessarytoassumethattheremainingpubsmay

seesales increase tosomedegree,compensatingboth thepubcoand the tenantmore

thanbefore.Wehaveattemptedtomodelthiseffect,whichwouldmitigatethenumber

ofunviableandthusclosedpubs,asaresultofthisproposedreform.

3.2 TheLondonEconomicsapproach

Ourapproachhas tobedrivenby theavailabledata.At thepresent time,noneof the relevant

pubcos systematically collectdata from their tenantson the valueof sales,or the costbaseof

theiroperation.

It

is

therefore

not

possible

to

observe

an

accurate

estimate

of

the

divisible

balance.

The pubcos do, however, collect actual values for wetincome, including wetrents, dryrent,

gamingincomeandotherincome,whichwecanmakeuseof.However,thisdataisinsufficientto

produceabottomupcostingofthefreeoftiealternative.

It is worth noting at this point that several stakeholders interviewed by us have their doubts

whetheracomparablefreeoftieestimatecanexistconceptually.Onemajorpointdrawnfrom

theseconversationsisthatdryrentsarecalculatedbyRICSsurveyorsusingcomparablelocalpubs

as benchmarks, but the idea of comparable means that a tied pub would not be considered

comparable to a freeoftie pub and vice versa, because of the large number of (potentially

unquantifiable)countervailingeffects,suchaswetrents,SCORFA,andwhetherornotthetenant

wouldbecomeresponsibleformaintenance inthefreeoftieoption.Wedoconsiderthatakeyrisk toBIS in relation to thispolicy is exactly how such assessmentswill be carried out in a

transparentwaythatisnotoverlyreliantonassumptionsthatmaynotmaterialiseorchangeover

time.

The lackofabottomupcosting toestimate the impactofmoving froma tied toa freeof tied

state,orwhatleveloftransferwouldberequiredtodeliverthenoworseoffstatustargetedby

theproposedregulatorychange,meansthatwehavehadtoassumearangeoffeasiblevaluesfor

this transfer to testpotential impacts.Providinganevidentialbaseora theoretical rationale for

theseisextremelychallenging,inpartbecause:

Identifyinganyfeasibledatasourcetousetocreateanestimatehasbeenchallenging


24/44


LondonEconomics


Conceptually,shouldwemodela flat averagetransfer forallpubs,orshouldwescale

thisbysize?Simplyput,ifatenantinasmalltiedpubis5,000worseoffthanafreeof

tieequivalent,shouldhereceivelesstransferthanatenantsimilarlyworseoffinalarge

tiedpubthataccruesmorerevenue?Isitfairtoassumethattenantsinsmallerpubshave

asmallergapbetweentheircurrentpositionandanoworseoffpositionthanatenant

in

a

larger

pub?

It

is

actually

easier

to

make

the

opposite

argument,

that

in

a

large

revenuepub,thereismoreprofittoshare,sothetenantinalargetiedpubshouldhavea

smallergapbetweenhiscurrentincomeandanoworseoffincomethanalowrevenue

pub, where the pubco will still be looking to cover their costs, which may not be

correlatedwithrevenue:

Maintenancecostsareexpectedtobecorrelatedwithpubsquarefootage,which

maynotbe correlatedwith revenue, anddependon location andneighbouring

facilities.29

Contract management costs may be a fixed cost, and therefore constant

irrespectiveofrevenue.

There isanargumentthat largepubsalreadyaccruing largerevenuesareableto

copewith

the

costs

that

fall

on

them

with

greater

ease

than

smaller

pubs,

and

it

may be logical therefore to argue that where pubcos provide support through

SCORFAtopubsthisislikelytobetargetedonsmallerpubs.30

Debtservicingcostsarelikelytobecorrelatedtorevenue.

Ascanbeseen,thereisnounambiguousanswertothequestionwillthetransferfrompubcoto

tenantbecorrelatedwithrevenue?Wecannotevenaprioriidentifywhetherthisrelationship,if

itdoesexist,ispositiveornegative.

Candryrentsgonegative?Ifatenantinasmalltiedpubis5,000worseoffthanafree

oftie equivalent, but his dryrent is only 2,000 (possibly because in his case the

negotiatedsettlement

is

ahigh

wet

rent

and

low

dry

rent),

then

can

dry

rent

only

be

reducedtozero,orcanitgonegativetomakehimnoworseoff?

