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Beer Orders

12.30 pm

Richard Younger-Ross (Teignbridge): The Government have repeatedly expressed their commitment to a competitive business society, and I am puzzled by the idea that revoking the beer orders will achieve their aim. In case the Minister should misunderstand me, I am not in favour of regulation for regulation's sake, but those regulations have a purpose, which is to make the economy stronger. The beer orders served, and still serve, an important purpose and I advocate their retention.

The beer orders followed the publication of a Monopoly and Mergers Commission report in 1989, which said in no uncertain terms that the brewing industry was highly uncompetitive and involved in a complex monopoly. The commission was satisfied that action needed to be taken, and perhaps if I explain why that was, my objections to the orders' revocation will be clearer. When it considered the business practices of the large brewing companies, it was alarmed to the extent that it averted integration in the industry. It noted that brewing companies not only owned the majority of pubs, but tied others through business loans.

Brewers compelled their tenants and loan recipients to select drinks from their range of supplies. They were also found guilty of imposing restrictive covenants on pubs when they were sold, with the result that future owners were forced to buy from the former owner's brewery. Smaller independent brewers and wholesalers found it difficult to break into the market. Since the brewers often refused to publish their retail prices, wholesalers could not even hope to compete and offer a competitive service. The result was high prices and less choice for customers.

What impact have the beer orders had? They have not necessarily been an unqualified success. Independent wholesalers are still small and brewing companies continue to control a large share of the market, but beer orders have removed some of the most blatant anti-competitive forces and have granted consumers more purchasing power and choice. However, I accept that the commission would be disappointed by the lack of progress since 1989.

That lack of complete success does not mean that the beer orders should be revoked. It is true that the brewing industry has changed, and perhaps not for the better. There were six major brewing companies in 1989, but there are now only four. Those companies have been able to dominate the market with greater advertising power that strengthens pre-existing brands. How can the smaller micro-breweries compete against that? Such brewers have grown in recent years, and not only in the United Kingdom. I took a trip to the United States a few years ago, and was amazed by the breadth and depth of its micro-brewing industry.

Brewers have been forced to sell their pubs, many of which are now owned by large retail chains that have a countervailing buying power to the brewers. However, I am not sure that that new trend necessarily translates into greater competition and survival chances for the

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smaller brewers, wholesalers and free houses. I am not the only one who is troubled by that development. When the Office of Fair Trading was asked to report on the beer orders two years ago, it stated that it was

I regret that the Minister did not appear to have considered that before reaching her judgment that it was time to reject the beer orders.

I am not opposed to modifying the beer orders to reflect new realities, and I know that some medium-sized brewers are worried and want them to be abolished. However, their worries can be taken into account in a review of the beer orders, and we do not have to go as far as revoking them. The complete removal of the orders could make a bad situation worse, and would fundamentally change the nature of our nation's pubs. We always hear tourists—especially Americans—saying how nice our pubs are, and how they are unlike their bars. We should cherish that as part of our English tradition.

As I mentioned, the Government asked the Office of Fair Trading to review the beer orders, and its findings were published in 2000. It concluded that certain aspects of them were outdated and unnecessary, but equally concluded that other aspects were still needed. It favoured a requirement for brewers to be compelled to publish prices and to allow beer to be resold to support independent brewers and wholesalers. It also advocated that loan-tie agreements should continue to be forbidden. Conversely, it did not support keeping the guest beer provision. I considered that to be a step too far, and I was pleased when the then Secretary of State for Trade and Industry, the right hon. Member for Tyneside, North (Mr. Byers), decided to support the retention of the guest beer provision, among others. He said:

It is a shame that the Minister has decided to cast those fine words aside quite indiscriminately.

Earlier this year, the Minister said that the Government intended to revoke the beer orders in their entirety. She said:

It is puzzling how she reached such a conclusion, and how she did so against the findings of the Office of Fair Trading and the former Secretary of State is a veritable mystery. Will she explain why she disregarded those thoughts? I realise that the Government have a reputation for not listening to the wider public, but I am surprised that they ignore the findings of their own people and Departments.

Revoking the beer orders will allow brewers to resume their anti-competitive activities. I disagree with the part of the Office of Fair Trading report that assumed that big brewers would not start buying up pubs again. In an industry in which mergers occur all the time, it is easy to

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imagine one of the big brewers buying one of the large pub chains. There are rumours in the industry about the likes of Scottish & Newcastle bidding for several pub chains.

