Select Committee on Trade and Industry Second Report


The retail market for beer

32. Defining the final market for the consumption of beer—the premises it is consumed in, who owns them and who the retailers are—is one of the main areas of contention between tenants and competition authorities.[35] These are important definitions which are used by competition authorities to determine concentration levels in any particular market and which are the first step in determining whether any one company, or group of companies, holds a 'dominant position'.

33. The final market for the consumption of beer, the retail market, comprises sales of: packaged products for subsequent consumption off the premises where they are sold (off­licence sales), for example supermarkets and off-licences; and sales of both draught and packaged products for consumption at the point of sale (on-licensed sales)—for example, public houses, hotels and restaurants. Currently, the retail sale of beer and other alcoholic drinks for consumption on the premises requires a licence[36] which is granted personally to its holder and not the premises. Three distinct classes of on-licences are currently in operation:

—  full on-licences: cover premises where a person can buy an alcoholic drink, without being a resident or having a meal. These may include public houses, hotels and wine bars. (There are approximately 88,000 full on-licences in issue);

—  restricted on-licences: cover premises where it is a condition of buying an alcoholic drink that the customer is either a resident or having a meal. These may include hotels and restaurants. (There are approximately 30,000 restricted on-licences in issue); and

—  clubs on-licences: covers commercial or non-profit making enterprises of which a person has to be a member before buying a drink. (There are approximately 29,000 clubs on-licences in issue.)[37]

34. There is no simple relationship between the type of on-licensed premises and the type of on-licence. For example, some restaurants hold a full on-licence so they can operate 'public house-type bars', while others hold restricted on-licences so drinks alone may not be served. Some clubs serve a very limited membership or are open only at very limited times and many hotels and restaurants with restricted on-licences serve a different market from public houses.[38]

35. The reference market used by the European Commission is based on the judgment of the Court of Justice, which stated in the benchmark Delimitis case: "the relevant market is primarily defined on the basis of the nature of the economic activity in question, in this case the sale of beer. From the consumer's point of view, the on-trade, comprising in particular public houses and restaurants, may be distinguished from the off-trade sector on the grounds that the sale of beer in public houses does not solely consist of the purchase of a product but is also linked with the provision of services. It follows that in the present case the reference market is that for the distribution of beer in premises for the sale and consumption of drinks".[39] That is, the whole on-licensed trade as defined above, some 147,000 outlets.

36. Since the time of the Beer Orders the OFT have applied a stricter market definition in tandem with that used by the European Commission. When analysing the market, they define it "both in terms of full on-licences and in terms of all on-licences". [40] In evidence, Mr Bishop of the FSB[41] told us he believed "the pub sector represents a distinct market and a separate market in itself".[42] The OFT have disagreed: "given the degree of competition in on-trade retailing, we have not needed to carry out any in-depth analysis of market definition in this area but it is clear that there are at least significant doubts about whether pubs are in a discrete market".[43]

37. There is clearly an overlap between public houses and other outlets whose main purpose is to sell alcoholic (and non-alcoholic) drinks for consumption on the premises. However, seen from the viewpoint of the consumer, there is a difference between going out for a drink at a public house and going out for a meal at premises where alcohol may be consumed. We would therefore suggest, on a common sense basis, that if public houses are not a discrete market, all on-licensed premises are not a coherent market either. It is clear there is no simple division: a number of self-styled public houses are now in reality restaurants with adjacent bars. However, an adequate proxy for a true definition of the market may be full on-licences plus clubs on-licences. This situation will be further complicated when the Licensing Act 2003 comes into force.

38. We disagree with the definition of the public house market which the OFT has adopted in the past. We recognise that the licensing regulations are due to change. However, we do not believe that these changes will alter the shape of the market itself. Nor are we certain about the speed with which the new licensing regulations will be implemented by the licensing authorities. It seems to us that there is time for the OFT to reconsider its previous definition so as to more accurately define the market in question and to establish mechanisms for monitoring it.

39. Without clear direction from the competition authorities, we decided we would look at competition in the market for beer using the three definitions of the relevant market, as proposed by the EU, the OFT and the FSB. The OFT told us that under these definitions of the market: "between them, the top ten pub-owning companies (including Punch, Enterprise and three brewers) own about 22,000 tied tenanted pubs. This accounts for about 37% of the UK's pubs but only 25% of all full on-licences and 15% of all on­licences".[44]

40. The blurring of the retail market boundaries made it very difficult for an accurate analysis of the number of public houses in the UK to be made. We were provided with several estimates, the majority of which put the figure in the region of 60,000.[45] Using our extended definition of pubcos and this estimate of the number of public houses, the top ten pubcos own just under 50 percent of UK public houses, 33 percent of all full on-licences and 20 percent of all on-licences.

