My Lords, with Amendment 33Y, we come to the issue of franchises—another great issue that has concerned us during discussion of the Bill. I and other noble Lords referred in earlier debates to the need for investment to allow pubs to reinvent themselves. I argue that there is an equally urgent need to allow pubcos to reinvent themselves by trying out and examining new corporate structures more in keeping with modern times, with less of the baggage of suspicion that traditional models carry with them, about which we heard from the noble Lord, Lord Snape, and about which other noble Lords clearly have similar concerns.
Noble Lords will know that I do not believe that changing the pub tie in any event is any more than a marginal answer to the fundamental challenges faced by the pub trade. The real challenges are: cheap beer in the supermarket at £1.13 a pint, compared to three quid in the pub; the increased drinking of wine, which people do not drink very much in the pub; the increasing tide of regulation of drink-driving, smoking and licensing; the rapid change in the structure of our society and the deindustrialisation of large parts of the United Kingdom; and, last but not least—in fact most importantly —the brutal hours required to run a successful pub. The presence or absence of a tie will have little or no effect on any of those.
I accept that the weakness of the tie is that it has two inbuilt conflicts of interest between the owner and the tenant: first, the rental level—the higher the rent, the lower the profit for the tenant—and, secondly, the price for which goods and services are supplied. To get around that conflict, pubcos have been developing the idea of a franchise. After all, that is how Burger King, McDonald’s, PizzaExpress, Starbucks, Costa Coffee and other successful companies have developed on
our high streets in recent years. That is a revenue-sharing model. The tenant pays no rent and all goods are supplied on a sale or return basis. The tenants’ only responsibility is for the wages paid to staff of the pub and the council tax. Both parties, owner and tenant, thus have a joint interest, a joint incentive to maximise revenue.
My Amendment 33Y is again about the Pubs Code and the market rent option. I seek to amend the clause so that it is clear beyond peradventure that all the provisions and protections of the Pubs Code apply to those franchises, including the fact that franchised pubs will count as part of the 500 pub level which triggers inclusion in the provisions of the code, which I know that the noble Lord, Lord Whitty, will discuss shortly. This is not a way to get around the code. All the provisions and protections of the code are there, except for one—the market rent option, which is of course because no rent is being paid. It is a revenue-sharing model.
My noble friend on the Front Bench again wishes to leave all this to consultation. That is not satisfactory. The hard edges of how this new world is going to operate are all in the Bill; the soft edges may—I repeat, may—come about as a result of consultation. This consultation will take place after 7 May and while I am 100% confident that the next Government will be a Conservative one, the industry will be thinking, “What if?”. For example, it will be wondering what the outcome of a consultation is likely to be with a Lab-Lib coalition, with Mr Mulholland leading a charge for no changes as a result of the consultation process. That is why there needs to be some reference to this new model in the Bill, otherwise we risk tying the industry back into an operating model which all experience has shown has some fundamental flaws and inbuilt mistrusts.
The Minister has argued that all this can be achieved under the powers of Clause 71, which is not to do with the market rent only option and the Pubs Code’s operation. It is concerned with power to grant exemptions from Pubs Code. This clause has become known as the Harry Ramsden clause. Harry Ramsden, the well known purveyor of first-class fish and chips, wishes to be certain that if his fish and chip shops supply beer and cider they will be exempt from the code. I understand that the Government are proposing to give that assurance. I know that Mr Harry Ramsden is talking to pubs to see whether he could sell his fish and chips in a pub. That would mean that fish and chips sold inside a pub would come under the code and beers sold inside Harry Ramsden’s fish and chip shops would come outside the code. Where is the sense in that? Further, Starbucks is now beginning to think about obtaining licences to sell beer and wine in its coffee shops, which are of course run on the franchising model. Where is this going to leave the traditional pub and the traditional pub model? The answer is: operating at an ever greater disadvantage.
All these developments emphasise the need for the industry to be freed up to try new ways of meeting the exceptionally competitive nature of our leisure market. The issue today is not whether 5,000 pubs are going to close. In my view, 5,000 pubs are probably doomed under any scenario. They are in the wrong location and have the wrong footprint, construction and reputation.
The challenge for us is to prevent these 5,000 becoming 10,000 or even 15,000 pubs, and new corporate models such as franchising are one way to help.
My final words as we come to the end of this long saga are to those who think that the changes in the Bill will somehow herald a return to the golden age of the pub. I say to them: be careful what you wish for. I say the same to my Front Bench and to the noble Lords, Lord Mendelsohn and Lord Stevenson, as well. As we have heard already this afternoon, 25 years ago our predecessors introduced the beer orders. The orders were the result of a belief that big brewers with big chains of pubs were shutting out small breweries, so the answer was to limit the number of pubs that a brewery could own. The small breweries would then have a place in the sun, with the market space to thrive. No doubt to our predecessors, that all seemed extremely logically persuasive. As we know, the result was completely different. On the one hand there emerged the pure pubco, the focus of so much fury today, and on the other the market gap thus created was filled not by small breweries but by large, foreign brewers, so that noble Lords visiting a pub today will find the bar dominated by Stella Artois, Grolsch, Heineken, Foster’s, Castlemaine XXXX, Kronenbourg, Carlsberg and Peroni, with not a single UK brand among them.
At an earlier stage of the Bill, I suggested that there was the possibility of a similarly unpredicted and unwelcome outcome to these proposed changes. A pure pubco—not an integrated brewery, which does not have the same flexibility because it needs the pub to sell its beer—could say to itself: “Parliament wishes us to behave as a property company. So be it. We will behave as a property company. We will increase our short-term profitability by reducing or eliminating our support to our tenants. Where they can pay the rent, fine; where they can’t, we shall begin to look for alternative uses for the premises”. I have never been involved in a pure pubco so this is pure supposition on my part, but the pure pubcos own the overwhelming proportion of the current tied estate so, if this were to be developing trend, it would be a very serious one for the pub trade generally.
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When I made these remarks in Committee, I described this as the nuclear option. I see on the faces of noble Lords opposite, particularly the noble Lords, Lord Whitty and Lord Snape, a weary look of resignation—“He would say this, wouldn’t he?”. My career has been in the City, the success of which has been based on a ruthless flexibility with an absolute absence of sentimentality. This is what a broker was writing last week about a company that I shall not name: its,
“like-for-like growth in net income reflects a number of self-help measures and estate improvements. However, MRO puts this progress at risk. Politicians are unlikely to soften their stance, in our view. The new rules are therefore likely to result in a material decline in support to tenants and capital expenditure. We think the most exciting option for shareholders would be the creation of a separate support-free”,
real estate investment trust,
“for all existing and future free-of-tie leases”.
So these developments are afoot even before the ink is dry on the deliberations of your Lordships’ House.
For the Government, and indeed the Opposition, to suggest that it could all be covered in the codes devised after consultation will encourage investment bankers to think of, and put forward, proposals for their pubco clients. If those proposals show clarity of structure and profitability, the argument will be to press on forthwith. Why wait for the uncertain outcome of consultation? Why live with the uncertainties of how a Pubs Code adjudicator might operate in future? Just as the beer orders led to the creation of an entirely unexpected and, in my view, counterintuitive corporate structure, so may the decisions reached by your Lordships tonight have an equally unexpected outcome. The answer is for the Government—supported, I hope, by the Opposition—to conclude that they do not want to run this risk, and to put into the Bill some reference to investment and franchising. I believe that this would give the country the level of certainty that it needs and to which, in my view, it is entitled. I beg to move.