If the beer orders were revoked, brewers would no longer have to publish wholesale price lists, and the Minister would presumably turn a blind eye when brewers refused to sell individual brands of beer for resale to independent wholesalers. Perhaps more importantly, however, revoking the guest beer provision would allow the brewers to resume their former habit of buying up pubs and tying them to their products. Retail pub chains, whose dominant position in the market is already a cause for concern, might be able to survive that due to their buying power, but what about smaller pub chains and free houses? Any protection that they have would be removed overnight. I fear that that would result in the closure of hundreds of small pubs, especially in rural areas where they already struggle to survive.

The Campaign for Real Ale estimates that 20 pubs close each week. Mike Benner, the head of campaigns and communications for CAMRA, said:

There are many rural pubs in my constituency. I know that the Minister is familiar with Teignbridge and, had she had the opportunity to visit many of those establishments, she would work to ensure their survival. I do not expect them all to survive. I had a long conversation with John Lawton, who runs a small brewery called Teignworthy in Newton Abbot. He is distressed at the revocation of the beer orders. He makes approximately 1,500 barrels a year of an excellent local beer and believes that that will be cut and cut. His small survivable business will end up as a hobby brewery when all he wants is an opportunity to expand. That is the direction in which we ought to move.

I strongly urge the Minister to reconsider the following questions. How will revoking the beer orders enable smaller, regional and independent brewers to access the market on a competitive basis? How will removing the guest provision give consumers more choice? How will new businesses be able to enter the market? How can she ensure that anti-competitive habits—which have been destroyed—will not resurface? The proposals seem akin to the farmer who concludes that, since there have been few deaths recently, it is safe to let the fox back into the hen-house.

A more sensible policy would be to exercise the strongest vigilance over anti-competitive forces and not give them a chance to flourish. Instead of waiting for the fox to attack, we should strengthen our levels of protection. If we fail to exercise vigilance, in a few years' time the big brewers and retail chains will dominate the market. That would kill off the small pubs, which have flourished and we have all enjoyed over recent years. We will lose much local character.

Most importantly, the customer—whom the Minister is attempting to defend—will pay more for less choice. If the Minister responsible for competition, consumers

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and markets continues with such detrimental policies, she will become the Minister responsible for monopolies, reduced choice and less competition.

12.42 pm

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson) : I am delighted that we are having a debate on this subject and I congratulate the hon. Member for Teignbridge (Richard Younger-Ross) on securing it. I can sort out his puzzlement quite easily. I emphasise at the outset that the beer orders are no longer relevant to today's industry. We are simply getting rid of unnecessary legislation. I am sure that he agrees that we should have legislation only where strictly necessary.

The beer orders were radical and necessary in their time, but that was in 1989, when the landscape in the brewing and pubs industry was completely different. The orders sought to increase competition in the beer trade and widen consumer choice using several methods, but mainly by attacking the vertical integration in the six major United Kingdom brewers of the time. Those brewers, which all owned large numbers of tied estates, were compelled to sell off half of those held in excess of 2,000. The effect was that free trade expanded rapidly and soon overtook the tied trade in size. The other main provision of the beer orders was the famous guest beer provision, to which I will return.

As long ago as 1986, Lord Borrie, then Director General of Fair Trading, asked the Monopolies and Mergers Commission to investigate the possibility of a monopoly in the supply of beer for retail sale on licensed premises in the United Kingdom. The structure of the brewing industry then was completely different from that now. It was dominated by six major brewers—Allied, Bass, Grand Metropolitan, Courage, Scottish & Newcastle, and Whitbread—which between them owned three quarters of all tied public houses. The retail pub chains that populate our high streets today had not even been thought of in 1986. I shall discuss the development of retail pub companies later.

The Monopolies and Mergers Commission report to which the hon. Gentleman referred described the major breweries' stranglehold over the majority of pubs in the country—not only tied pubs, but half the so-called free houses, which through low-interest loans or so-called loan-tie agreements, were restricted to selling exclusively its brewer owner's beer and even the owner's own brands of cider and soft drinks. Consumer choice was severely limited, and independent producers and wholesalers were denied access to thousands of retail outlets. As a result, both wholesale and retail prices were higher than they needed to be.

The Government's response to the MMC report's recommendations formed the beer orders, of which there were two: the Supply of Beer (Tied Estate) Order 1989, and the Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989. The Government decided to require brewers that owned more than 2,000 pubs to release from the tie by November 1992 half the surplus over 2,000, thus creating some 11,000 more free houses. Moreover, all national brewers had to allow their publicans complete freedom to buy wines, spirits, soft drinks and so forth from any source and to sell at least one draught cask-

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conditioned guest beer. The tied estate order was amended in 1997 to extend the guest beer provision to include one bottle-conditioned guest beer.

