Select Committee on Trade and Industry Second Report


The wholesale price differential

112. Many tenants complained that the wholesale price they paid for tied products was excessive, which made them uncompetitive in their local marketplace.[137] However, pubcos told us their wholesale selling price was broadly similar to the standard national wholesale prices, before discount, published by the brewers and charged to free house operators.[138]

113. National brewers' standard wholesale price lists provide information on the price at which beer is normally sold at the wholesale level. They do not indicate the actual price at which it is bought and sold on, due to brewers' practice of discounting.[139] Because pubcos consider as commercially confidential the detail of their contracts with brewers, such as the actual price they pay for products, there is a lack of transparency surrounding the nature of product discounts obtained by pubcos and the degree to which they are passed onto their tenants. Tenants find it difficult to ascertain with any accuracy the 'real' wholesale price pubcos paid for their beer, much less to compare wholesale prices between different agreements and thereby work out the 'value equation' which balances the rent, wholesale prices (wet rent) and any further 'countervailing benefits'.[140]


114. For a free house operator, the wholesale price paid is the price according to brewers' standard wholesale published price lists, less any discounts. Mr A. B. Jacobs suggested as a guide that these discounts ranged from £40 to £140 a barrel for a single public house,[141] while Maitland & Walker (M&W) estimated the discount to be in the region of £80 to £90 a barrel.[142] Higher discounts were available according to volume purchased, the distance from an 'average' distribution area or membership of a purchasing group.

115. Pubcos' tenants generally paid the brewers' standard wholesale price with no discount. The FSB told us that tenants forwent some £70 per barrel of beer by having to purchase beer from their pubco as opposed to buying on the free market and they had known of instances where this disadvantage had risen to £100 per barrel.[143] The FSB reported it had received a large amount of correspondence from its members stating that this wholesale price differential was in the region of 35p to 45p per pint.[144] Alan Dunton, Managing Director of EasyBars Ltd, gave the FSB an example of the differential on a pint of Carlsberg supplied through his pubco (Punch) and to an adjacent free from tie competitor, supplied directly by a brewer/wholesaler (Carlsberg-Tetley, now Carlsberg UK). The Carlsberg lager supplied by Punch to his public house cost him 81p a pint, while his competitor was charged 42p, a differential of just over 39p a pint or £110 a barrel.[145]

116. Mr Dunton gave similar evidence to us based on the price he paid for Tetley beer in three public houses he operated. In two public houses he operated, tied to Punch under an Allied Domecq and Punch Growth Lease, he paid £279 and £233 a barrel (including a £45 a barrel discount) respectively. In the free from tie public house he had been quoted £164 a barrel, a 'full' discount of £115.[146] Other tenants provided further evidence, based on brewers' and pubcos' wholesale price lists that showed the prices they paid to their pubcos were, on average, 30 percent higher than the free market price.[147] To put this loss of 'discount' into perspective, a tied tenant with an average throughput of 210 barrels per annum, with no discount, would be paying in excess of £10,000 per annum more than a free of tie tenant.[148]

117. Pubcos said the wholesale price they charged was "comparable with the free market price, if not a little lower than that available in the free trade if considered on an equivalent basis".[149] They argued that for a direct comparison to be made it was important to take into account that should a free house operator wish to stock all the top selling brands he/she would need to source products from at least eight different brewer/wholesalers. National brewers were generally not prepared to offer competitive terms on a competitor's products. A free house operator would be left with the choice of buying products through an independent wholesaler at a lower retail margin or purchasing a less attractive range of products from a single brewer. Pubcos argued that they offered their tenants all the top brands in a 'one-stop shop' at certain pricing.[150]


118. Centralised beer purchasing with high minimum order values allows pubcos to negotiate higher discounts from brewers than are available to free house operators. This discount is not necessarily passed onto their tenants; instead it increases their wholesale margin at the expense of the brewers.[151] Tenants and their representatives complained the wholesale margin which pubcos made on beer did not reflect their input into the public house business. Many tenants called for a higher proportion of these discounts to be shared with them.[152]

119. The actual amount of discount pubcos achieve from individual brewers, and therefore the margins they make, is not publicly available as pubcos consider such arrangements commercially confidential. However, the Chief Executive of Enterprise told us that "a pub company of our scale can get a [average] discount of about £140 a barrel".[153]

120. Investec Securities suggested for a barrel of beer selling at £2.20 a pint, pubcos paid brewers in the region of £130 a barrel (table 4). This barrel of beer would be available to a free house operator at between £190 to £230 a barrel, depending on the volume purchased. The same barrel of beer was sold onto pubcos' tenants at £300 a barrel. On this basis the pubcos' margin was in the region of £170 a barrel, and the discount forgone by tenants was in the region of £70 to £110 a barrel.[154]