Ourapproach,therefore, isbasedoncomparingpubcorevenueandcosts inasimplebreakeven

analysis. At the margin, when we apply a transfer from the pubco to the tenant we can then

identifywherepubsmove fromdeliveringpositivenet revenues tonegativenet revenues.This

analysis therefore identifies these pubs that are potentially likely to be divested under each

scenario.Thefollowingpointsarise:

In the baseline data there are already a number of pubs which have costs exceeding

revenuesandarethereforecandidatesfordivestment.This isbecausethepubsector is

experiencinglong

term

shifts

in

consumer

behaviour

that

are

reducing

demand.

We

excludethesefromourresultsasitwouldbeinaccuratetoallocateanyresultantclosures

fromwithinthisgrouptobeingcausedbythepolicy.Instead,weidentifyonlythosepubs

whichmovefrompositivenetprofitstonegativenetprofitsasaresultoftheintroduction

oftheabovedescribedpolicyoptions.

29Twopubswiththesamefootprint,oneinacitycentreandtheotherinanisolatedvillage,willhaveverydifferentrevenues.

30ThisargumentimpliesthegapbetweenwetrentandSCORFAinpubswithlowerrevenuesmaybelowerandwouldsupportthecase

thatwe

should

scale

by

size.


25/44


LondonEconomics


In the baseline data there are some pubs with negative income for the pubco. In

consultation with the pubcos we believe these to be those which are currently

transitioning from one tenancy to another, or otherwise in some form of special

measures. As this is a normal churn within the sector, including those which may be

divested,wehavetakenthese intoaccountbyretainingthem inoursample,aspartof

the

baseline.

As

they

already

demonstrate

negative

profits,

they

will

not

show

a

change

in

stateasaresultofthepolicy.

3.3 Datacollection

3.3.1 Collectionprocess

LondonEconomicshasreceiveddatafromanumberofpubcos,withresponseseachcontaininga

randomsampleof300400anonymisedpubs.Thissamplehasbeendesignedasfollows:

We asked pubcos to provide a sample with 3040 pubs from each decile of their

population

of

pubs,

where

the

pubs

are

ordered

by

income

for

the

pubco.

Weaskedpubcostoensurethattherewasageographicalspreadofpubsrepresentative

oftheirdistribution.

Informationcollectedfrompubcompaniesforeachpubwas:

Wetrent

Dryrent

Gamingrevenue

Otherrevenue

Rentpaidtofreeholderwherethepubcodoesnotowntheproperty

Managementandoperationcostsincurredbythepubcoinrelationtothepub

Maintenancecosts

Debtservicingcosts

Itisworthaddressingeachoftheseinmoredetail,asthedefinitionofeachisimportant:

Wetrentthisistakenastherevenueforthepubcofromwetsalesbythepub.Thiscan

benegativeasthisisanetfigure.Inthecasewherebeersalesarelow,forexampleifthe

pub isundergoingaperiodofmaintenance,costs relatingtotherentalofthebeer line

assetscanexceedtherevenues,whichweseeinasmallnumberofcasesforeachpubco.

Dryrentthisistakenasthepropertyrentalpaidbythetenanttothepubco.

Gaming

revenue

this

is

the

income

for

the

pubco

from

the

gaming

machines

in

the

pubs. The operational position on gaming income changed during the duration of our

study, with the pubcos voluntarily agreeing to remove the gaming income from the

divisiblebalancecalculationundertheirvoluntarycodes.Broadly,olderleaseswherethe

renthasnot recentlybeen reviewedmay stillbepaying a rent thatwas assessed in a

different way, but income is now generally split three ways between the tenant, the

pubco and themachine supplier,anddoesnot feed intodivisiblebalance calculations.

However,ifthesiteisfreeoftieformachines,100%ofthemachineincomewasincluded

inthecalculationofrent,asnomachineincomewouldbetakenatsourcebythepubco.

OtherrevenueSpecialcasesandotherincomesforthepubcofromapub.