It is worth lingering on the guest beer provision because it is probably the only provision in the beer orders to have become firmly lodged in the beer drinker's consciousness. It is important to consider it in context. It was one element in two statutory instruments whose overall impact was to widen the free trade by greatly increasing the number of retail outlets not tied to a brewer. They reduced the number of pubs controlled by the largest brewers, whether managed or tenanted. In the case of the tenanted variety, the guest beer provision further weakened the tie by empowering the publican to retail an additional beer from outside sources. That initiative conferred a new, legally defined right on a particular category of publican. The main gainers were regional brewers and, to some extent, independents and micro-brewers, which for the first time could offer their cask beers for sale in the large brewers' tied estates. The potential market for their products was, therefore, considerably widened.

It is also interesting to note that, beyond the strict legal provision that required large brewers to permit their tied tenants to purchase and sell a guest beer, the wider concept of offering a guest beer has been taken up voluntarily—I emphasise voluntarily—in other parts of the industry, by, for example, regional brewers and retail pub companies. Following last year's sale of Whitbread's remaining tied tenanted pubs, hardly any pubs now have formal guest beer rights as defined in the beer orders, and virtually all guest beers on offer in British pubs are offered voluntarily. I suspect that that is why the general concept of guest beers is so firmly entrenched in the beer-drinking public's collective mind.

I return briefly to the opportunities that the guest beer provision in the beer orders offered independent and micro-brewers in 1989. It is worth noting that they mostly under-performed in the following decade. Many independent brewers—such famous names as Boddingtons, Greenall's, Eldridge Pope and Morland's—withdrew from brewing. By contrast, micro-brewers have become more numerous. They have a high start-up and failure rate, and their collective market share has only ever been tiny. I announced on 19 February that the Government are keen to enhance the contribution made by the UK's small brewing industry to the diversity and competitiveness of the beer market.

My right hon. Friend the Chancellor of the Exchequer announced in the 2001 Budget that he was minded to introduce reduced rates of duty on beer produced by smaller brewers. In his pre-Budget report of 2001, he announced that he would consider the scope for introducing such a scheme in close consultation with the brewing industry, and he will announce his decision in the Budget.

The Director General of Fair Trading's review of 2000 was long overdue, as it had been clear for some time that the market had changed dramatically. There have been considerable structural changes in both the brewing and pub retailing sectors since the beer orders. There have been a number of significant mergers among brewers. Retail pub chains have developed and now own over a third of the UK's pubs, offering countervailing buying power to the national brewers. The director general consulted widely, with the aim of establishing

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the appropriate level of regulation. He found that the overall volume of beer that is supplied to the UK market has declined since 1989. The declining market, coupled with the rise of the retail pub chains, has forced the consolidation of both larger brewers and regional and local brewers. Apart from micro-brewing, entry into UK brewing has been limited, and there continue to be significant barriers to entry or expansion.

However, the most significant changes to competition in the beer market during the 1990s have occurred at the level of the retail on-trade. The structure of retail ownership has changed dramatically following the implementation of the beer orders and the subsequent emergence of the retail pub chains. At the same time, the retail on-trade market has become significantly more differentiated, with pubs increasingly competing alongside clubs, bars and, to some degree, restaurants.

Retail competition has been manifest in higher levels of capital expenditure on amenity and greater service provision. At the same time, with the emergence of low-priced retail pub chains, consumers have been given a greater choice of different price-amenity combinations. Therefore, against the background of the need to keep competition healthy in such an important market, it is perhaps not surprising that the director general concluded that the beer orders were complex and that there were many ways of amending them. I emphasise to the hon. Gentleman that healthy competition and consumers getting a good deal go very much hand in hand.

The director general decided that the industry was not suited to regulation by the beer orders as they stood. He therefore recommended—as the hon. Gentleman said—that all the provisions of the orders should be revoked except for three specific provisions of the loan ties order, which should be retained to minimise foreclosure of the market to competing brewers and to maintain the position of independent wholesalers and free trade pubs. The three provisions were those dealing with loan-tie agreements, the publication of wholesale prices and the refusal to supply beer for resale.