41. Ms Kent[46] of the OFT told us the general benchmark they used to determine if a company or group holds a dominant position is 40 percent of market share.[47] However, the holding of a dominant position itself is not unlawful. Only if there was evidence of abuse, such as collusion against tenants or price fixing amongst the pubcos, would dominance become anti­competitive.[48] When asked if they had received evidence of the abuse of a dominant position in the market for beer, Mr Vickers, the Chairman of the OFT, told us: "we have not had evidence of that kind and we are not near the thresholds—I will avoid the word "trigger"—where the provisions on abuse of dominance come into play".[49]

Wholesale supply

42. Because of national brewers' public house ownership and loan ties with independent free house operators, the MMC Report suggested that national brewers directly controlled the wholesale supply to almost 70 percent of public houses in the UK (other brewers controlled supply to 20 percent while independent wholesalers supplied the remaining 12 percent). They concluded this inevitably fed through into higher retail prices for the consumer.[50]

43. The international brewers continue to supply free house operators and have supply agreements with many of the pubcos but no longer act as pure wholesalers to pubcos' tenants. This position has been taken over by the pubcos themselves. Free house operators are left with the compromise of receiving a limited range of products from one of the international brewers, being supplied by more than one brewer, or getting a range of beer brands from an independent wholesaler at inferior prices.[51]

44. Pubcos either have their own wholesaling and distribution operations or are supplied directly by brewers. While some of the brewers' brand supply agreements oblige pubcos to meet certain distribution or volume commitments, these are not imposed onto pubcos' tenants. Pubcos base the wholesale price of beer sold to their tenants on the brewers' own standard wholesale selling price for each product. These prices are used throughout the industry, including brewers' own sales to independent free house operators.[52]

45. The pubcos argued that through the multiple supply contracts they had with brewers, they offered tenants a greater choice of beers than was available to them before the Beer Orders. For example, Punch told us when they first acquired public houses from the Bass Lease Company, 87 percent of the beer sold in those public houses was brewed by one supplier—Bass. Today, Punch purchases beer brands from 46 different suppliers and the largest single brewery supplier to their estate (Coors) produced just 34 percent of the beer sold in their estate.[53]

46. Although pubcos control the wholesale supply to their own estates, no one pubco holds a dominant position in the wholesale market for beer. The largest pubco, Enterprise Inns, controls wholesale supply to just under 15 percent of public houses, 10 percent of full on­licences and six percent of all on­licences. Other wholesalers, mainly the international brewers, supply free house operators who account for just under 30 percent of the market.

Small brewers

47. One area of concern highlighted by our witnesses was the availability to tenants and consumers of locally brewed beers.[54] Tenants, small brewers and consumer organisations told us the beer­tie and pubcos' centralised distribution systems appeared to be stopping some small brewers from supplying public houses in their area.[55]


48. The Campaign for Real Ale (CAMRA) told us there were barriers to entry for small brewers trying to gain access to the market for beer. They suggested the big four international brewers maintained their dominance of the brewing market through discounting and distribution.[56] The Society of Independent Brewers (SIBA) believed this dominance was encouraged by the supply agreements brewers had with the larger pubcos and by pubcos' operating practices.[57]

49. To get a clearer idea of how small brewers were treated by the pubcos, we asked SIBA what the criteria were for small brewers to get their product onto pubcos' wholesale price lists. Mr Stafford, the Commercial Director of SIBA, told us there were four main criteria which had to be fulfilled: the small brewer had to convince the pubco there was a demand for their product; the brewer had to show the orders placed by pubcos could be honoured; the price the pubco would pay for the product (usually determined by the pubco and not by the brewer); and the logistics—could the small brewer comply with the distribution demands of the pubco.[58]

Demand and supply

50. Independent research commissioned by CAMRA suggested there is consumer demand for locally produced beers amongst the adult public house visiting population. It found 55 percent of respondents agreed with the statement "at least one beer sold in every pub should be locally brewed".[59] SIBA told us in recent membership surveys they found more than 70 percent of small brewers were not able to count tenants of the large pubcos (1,000 public houses and above) among their customers. However, 90 percent of small brewers would be prepared to deliver directly to pubco-controlled public houses if given the chance.[60]