26/44


LondonEconomics


Rentpaidtofreeholderwherethepubcodoesnotownthepropertysomepubcos,as

wellasusingdebtto financetheacquisitionofpubproperties,or indeedhavereached

the pointof havingpaid thesedebtsoff, also leasepubproperties from a thirdparty,

paying the rentalon these in lieuofdebtservicingcosts.Forpubcos thatwereable to

providethisinformationtousweallocatedtheleasecostsinplaceofdebtservicingcosts

for

that

pub.

For

those

pubs

that

were

not

able

to

break

this

cost

out,

this

cost

was

includedinmanagementandoperationcostsandallocatedacrossallpubs.

ManagementandoperationcostsincurredbythepubcoinrelationtothepubThese

wereprovidedaseitheraggregatesforthewholefirm,orbrokendownonapubbypub

basis.

Maintenance costs These were provided as either aggregates for the whole firm, or

brokendownonapubbypubbasis.Thekeydifficultyisthatthecapitalcostsofthefirm

fallintothreemainparts:

Maintenanceonexistingpubs

Renovationofpubs intheestatetobringthemback intoaserviceablecondition

andremainapub

Purchasingnewpubs

Whilstthereislittleactivityinthethirdofthesecategories,thefirsttwoexistandthereis

anargumentthatweshouldattempttoexcludethecostsofrenovatingrundownpubs

fromthecostsincurredonserviceablepubsinoperation,asthiscostinnotreflectiveof

thetruecostsofoperatingandrunningthispubtoworkoutafairdivisionofprofits.We

haveincludedthiscostfortworeasons.First, inapracticalsense,it isnotpossiblefrom

the data we have to separate out this cost, and therefore we would need to apply a

roughandreadyassumptionofwhatshareofapubcocapitalcostsisrenovationcosts,

weakeningtherobustnessofouranalysis.Secondly,fromageneraltheoreticalpoint,we

cannot thinkof apubsprofitability anda fair allocationofprofitswithout recognising

thatthere

is

atemporal

dimension

to

this

question,

and

that

along

term

property

owner

(thepubco)hastohavea longertermperspectivethanashorttermtenant.Thepubco

hastofundrenovationworkofthistypeorwatchadeclineintheirestate.Itcaneitherdo

this by laying aside cash every year into a sinking fund to pay these costs as they

emerge,orpaythesecostsastheyareincurred.Eitherway,thislongtermcosthastobe

fundedfromthepubcosrevenuestreamsfromitspubs.Thisappearstoustobethecore

differencebetweenthosewhoarguetenantshaveabaddealandthosewhoarguethe

pubcos are struggling; the first group conceptualise the pub as an operation in the

present, whereas the pubco conceptualises the pub as an operational unit of a larger

business,whichalsohastomaintainanestateand fundcorporatebranding,marketing

andotherservices.Thissecondviewappearstoustobejustified,sowehaveallocatedall

capitalcosts

to

the

pubs.

Debt servicingcosts Thesewereprovidedaseitheraggregates for thewhole firm,or

broken down on a pub by pub basis. Again here, in the same way as described with

maintenanceandrenovationcostsabove,thereisanargumenttosuggestthatthedebt

servicingcostsshouldbe limitedto interestpayments, leavingtheprincipaltooneside.

This appears to us to suffer from the same arguments as presented above for the

maintenance costs. Whilst the pubco could only cover the interest charges from their

pubs,and indeed for thosepubsthatbecomeunviablethismaybeasensible firststep

approach, the longtermprincipalof thedebtmustbe repaid for thepubco to reacha

position where it can significantly improve the longterm viability of the pubco by

significantlyreducingdebtservicingpayments. Indeed,duringthecurrentperiodof low


27/44


LondonEconomics


and stable interest rates this is almost the optimal time to reduce debt levels before

interestratesrise. Inthecasewheredebtprincipal isnotpaidoff, if interestratesthen

rose we would expect to enter another cycle of divestments by pubcos, affecting the

longtermstabilityofthesector.Takingalongtermview,assuch,itisappropriateforus

toincludethefulldebtservicingcostsinthisanalysis.