As the hon. Gentleman has remarked, on 1 December 2000, the then Secretary of State for Trade and Industry, my right hon. Friend the Member for Tyneside, North (Mr. Byers), announced that he was minded to accept all the director general's recommendations but wished to retain the guest beer provision and the rules preventing brewers from imposing conditions when selling a pub so that it could not remain a pub. He made his announcement on the basis that the director general's report—this is where I can solve the hon. Gentleman's puzzlement—noted that some 1,700 Whitbread pubs still had formal guest beer rights under the beer orders. My right hon. Friend rightly wished to preserve the consumer choice which such rights bestowed. However, soon after his announcement, Whitbread sold those pubs, leaving scarcely any others with formal guest beer rights. That put a completely different complexion on the matter.

Richard Younger-Ross : Would Whitbread have sold those pubs if the guest beer provision had not been in force?

Miss Johnson : I cannot speculate on that question; as the hon. Gentleman knows, it is impossible to give an

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answer to that. However, the key point is whether there is a continuing need for the orders, as we do not believe in regulation where there is no need for it. As I said, the sale of those pubs put a completely different complexion on the matter. It made sense to look afresh at the director general's report. In the light of the Whitbread development, there was little or no point in retaining the guest beer provision.

More broadly, the problems that the beer orders were introduced to address—brewers' ability to prevent proper competition between pubs and to restrict consumer choice—no longer existed. That is why I concluded that the beer orders had served their purpose, and should be revoked in their entirety.

I know that the decision to revoke the beer orders in their entirety has not been universally welcomed. Some hon. Members, and their constituents, are worried in particular about the revocation of the guest beer provision. However, it is important to remember that the two main provisions of the beer orders of 1989—the cap on the number of pubs a large brewer could own and the guest beer provision—applied only to the then six large brewers owning tied estates of 2,000 or more pubs. No such brewers exist any longer, which is why I have decided that the beer orders have outlived their usefulness.

I wish to recap on the guest beer provision. There seems to be confusion in the industry, particularly among consumers, about guest beers. I welcome the opportunity to put that confusion straight. In 1989, the beer orders obliged the then six large brewers to permit their tied tenants to sell a guest beer. At the same time, other pub-owning brewers, such as the regionals and even non-brewer retail pub companies, often voluntarily sold so-called guest beers in their tenanted and managed houses. As I mentioned earlier, because virtually no pubs any longer have formal guest beer rights, as defined in the beer orders, guest beers available in pubs today are almost certainly offered on a voluntary basis. There is absolutely no reason why that practice should not continue, regardless of what happens to the beer orders.

To pick up one of the hon. Gentleman's points about competition, the Director General of Fair Trading has found no evidence that small brewers are operating in anything but a fair market, but he remains alert to their concerns about their ability to compete fairly in the UK

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beer market and, as I mentioned, he has pledged to remain vigilant in his pursuit of any anti-competitive practices that might come to light.

Richard Younger-Ross : I hear what the Minister says about the beer orders, but she skirts over the point about tied loans, which the Office of Fair Trading said should be retained. The Minister has not explained why those are going with everything else. When she visits Teignbridge, I can take her to small pubs where there has been a changeover of management because of the tied-loan arrangements under which people are placed.

Miss Johnson : We did not consider it necessary to retain the loans because of the nature of the market, competition and the opportunities. The hon. Gentleman may have identified a problem in his constituency, but in general we do not believe that there is a widespread problem.

Many people have argued that beer order-type measures should be applied to the retail pub chains. I think that the hon. Gentleman was on the verge of saying so. Even if there were a case for applying them—the director general concluded that there was not—we could not do so. The Government's powers flowing from the 1989 MMC report are limited to remedying the anti-competitive effects found in that investigation. Those related to the national brewing companies. Radically changing the beer orders by extending the guest beer provision to pub chains, which are not brewing companies, could be done only if a new complex monopoly investigation by the Competition Commission found anti-competitive effects in that sector. The director general has not found any evidence of such effects.

As for the possibility of brewers being able to sell pubs with restrictive covenants on their future use, the director general recommended the revocation of the provision banning that, given the relative ease with which new pubs can now be opened. It is worth remembering that that provision applied only to brewer-owned pubs, which have declined dramatically in numbers, and not to those owned by retail pub companies, the number of which, correspondingly, have increased dramatically. Slightly more pubs are now owned by pub companies than by brewers. It would be unfair to maintain a restriction on one type of company and not to apply it to the other type.

Finally, I should like to emphasise that even if competition problems arise following the revocation of the beer orders, the director general now has much stronger powers under the Competition Act 1998 than he had under the Fair Trading Act 1973. He has assured us that he stands ready to use those powers whenever evidence of anti-competitive behaviour comes to light.

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