Listing fees

51. SIBA told us pubcos demanded fees for listing them on pubcos' wholesale price lists. These were not 'listing' fees in the normal meaning of the term but marketing fees to advertise the small brewers' brands which would be put into the marketplace. These could be a serious financial commitment for the small brewer which was paying these fees without any guarantee of the volume of its product it would sell. The expense could be prohibitive, with the result that small brewers could not compete with the national, or even regional, brewers. Small brewers would rather deal directly with local tenants "so when it comes down to marketing they have got the ability and the resources to pop down to their local pubs and go and talk to the licensees and do their marketing that way and also stand in front of the consumer and talk to them".[61]


52. It was suggested to us that small brewers found it difficult to gain wholesale price 'listings' for their products from pubcos because small brewers' price differential,[62] or discount, was considered too low by pubcos.[63] One small brewer told us when they tendered their product to a particular pubco, the pubco "had no interest in the price we would actually sell our beer to them for, or even what the price to the tenant would be. What they were interested in and were very interested in was DISCOUNT".[64] Their tender was rejected due to the low discounts they were quoting. The small brewer re-tendered the following year quoting a higher wholesale price: "our solution was simple for the following year—up went our list prices and up went our discount, the price we quoted was exactly the same but the pubcos' slice goes up".[65]

53. Marketing fees act as a deterrent to the extension of consumer choice and will usually be reflected in higher prices to the consumer. If pubcos are serious about extending consumer choice to include the products of small brewers they should reconsider their policy on marketing fees.

54. Small brewers are unable to offer the same level of discounts as national brewers as they do not have the size of operation required to benefit from the same economies of scale. Pubcos' requests for higher wholesale prices and bigger discounts mean the small brewer which cannot offer these is "effectively priced out of competing for business, and denied market access" to pubcos' estates.[66] This in turn denies pubcos' tenants beers from small brewers even if their customers demand it.


55. Tenants, consumers, small brewers and their representatives suggested the perceived problems for small brewers could be mitigated by reintroducing the 'guest beer provision' of the Beer Orders.[67] The Beer Orders allowed for premises, which remained tied to the six national brewers to sell a brand of draught cask-conditioned beer and a brand of bottle-conditioned beer from another supplier. The Director General of Fair Trading (DGFT) found in 2000 that only 1,700 of the national brewers' remaining public houses had guest beer rights. Whitbread's sale of its tenanted public house estate in 2001 meant virtually no national brewers' tenants still had guest beer rights. In light of this, the Government took the decision that the guest beer provision should be revoked with the rest of the Beer Orders in 2003.[68]

56. We asked our witnesses what they thought about reintroducing a guest beer provision. Mr Thorley, Chief Executive of Punch, told us Punch still had around 500 public houses which retained a guest beer right in their agreements as a legacy of their former ownership by a brewer. However, in a survey of these tenants they found "only 17 percent take advantage of that guest beer right […] and 68 percent buy brands which we sell already from the brewer even though it is already on our price list".[69]

57. This showed one of the most curious effects of the guest beer provision:although it was included in the Beer Orders to aid small brewers it did not restrict national brewers, who were the tied suppliers to a public house, from selling beer independently and separately to that public house. This was due to the Beer Orders specifying a tied tenant could purchase from "whomsoever he may choose at least one brand of draught cask-conditioned beer selected by him".[70] This did not specifically preclude tenants from purchasing their guest beer from their brewer-landlord or another national brewer.

58. Mr Bott, Chairman of the Council for SIBA, told us that this 'loophole' meant small brewers were no better off because of the Beer Orders: tenants simply substituted their tied national brewers' brands for another national brand "an awful lot of those licensees realised that instead of buying their John Smith's from the owning brewery they could buy Tetley's at the same sort of price that the brewery was producing John Smith's. We were left out of that loop. We did not gain the opportunities to sell beer that we thought we would".[71]

59. We asked the DTI about the possibility of the Government reintroducing the guest beer provision. They told us that as the adverse competition effects identified in the MMC report no longer existed, it would not be legally possible simply to re­instate the original guest beer provision. Nor would it be possible to extend it to pubcos as the Beer Orders were specifically directed at the six named national brewers. Further, introducing new legislation requiring the pubcos to offer tenants the choice of a guest beer could run counter to general EU competition policy by "effectively creating a market distortion. Regulatory intervention does not appear necessary, given that the market power of the large brewers is now more balanced with the purchasing power exerted by pubcos".[72]