Insomecases,negativeornullvaluesaregivenforrevenuefigures.Wehavebroughtthesetothe

attentionofpubcosandsoughtclarificationontheirinterpretation.Ingeneral,theseappeartobe

netcostsderivedbyapubneedingtopayservicechargeorbeerlinechargesforaperiodwhilsta

pub is not in operation (i.e. closed for maintenance or between tenants). In general, these

negativesaresmall.

3.3.2 Costallocation

Because manypubcosprovided their cost data in aggregate formwe carriedout the following

stepstocreatepubleveldataforeachdataitem.

The aggregate costs are divided by the aggregate number of pubs owned by the firm, and

multipliedbackupbythenumberofpubsinthesampletoproduceasampleaggregatecost.

As a first step, management and operations costs, and maintenance costs are divided equally

between allpubs in the sample,except that themaintenance coston leaseholdpubs isdown

weightedbyaquartertoreflectthetransferofsomemaintenancerisktothefreeholder.Thetotal

debt servicing cost is scaledaccording to thenumberofnonleaseholdpubs in the sampleand

dividedequallybetweenallnonleaseholdpubs.Forleaseholdpubs,weassumenodebtservicing

costs,however,wedoincludetheamountofrentpaidbythepubcotothefreeholderasacost.

Thisprocess

delivers

an

aggregate

imputed

cost

to

the

pubco

for

each

pub

to

be

compared

against

the aggregate declared revenue. This linear transformation of the cost data produces a larger

numberofunviablepubs,thanexpected.

3.3.3 Costcalibration

Expectedratesofunviability

UsingevidencefromtheBISconsultationdocumentthatnetpubclosuresare18aweek,froma

baseof51,000pubs,thissuggestsanannualnetclosurerateof939pubsayear,or1.8%ofthe

base.

As discussed above, assuming that tied pubs shut at the same rate as freehold and freeoftie

pubs,withtwothirdsofunviablepubsremainingclosed,this impliesanunviabilityrateof2.7%.

However, assuming pubcos take a longerterm view (demonstrated through renovation

expenditure etc), and with the capacity to support a pub for a short period of lower revenue

throughcoveringonlytheinterestonthedebtservicingcosts,wehavemadeanassumptionthata


28/44


LondonEconomics


pubcowillonly releaseapubwhich isnotable to return toprofitwithin fouryears31

.We thus

calculateabaseunviabilityrateof10.8%32

.

Giventhat inaflatallocationofcoststopubs,farmorepubswouldbeunviablethanthistarget

number,wecalibratedthedatabyapplyinganadjustmentfactorontothecostallocation,scaled

according

to

the

revenue

of

each

pub,

with

the

costs

multiplied

by

the

adjustment

factor

for

each

pubsothathigherincomepubstakealargershareofthecosts.Thisisintuitive,ashigherincome

pubswouldbelikelytohavealargerfootfall,andbelocatedinhighcostareas(towncentresetc),

implying higher debt servicing costs (and maintenance costs). The key constraint on this re

allocation of costs to deliver the target unviability rate in the basecase is that the average

adjustmentfactormustbe1,sothatthetotalcostsacrossallpubs isequivalenttothe imputed

sampleaggregatecostbase

3.4 Modelsetup

3.4.1 Scenarios

Threeofthemodelinputshavebeenconstructedtotakearangeofvaluestoallowustogenerate

scenariostoreflecttheuncertaintyintheevidencewehavecollected.Thesethreefactorsareas

follows:

SCORFA

SCORFAtakesbasicvaluesof1,000,1,500,and2,000reflectingontheOFTestimateandanup

rateonthistoreflectinflationarypressuressince2010,andadownratetoaccountforanycost

savingefficienciesthepubcosmayhavebeenabletogenerateinthisperiod.

Inaddition,industrystakeholdersinterviewedforthepurposeofouranalysisindicatedarguments

infavourofanegativerelationshipbetweenthevalueofSCORFAapubcoprovidestoatenantand

the income which that tenants pub produces for the firm. Particularly, it appears that pubcos

grantlargerfinancialsupporttothosepubswhichaccruelessincomeandarethereforelesslikely

tobeabletocovertheexpenses included inSCORFAthemselves.Toaccount forthispossibility,

we divided the sampled pubs into three groups depending on their income (i.e. based on 33rd

incomepercentiles).Whereasthosewhoseincomerangedbetweenthe33rd

and66th

percentileof

incomewouldsimplyreceiveoneofthebasicSCORFAvalueslistedabove,thoseinthelowincome

groupwouldreceive150%ofthisbasicvalue; incontrast,those inthehighincomegroupwould

beassignedonly50%ofthebasicvalue33

.

