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Fourth Standing Committee
on Delegated Legislation
Wednesday 11 December 2002
[Miss Anne Begg in the Chair]
Supply of Beer (Tied Estate)
(Revocation) Order 2002
The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson): I beg to move,
That the Committee has considered the draft Supply of Beer (Tied Estate) (Revocation) Order 2002.
I should make it clear at the outset that in addition to the order I intend to lay a related order to revoke the other remaining beer order—the Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989—which will be subject to the negative resolution procedure.
The central point, which I want to make straightaway, is that the orders are no longer relevant to today's industry, so we are simply getting rid of unnecessary legislation.
The beer orders were radical and necessary in their time, but that was in 1989 when the landscape in the brewing and pub industry was completely different. It may be helpful if I explain the history of the orders.
As long ago as 1986, the Monopoly and Mergers Commission was asked to investigate the possible existence of a monopoly situation in the supply of beer for retail sale on licensed premises in the United Kingdom. The structure of the brewing industry was completely different. It was dominated by six major brewers who between them owned three quarters of all tied public houses. The sort of retail pub chains that populate our High streets these days had not even been thought of in 1986.
The MMC's report described the major breweries' stranglehold over the great majority. 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's recommendations was the two beer orders: 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 owning more than 2,000 pubs to release from the tie half of the surplus over 2,000, thus creating some 11,000 more free houses. However, all national brewers had to allow their publicans complete freedom to buy non-beer drinks from any source and to sell at least one draught cask-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 may be worth lingering momentarily on the guest beer provision because it is probably the only
Column Number: 004provision of the beer orders to have become lodged in the beer drinker's consciousness. It is important to consider it in context. It was one element of two statutory instruments, the overall impact of which was to widen free trade by greatly increasing the number of retail outlets not tied to any brewer. They reduced the number of pubs controlled by the largest brewers, whether managed or tenanted. In the case of tenanted pubs, the guest beer provision further weakened the tie by empowering a particular category of publican to retail an additional beer from outside sources. In practice, the indirect beneficiaries proved to be the regional brewers and some independents and micro-brewers which, for the first time, were able to offer their cask beers for sale within the tied estates of large brewers. The potential market for their products was widened considerably.
It is interesting to note that, beyond the strict legal provision requiring the 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 in other parts of the industry—for example, by the regional brewers and the retail pub companies. Since last year's sale of Whitbread's few remaining tied, tenanted pubs, no pubs have had formal guest beer rights as defined in the beer orders. All guest beers currently on offer in British pubs are those being offered on a voluntary basis. I suspect that that is the reason for the general concept of guest beers being so firmly entrenched in the beer-drinking public's collective mind.
I want to turn briefly to the opportunities that the guest beer provision of the beer orders offered to independent and micro-brewers in 1989. While many independents withdrew from brewing, micro-brewers have become more numerous, but, as with many small businesses, they have both a high start-up rate and a high failure rate. Their collective market share has only ever been tiny. I was therefore pleased to announce on 19 February that the Government are keen to enhance the contribution made by the United Kingdom's small brewing industry to the diversity and competitiveness of the beer market. Actions speak louder than words and my right hon. Friend the Chancellor announced in the 2002 Budget his intention of introducing reduced rates of duty for beer produced by small brewers from June this year. The small breweries relief scheme benefits more than 370 breweries that produce around 2 per cent. of beer for the UK market. The relief helps small breweries to compete more effectively with larger breweries and benefits the wider economy, particularly in rural areas where many small breweries are located.
The review by the director general of fair trading of the beer orders in 2000 was long overdue in that 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. There have also been a number of significant mergers among brewers. The retail pub chains have developed and now own more than one third of the UK's pubs, offering countervailing buyer power in relation to large brewers.
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The director general of fair trading found that the declining market for beer in the UK since 1989 had forced the consolidation of 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 and expansion. The most significant changes have been to the structure of retail ownership. That has changed dramatically with the 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, consumers have a greater choice of different price-amenity combinations with the emergence of low-priced retail pub chains.
Not surprisingly, the director general of fair trading concluded that the beer orders were complex. He noted that there were many ways of amending them against the background of the need to keep competition healthy in the market. However, he decided that the industry in its current shape was not suited to regulation by the beer orders as they stood. He therefore recommended that all provisions of the orders should be revoked, except for the three provisions of the loan ties order. Those provisions covered loan tie agreements, publication of wholesale prices and refusal to supply beer for resale.
My right hon. Friend the Member for Tyneside, North (Mr. Byers), the former Secretary of State for Trade and Industry, announced on 1 December 2000 that he was minded to accept all the recommendations of the director general of fair trading except that he wished to retain the guest beer provision and the rules preventing brewers from imposing conditions when they sell a pub to prevent it from being used as a pub in the future. My right hon. Friend made his announcement on the basis that the report of the director general of fair trading noted that some 1,700 Whitbread pubs still had formal guest beer rights under the beer orders and he rightly wished to preserve consumers' choice which such rights bestowed.
However, soon after his announcement, Whitbread sold those pubs, leaving no pubs with formal guest beer rights. That 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 is no point in retaining the guest beer provision. More broadly, the problems which the beer orders were introduced to address—that is, when brewers were able to prevent proper competition between pubs and restrict consumer choice—no longer existed. That is why I decided that the beer orders have served their purpose and should be revoked in their entirety.
In conclusion, I want to emphasise that even if competition problems arise following revocation of the beer orders, the director general of fair trading 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
Column Number: 006behaviour comes to light. In the meantime, I look forward to hearing the comments of hon. Members and I commend the order to them.
Mr. Andrew Robathan (Blaby): Meeting at 4.30 is becoming a habit with the Minister and me. This is the third Wednesday in a row that it has happened and I hope that it will not become a habit over Christmas.
We do not oppose the order. It is largely sensible, but I have some questions to ask later. I understand that the Liberal Democrats will oppose the order, but the hon. Member for Weston-super-Mare (Brian Cotter) turned up eight minutes late, which illustrates how important he believes it is.
The beer orders introduced prior to the Monopolies and Mergers Commission report in 1989 were very unpopular with brewers, some of whom were major Conservative donors, and with publicans.
Mr. Jim Murphy (Eastwood): No.