60. The DTI continued, "there is nothing to stop potential tenants, whether of pubcos or brewers' premises, seeking in their detailed contract negotiations to secure rights to offer guest beers or rights to directly source some or all of their beer supplies, although this is likely to influence other terms of the deal. Likewise it is open for a pubco to adopt a policy of allowing their tenants to offer guest beers, possibly as a means of attracting suitable tenants; however these are essentially matters for commercial negotiation".[73]

61. We concur in the DTI's conclusion: a statutory requirement on pubcos to allow all tied tenants the option of offering a guest beer of a particular type, for example cask ales and regional or national specialities, would run contrary to EU competition law and could lead to the UK Government being challenged in the European Courts. However, the ability of public houses to offer a broader range of products, for example to satisfy demand for local products, is important in the interests of extending consumer choice. In the absence of the legislative option we recommend that pubcos allow their tenants more flexibility in their choice of the products they sell. The early adoption of such practices should afford more opportunity for small brewers to participate in the market.


62. The large pubcos told us small brewers had been able to access their distribution infrastructure, which operated nationally whereas their own infrastructures were only regional or local in scope.[74] However, SIBA argued that because pubcos outsourced distribution to the international brewers' distribution arms, small brewers were in practice required to ship their goods to the national brewers' regional warehouses, sometimes up to 200 miles from their brewery. Small brewers often found this both impractical and prohibitively expensive.[75] Beer was then transported back through the national brewers' distribution networks to local public houses, which could be "only five miles down the road from the originating brewery".[76]

63. Punch told us that for the small brewer who was unwilling or unable to get their product into Punch's distribution depots, they had an alternative arrangement with Beer Seller, a cask beer specialist, to assist in delivering small brewers' brands.[77] Enterprise, through their Unique estate, had adopted SIBA's 'Direct Delivery Scheme' (DDS), where SIBA members delivered local beers direct to local public houses owned by Enterprise.[78] Both pubcos also ran specialist cask ale programmes, with Enterprise purchasing up to 264 cask ale brands from 150 brewers.[79]

64. With the DDS, the Chairman of the Council of SIBA told us that they act as a 'middle person' between the small brewer and the pubcos, accepting orders on behalf of the pubcos electronically and pushing them out to the small brewers in question. The brewers delivered these particular orders direct to the public houses, which they recorded. SIBA paid the brewers and was reimbursed by the pubcos. The scheme had been well received by pubcos' tenants: "it has proven to be a fantastic success and over 95 percent of the licensees interviewed by our telephone surveys are extremely delighted with the new Direct Delivery Scheme".[80]

65. The Society of Independent Breweries' offers tenants the opportunity to have a permanent choice of SIBA members' beers delivered directly by the small brewer, rather than relying on pubcos guest ale programmes. This gives small brewers the potential of trading locally while retaining the economies of central sourcing and administration of the pubcos. SIBA told us the scheme had so far been embraced by three pubcos but had yet to find broader support, despite their ability to demonstrate sales levels over and above established guest ale programmes.[81]

66. At a national level there are opportunities for small brewers to supply the on­licensed trade, with around 17,000 free public houses available for them to supply. Pubcos' centralised distribution facilities enable small brewers who are 'willing and able' to deliver to regional depots to have access to a far wider geographical market than ever before. However, we are concerned that alternative beer distribution arrangements for those small brewers which are not 'willing' or 'able' are dwindling, with the recent acquisition of Beer Seller by one of the big three centralised logistics companies, Scottish Courage. For those small brewers for whom barriers to market entry still exist, Society of Independent Brewers' 'Direct Delivery Scheme' suggests one possible way forward, especially if operated on a regional basis.


67. Originally public houses were sold to pubcos under a structure whereby the national brewers retained credit control, ordering and distribution. Pubcos told us they had become increasingly concerned with the ability of these brewers to unduly influence the choice of their tenants, through the order and delivery process, towards brewers' own brands. Larger pubcos had created their own infrastructure to handle ordering and credit management processes but the distribution of beer remained in the control of three international brewers.[82]

68. Because the majority of beer delivered to public houses is draught, specialist distribution has to be used. This distribution is almost exclusively owned by the national brewers: Carlsberg UK, Scottish & Newcastle (branded as Scottish Courage) and TradeTeam, a partnership between Exel and Coors. Punch told us that to sever the link between brand supply and distribution they had contracted out their distribution business. In 2002, following tendering procedures, Carlsberg UK was appointed as sole service provider for retail distribution to Punch tenants. Under their contracts, Carlsberg stocked and distributed products required by Punch's tenants, whether or not they were brands from rival brewers. This was a service Carlsberg did not offer its other customers.[83]

69. We are concerned that the national brewers retain a stranglehold on the distribution for beer. This is due not so much to the supply contracts the national brewers have with the pubcos but the distribution contracts pubcos have with national brewers' distribution arms. A barrier to entry such as this could be avoided if the link between brand supply and distribution were severed.