Hence, to provide a realistic and wide range of SCORFA, we allow for variations in the basic

SCORFAestimatestoaccountforinflation,potentialpubcosavingefficiencies,aswellasindividual

pub

income.

31Thefouryearassumptionisbasedonourconsultationwithstakeholders.

32

33Toprovideanumericalexample,assumingabasicSCORFAvalueof1,000,alowincomepubwouldreceive1,500,amiddleincome

pub1,000,andapubwithhighincomeonly500inSCORFA.


29/44


30/44


LondonEconomics


These three inputs can be combined to construct 36 distinct scenarios representing different

potentialoutcomes.

3.4.2 Modellingthesuggestedpolicyoptions

We

have

modelled

five

distinct

options

Statusquo

Revenue and costs remain the same and the percentage of unviable pubs is

calibratedto10.8%

Policyoption1withoutguestbeer

Dryrentisadjusteddownwardunderthenoworseoffrule

Policyoption1withguestbeeroption

Wetrentdecreasesby38%whichistheassumedguestbeershare35

Dryrent increasesbyaproportionof the increase in thepubsdivisiblebalance

(equalin

this

case

to

the

decrease

in

wet

rent)

Dryrent isadjusteddownwardunderthenoworseoff ruleusing thedryrent

adjustmentassumption

Policyoption2whereallpubsgofreeoftie

WetrentiszeroforallpubsbutnowtenantshavetopaySCORFAandcapitalcosts

themselves36

SCORFAisassumedtobe1.5timesmorecostlytotenantsthantopubcosdueto

economiesofscale

Dryrentincreasesusingthedivisiblebalanceassumption

Policyoption2wheresomepubsgofreeoftie

Pubsgo

free

of

tie

ifwhat

they

would

gain

in

wet

rent

exceeds

what

they

would

havetopayinSCORFAandcapitalcosts

Pubsthatgofreeoftiehavethesameoutcomeasinoption(d)andpubsthatdo

nothavethesameoutcomeasinoption1withoutguestbeer.

3.5 Employmenteffectsofclosure

Whenapubclosesarelativelysimpleequationcalculatesthenumberofjobslost.Usingdatafrom

theBBPAsBeerandPubSectorRegionalImpactAssessmentcompletedbyOxfordEconomics37

,

35Itisassumedthatpubswillseektomaketheirtopsellingbrand(almostinvariablyalager)theirguestbeer.Whilstthepolicymaybe

designedtosupportcraftbeersandlocalrealalesweseethisasexceedinglyunlikely.Datawehaveseenfromexpertsourcessuggest

standardlagersalesarenormallybetween35%and40%ofwetsales36

Takinganexampleofapubco that retains responsibility for repairs to thepub,andwhich delivers this througha large facilities

managementoperationtoseveralthousandpubs,wecanseethevaluetothetenantofthisservice,butwecannoteasilyimputethe

costforafreeoftietenant(whomayultimatelybeaskedtotakethisresponsibilityonthemselvesandwouldbeforcedtopayinthe

openmarket).Assuch,weconsiderthatfortheoptionswherethetiedpubremainsatiedpub(theactivationofthecode),therewould

benochangeinthecontractualmodelandthepubcowouldstillincurthemaintenancecosts.Forthefreeoftieoption,wewouldneed

toattempttomodelthe increase incostsapubwouldface if itwasattempting topurchasetheseservicesthemselves,asunderthe

standardfreeoftiecontractualterms.Thiswouldhaveakeysecondaryeffectinthatweshouldassumethatcostsavingsdeliveredby

thepubcosbuyingpowertoanytiedpubswhichremaintiedpubswouldfall,butwouldfalllessthanproportionatelyduetothepubco

losingeconomiesofscaleandthereforebuyingpower,whichwould implyhigherunitcosts.Othersectorswehavereviewedsuggest

thatadropindemandforaserviceof7%wouldincreaseunitpricesbyaround1%,butwehavenotincludedthisinouranalysistoas

wefelt

it

was

important

to

focus

on

the

key

secondary

effect

of

demand

shifting.


