House of Commons - Trade and Industry

Select Committee on Trade and Industry Second Report

2 DEVELOPMENT OF THE UK MARKET FOR BEER, 1989-2004

7. At the end of the 1980s, the market for beer in the UK was dominated by six national brewers (table 1). These accounted for 75 percent of UK beer production, controlled just over half of all public houses, and a substantial proportion of offlicence sales.[2] Brewerowned public houses fell into two categories—managed houses, where the publicans and their staff were employed by the brewer, and tenancies where independent publicans rented the public house from the brewer. Under an exclusive supply deal, the 'beer tie', these tenants were required to buy their brewers' products, guaranteeing the brewer an outlet for their product.

8. The remainder of public houses were owned by regional and smaller brewers, such as the Boddington Group, or by individuals whose public houses were described as 'free houses', many of whom were still tied for their beer supplies to national brewers by means of 'brewer loans', loans made at a favourable interest rate in return for a tie.

The Beer Orders

9. In 1986, the Director General of Fair Trading (DGFT), worried about brewer consolidation and the level of vertical integration in the beer market, asked the Monopolies and Mergers Commission (MMC) to investigate the market. Its report, The Supply of Beer,[3] found that a complex monopoly existed in favour of brewers who owned tied houses or who had tying agreements with free houses in return for loans (brewer loans) at favourable interest rates. The main recommendation of the MMC was that a ceiling be introduced restricting any one brewing company, or group, from owning more than 2,000 on-licensed outlets (the majority of which were public houses), thereby increasing competition in brewing, wholesaling and retailing.[4]

10. The Beer Orders[5] modified the recommendations of the MMC report by requiring all brewers who owned more than 2,000 onlicensed premises to dispose of their breweries or release from their ties one half of onlicensed premises above the 2,000 threshold by November 1992. They also allowed for landlords of premises which remained tied to purchase one brand of draught cask-conditioned beer and one brand of bottle-conditioned beer[6] from any supplier, the so-called 'guest beer provision'. They also forbade ties on non-alcoholic beers, low-alcoholic beers and non-beer drinks.[7]

11. The Beer Orders aimed to "increase competition in brewing, wholesaling and retailing".[8] Prior to their introduction, the UK market for beer was controlled by the vertically integrated national brewers, being at once producer, distributor, wholesaler, and in many cases retailer. This made the supply chain for beer relatively easy to understand (figure 1).

12. The break up of the national brewers following the Beer Orders created increased confusion about the competitive situation in the various sectors which contributed to the supply chain for beer, from brewers, as producers, through to the retail market for the consumption of beer (figure 2).

Public house ownership - the emergence of the pubcos

13. Before 1990, the national brewers, with the exception of Guinness (now merged with GrandMet to form Diageo), all owned substantial tied estates comprising both managed and tenanted public houses. Their estates represented almost 57 percent of the 60,000 public houses and a still greater share of public house sales and beer volumes.[9]

14. Of the six national brewers identified by the MMC in 1989, only one, Scottish & Newcastle Brewers (branded as Scottish Courage Brands) still operates a public house estate (branded as S&N Pub Enterprises). However, they no longer own these public houses. Instead they operate just over a thousand tenancies on behalf of the Royal Bank of Scotland (RBS).[10] The divestment of national brewers' estates comprising some 32,000 public houses (table 2) happened as they focused on developing their international beer brands in place of controlling access to the retail market.[11]

15. Not all brewers have divested their public house estates. Regional brewers still own some 8,600 public houses. Many of those highlighted by the MMC in 1989 sold off their brewing concerns to become pubcos instead, for example Boddingtons and Greenalls.[12] Some regional brewers continue to own and operate tied public houses, for example W&DB and Greene King. Around 2,600 of these public houses are managed, where the regional brewer still sets the retail price for beer, for example the Pathfinder Pubs managed estate of W&DB.[13]

16. At the time of the Beer Orders, there were very few pubcos as they would be recognised today. Pubcos were created from the disposal of the national brewers' public house operations following the implementation of the Orders. Concentration in public house ownership increased through merger and acquisition activity in the 1990s, until by 2000 the first of the 'large' pubcos, Enterprise, appeared with an estate of 1,500 public houses.[14] The rate of concentration has accelerated since 2003 with the acquisition by Punch of the Pubmaster estate (3,000 public houses) and the InnSpired estate (1,100 public houses), and the acquisition of the Unique estate (4,100 public houses) by Enterprise.