70. The distribution market for beer has been investigated by the OFT in the context of the takeover of the assets of Interbrew UK's distribution business by TradeTeam in 2002, which was not referred to the Competition Commission. However, since then alternative wholesaling and distribution arrangements have further dwindled with the recent acquisition of the largest independent beer wholesaler, the Beer Seller, by Scottish Courage.[84]

71. In the distribution market for beer there is the strong possibility of anti­competitive consequences. We would hope that the OFT's latest consideration of market concentration in this area will not be their last. The distribution market should be kept under close and regular scrutiny.

35   For example see Q 3 (Mr Bishop) and MMC, The Supply of Beer, Cm 651, 1989, para 2.128  Back

36   Currently licences are obtained from the local courts. From February 2005, under the Licensing Act 2003, licences will be obtained from the Local Authority.  Back

37   European Commission Decision 2000/484/EC, Case IV/36.492/F3, Inntrepreneur (OJEC (L) 2000 195/49 para 19) Back

38   MMC, The Supply of Beer, Cm 651, 1989, para 2.128 Back

39   European Court of Justice, Case C-234/89, Delimitis v Henninger Bräu AG, 28 February 1991 (European Court Reports 1991 I-0935 para 16) Back

40   MMC, The Supply of Beer, Cm 651, 1989, para 2.128 Back

41   Mr Bishop is Deputy Head of Parliamentary Affairs at the FSB Back

42   Q 2  Back

43   Appendix 22, para 6 Back

44   Ibid. para 7 Back

45   For example, see Appendix 5, para 3.4 where the total number of public houses is given as 58,150, while the Industry Report, Publican Newspaper, 12 January 2004, puts the figure at 59,663 Back

46   Ms Kent is Director of the Competition Enforcement Division at the OFT Back

47   Q 609  Back

48   Q 607 (Mr Vickers) Back

49   Q 658  Back

50   MMC, The Supply of Beer, Cm 651, 1989, para 1.19 Back

51   Appendix 23, para 204 Back

52   Appendix 23, paras 201-204  Back

53   Ibid., para 187 Back

54   The term 'small brewer' here distinguishes the 450 local and micro brewers from the regional, national and international brewers and comprises brewers producing up to 30,000 hectolitres per annum. (Source: Appendix 26, para 3.1.2) Back

55   For example Appendix 12, para 7.5; Appendix 26, para; and Appendix 5, para 3.2 Back

56   Appendix 5, para 3.2 Back

57   Appendix 26, para Back

58   Q 563 Back

59   Appendix 5, para 5.5 Back

60   Appendix 26, para 3.1.2 Back

61   Qq 564-565 (Mr Stafford) Back

62   Between the brewers selling price pubcos are willing to pay and the wholesale selling price they expect to charge their tenants. Back

63   For example Appendix 12, para 7.5 Back

64   Appendix 6 Back

65   Ibid. Back

66   Appendix 5, para 3.2 Back

67   For example see Appendix 12, para 9.4; Appendix 23, para 473; and Appendix 5, para 10.1  Back

68   Appendix 7, page 2 Back

69   Q 558  Back

70   The Supply of Beer (Tied Estate) Order 1989, SI 1989/2390, article 7, subsection (2)(a)(i) Back

71   Q 601  Back

72   Appendix 7, page 2 Back

73   Appendix 7, page 4 Back

74   Appendix 23, para 193 Back

75   Appendix 26, para Back

76   Q 568 (Mr Bott) Back

77   Appendix 23, para 188  Back

78   Appendix 8, para 1.3 (ii) Back

79   Ibid., para 1.3 (i) Back

80   Q 570 (Mr Stafford)  Back

81   Appendix 26, para Back

82   Appendix 23, para 225 Back

83   Ibid. paras 226-227 Back

84   The Beer Seller, previously positioned as a cask beer specialist, has been integrated within Scottish Courage's existing wholesaling operation, Waverley, to create Waverley TBS. Source: Appendix 26, para Back

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