31/44


LondonEconomics


which identified an average of five fulltime direct employees per pub38

. This figure excludes

indirectemployment,butgivenmanyof theseare insupport industries thatmaynot reduce in

scale (a delivery van stillneeds the samedriver and crewman even if theyundertakeone less

delivery),wehavedecided tonot take intoaccount thepotential indirect laboureffects,or the

secondordereffectsofthealternativeuseofthepropertyorthealternativespendingofthe40%

of

sales

that

moves

outside

the

pubs

sector.

37OxfordEconomics,2012

38NotethattheoriginaldataprovidefulltimedirectemploymentfortheUKpubandbreweryindustry,intotalandbyregion.Forthe

purposeofouranalysis,basedonthegeographicalrangeofthesuggestedpolicyoptionswetookasimpleaverageoffulltimedirect

employment perpubacrossallEnglishregionsandWales,thusexcludingScotlandandNorthernIreland.


32/44

4Resultsandconclusions

LondonEconomics


4

Resultsandconclusions

4.1

Whymight

apub

close?

Theproposalsunderdiscussionaregenerallycharacterisedassimplyreallocatingprofitfromthe

pubcompany(pubco)tothetenant,so ifthere isonlyaredirectionofprofitfromoneagentto

another,whyshouldthischangetheviabilityofthepub?Theanswer isthatthediscussiondoes

notrevolvearoundprofitbutratheraroundoperatingmargin,whichisadifferentconcept.

Profit is the residual from revenue after all costs have been covered. Operating margin is the

revenueremainingafterfrontlineoperationalcostshavebeenpaid.Thedifferenceisthatwhilsta

pubmaybeoperationallyviable in termsof the revenueexceeding theoperatingcostsand the

costofsalegoodsthatarefacedbythetenant,therearefurthercoststhatmustbeconsidered,

whichare

currently

borne

by

the

pubco,

including,

as

explained

above,

capital

costs

(e.g.

maintenance), and debt servicing costs (i.e. the interest on the debt used to purchase the

property).

For thepubco, theposition is relatively simple. Income from thepubneeds tobe sufficient to

coverthesecosts,andthemanagementcostswhichthepubcofacesaroundtheseelementsand

thecontractwiththetenant,aswellascoveringthecostofanySCORFAprovisions.Iftheincome

from thepub fallsbelow theaggregateof these, thepubmaycontinue toappearviable to the

tenantbutwouldnolongerbeviableforthepubco,whichwouldbeforcedtodivestthisasset.

4.2 Modelledoptionsandresults

Wehavemodelledfiveoptions:

Thecurrentbasecase

ImplementingtheCode,butnotallowingaguestbeeroption

ImplementingtheCodewiththeguestbeeroption

Allowingtenantstogofreeoftie,withalltenantstakingthisoption

Allowing tenants to go freeoftie, but only doing so if it improved their financial

position39

.

Wehavemodelledtheseusing36scenarios,basedonthekeyvariablesofthevalueofSCORFA,

thedivisible balancepercentage and thedryrent adjustment. The following tablespresent the

numberofpubswhichbecomeunviable,thenumberofpubsweexpecttocloseandthenumberofjobsweexpecttobelostasaresultofthepolicyandperscenario,takingintoaccountonlythe

firstordereffects.

4.2.1 Firstordereffects

39ThevastmajorityoffreeoftiepubsareresponsibleformaintenanceanddonotreceiveSCORFA,whichmeanstheadditionalincome

frombeing

free

of

the

wet

rent

needs

to

exceed

the

sum

of

these

for

atenant

to

wish

to

use

the

option.