17. There are currently seven large pubcos[15] (owning over 1,000 public houses) in the UK (table 1). The largest two, Enterprise and Punch, own over 8,000 public houses each. All their public houses are leased to tenants (individuals or small companies) who operate the public houses themselves, subject to the terms of their lease. There are two managed pub retail chains, the Spirit Group and Mitchell & Butlers, two regional brewers, Greene King and W&DB and Scottish & Newcastle's Pub Enterprise division. There are approximately 40 medium sized pubcos (100 to 999 public houses) and 50 small sized pubcos (30 to 99 public houses). There are also a further 200 smaller pubcos (3 to 29 public houses) and an unknown number of operators with two public houses.[16]

18. The top six pubcos control almost 40 percent of public houses in the UK. The largest two, Enterprise Inns and Punch Taverns control almost 30 percent of public houses between them, seven percent more than the two largest national brewers did in 1989. Together, all pubcos, under our extended definition, own around 70 percent of UK public houses, with the remaining 30 percent owned by free house operators.[17]

19. Under any of the market definitions we have chosen, no one company, be it pubco, brewer or retail pub chain, holds a dominant position in the total market for beer. The largest brewer, Scottish Courage, has a market share of beer supply to the on-licensed trade of 26 percent but only operates a public house estate for the Royal Bank of Scotland (RBS), where their tenants sets the retail price. The largest company in terms of public house ownership, Enterprise, owns just 15 percent of public houses, all tenanted, to whom it acts as wholesaler, and has no brewing or retail operations. There are sufficient different types of public houses: pubco managed, pubco tenanted, and free houses, for us to agree with the Office of Fair Trading (OFT) when they say "there seems to be a reasonable amount of competition between on-trade outlets".[18] There may, however, be higher concentrations of public house ownership in certain towns, areas, or regions.

Changes in the brewing sector

20. In 1989, the six national brewers controlled 75 percent of the production of beer with the balance being accounted for by 11 regional brewers and approximately 200 local and small brewers. The MMC believed that without government action against the national brewers it would be "inevitable that a very small number of brewers will increasingly dominate the supply of beer in the United Kingdom".[19]

21. Since the Beer Orders, the brewing industry has undergone structural and strategic changes. None of the pre-1990 national brewers remains intact and some company names, such as Bass, disappeared as brewers restructured, merged and grew their market shares in response to the new industry structure.[20]

22. Contrary to the aims of the Beer Orders, concentration in the brewing industry has increased, rather than fallen. Table 3 shows that at the end of 2003 the top six brewers, all international companies, commanded 84 percent of the on-trade market in terms of supply, the top four 76 percent.

23. Although concentration in the brewing sector has increased since the Beer Orders, the sector appears to be competitive, with the largest international brewer, Scottish Courage, controlling just over a quarter of the market in terms of the supply of beer to the onlicensed trade.

The revocation of the Beer Orders

24. In 2000, the OFT investigated the beer industry again to see if the Beer Orders should be retained. The report by the former Director General of Fair Trading, Mr John Bridgeman, recommended that the majority of Articles in the Beer Orders be removed as none of the brewers covered by the Orders still owned estates of anywhere near 2,000 on-licensed premises.[21] The Beer Orders were finally revoked in 2003,[22] with the Government stating "there is nobody to whom the orders are currently relevant […] it is a pointless regulation, which will be removed by the order because it does not apply to anything".[23]