33/44


LondonEconomics


Table4: Numberoftiedpubsbecomingunviableanddivestedbypubcos(firstordereffects)

underdifferentscenarios

Scenario SCORFA

value()

Divisible

balance

value

Dryrent

adjustment

value

Option1

noguest

beer

Option1

guestbeer

Option2

freeof

tie

(all)

Option2

freeof

tie

(optimised)

1 1,000 35% 1% 2,300 8,000 9,500 9,600

2 1,000 35% 5% 4,100 9,000 9,500 9,700

3 1,000 35% 10% 6,800 10,400 9,500 9,900

4 1,000 35% 15% 7,200 11,500 9,500 10,000

5 1,000 50% 1% 2,300 6,800 8,500 8,600

6 1,000 50% 5% 4,100 8,200 8,500 8,700

7 1,000 50% 10% 6,800 9,500 8,500 8,900

8 1,000 50% 15% 7,200 10,700 8,500 9,000

9 1,000 65% 1% 2,300 5,700 6,900 7,000

10

1,000

65%

5%

4,100

7,300

6,900

7,100

11 1,000 65% 10% 6,800 8,700 6,900 7,300

12 1,000 65% 15% 7,200 9,900 6,900 7,300

13 1,500 35% 1% 2,300 8,000 9,400 9,500

14 1,500 35% 5% 4,100 9,000 9,400 9,600

15 1,500 35% 10% 6,800 10,400 9,400 9,800

16 1,500 35% 15% 7,200 11,500 9,400 9,900

17 1,500 50% 1% 2,300 6,800 8,400 8,500

18 1,500 50% 5% 4,100 8,200 8,400 8,600

19 1,500 50% 10% 6,800 9,500 8,400 8,800

20 1,500 50% 15% 7,200 10,700 8,400 8,900

21 1,500 65% 1% 2,300 5,700 6,900 7,000

22

1,500

65%

5%

4,100

7,300

6,900

7,100

23 1,500 65% 10% 6,800 8,700 6,900 7,300

24 1,500 65% 15% 7,200 9,900 6,900 7,400

25 2,000 35% 1% 2,300 8,000 9,200 9,400

26 2,000 35% 5% 4,100 9,000 9,200 9,500

27 2,000 35% 10% 6,800 10,400 9,200 9,800

28 2,000 35% 15% 7,200 11,500 9,200 9,900

29 2,000 50% 1% 2,300 6,800 8,300 8,400

30 2,000 50% 5% 4,100 8,200 8,300 8,500

31 2,000 50% 10% 6,800 9,500 8,300 8,800

32 2,000 50% 15% 7,200 10,700 8,300 8,900

33 2,000 65% 1% 2,300 5,700 6,900 6,900

34

2,000

65%

5%

4,100

7,300

6,900

7,100

35 2,000 65% 10% 6,800 8,700 6,900 7,300

36 2,000 65% 15% 7,200 9,900 6,900 7,400Source:LondonEconomics'analysis

Thenexttabletakesaccountofthefactthatcurrentbestestimatessuggestthataroundtwothirds

ofthosepubsdivestedbypubcoswillclose,withonethirdbeingreopenedasapubbyadifferent

agent.Thetableabove,therefore,showsthe impactonthepubcos,and the tablebelowshows

theimpactonthepubsectorasawhole.


34/44


LondonEconomics


Table5: TotalnumberoftiedPubsclosingasaresultofthepolicy(firstordereffects)

Scenario SCORFA

value()

Divisible

balance

value

Dryrent

adjustment

value

Option1

noguest

beer

Option1

guestbeer

Option2

freeoftie

(all)

Option2

freeoftie

(optimised)

1 1,000 35% 1% 1,500 5,300 6,400 6,400

2 1,000 35% 5% 2,700 6,000 6,400 6,500

3 1,000 35% 10% 4,600 6,900 6,400 6,600

4 1,000 35% 15% 4,800 7,700 6,400 6,700

5 1,000 50% 1% 1,500 4,600 5,700 5,700

6 1,000 50% 5% 2,700 5,500 5,700 5,800

7 1,000 50% 10% 4,600 6,400 5,700 5,900

8 1,000 50% 15% 4,800 7,100 5,700 6,000

9 1,000 65% 1% 1,500 3,800 4,600 4,700

10 1,000 65% 5% 2,700 4,900 4,600 4,700

11

1,000

65%

10%

4,600

5,800

4,600

4,800

12 1,000 65% 15% 4,800 6,600 4,600 4,900

13 1,500 35% 1% 1,500 5,300 6,200 6,300

14 1,500 35%

tied pubs final report

Documents