121. Some pubcos have reacted to the criticisms that they do not offer discounts by introducing leases allowing tenants to earn discounts on certain products, for example up to £50 a barrel with Punch's 'Growth Lease' and S&N Pub Enterprises' '25 year Investment Lease'. Enterprise also told us they were introducing a new agreement, the 'Retail Partnership Agreement', in which tenants would be able to choose from two discount packages, with discounts of up to £100 a barrel.[155]

122. We were interested in finding out how widespread the use of discounts was by pubcos. Punch told us that one third of public houses in their estate purchased their beer with discounts of approximately 15 percent or an average of £45 per barrel, with a small number receiving discounts of an average of £80 per barrel.[156] Punch guaranteed these discounts for the life of the tenant's lease—a commitment they said was "not available to free of tie publicans who rely on the free market price at a particular time".[157]

123. Deutsche Bank estimated that 35 percent of Enterprise's tenants received discounts of around £32 per barrel, while 90 percent of W&DB's tenants received some form of discount. Their 'Union Pub Lease' offered discounts on non­W&DB brewed products of around £70 per barrel.[158] However, A.B. Jacobs told us that across the industry such discounts were not widespread: "on the basis of recent surveys the discounts are generally on selected products and about 40% to 50% of those which could be achieved in the open market".[159]

124. The wholesale selling prices quoted to tenants for tied beer purchases is roughly the same as the brewers' standard wholesaling selling price at which free house operators purchase their beer. However, the actual wholesale price paid by pubcos' tenants is in reality higher than is available to free house operators because of the higher discounts that are available to these operators. Whilst pubcos do operate some discount schemes, and these have increased in recent years, they do not match the opportunities available to free house operators.

125. As with any commercial contract, we believe the actual details of pubcos' contracts with individual brewers should remain confidential. However, we believe that pubcos should advise their tenants of the average discount they receive, how this compares to the free market discounts available, and how much of this discount pubcos are passing onto their tenants.

AWP income

126. Pubcos derive further income from their tenants through taking a share of income for machines sited in their public houses: for example, pool tables, vending machines and in particular amusements with prizes (AWP) machines, such as 'slot' machines. Tenants are not 'tied' to pubcos for AWP machines in the same way as they are for beer. A machine tie is imposed as pubcos' agreements require tenants to obtain written consent from them for the introduction of machines. Consent is usually provided on condition income is shared with the pubco (usually 50/50 net of rent and VAT) and is limited to machines provided by certain operators only, nominated by the pubco.[160]

127. Dr Rawlings, Director of the Pub & Leisure division of the BBPA, told us that pubcos' share of AWP income represented the "added value which the pubco puts in".[161] The income, quality and number of AWP machines had risen "primarily because the pubcos had taken an interest; prior to that a lot of pubs did not realise the potential of gaming machines". Further, "where the pubcos have gone in and taken on companies they will go round and do deals with suppliers, much as they can with anybody else; they will turn the fruit machines around".[162] Non-tied tenants were "renting second-tier machines from the suppliers because they are somewhat cheaper, but they are not earning the money" machine tied tenants can.[163]


128. Pubcos suggested that AWP machines in their tenanted public houses outperformed machines in free houses by almost 100 percent.[164] We asked Enterprise to clarify these comments. They provided information (table 5) from a range of machine operators demonstrating that AWP machines in tenanted public houses outperformed machines in free of machine tie public houses, after rent had been deducted.

129. The machine tie improves tenants' takings from amusement with prizes machines (AWP). However, as free of machine tie tenants retain 100 percent of these takings as income, while tied tenants by pubcos' own admission[165] receive an average 50 percent of these takings, it appears from the information the pubcos themselves submitted that in many cases free of tie tenants make more money from their second tier machines than tied tenants do from their more up-to-date models. In our opinion, pubcos do not add sufficient extra value from their deals to justify their claims to 50 percent of the takings from AWP machines. We remain unconvinced that the benefits of the AWP machine tie outweigh the income tenants forgo and we recommend that the AWP machine tie be removed.


130. AWP machine operators have written to us complaining that the larger pubcos charged them royalties to be listed as nominated suppliers to their public house estates.[166] In the case of Enterprise and Punch, the operators had to pay £22.50 and £11 per week respectively for each machine installed.[167] We asked our pubco witnesses if they took royalties from AWP operators to be nominated. The Chief Executive of Punch confirmed Punch did but told us: "we use it to subsidise the rent".[168] The Chief Executive of Enterprise also suggested the AWP rent levels Enterprise's tenants were charged were lower than for a free house operator.[169]

131. We received evidence, on a confidential basis, which showed the larger pubcos' machine tied tenants paid higher rents than free of machine tie tenants. This was because the royalty payment made to pubcos by AWP operators was included in the rent tenants paid without their knowledge. For example, where a free from machine tie tenant would pay £50 a week rent per AWP machine, a tied tenant would pay £70 a week, including a rent premium of £20, which was subsequently paid to the pubco by the AWP operator as royalties.

132. Pubcos' tenants, who are tied for AWP machines, pay higher rents for AWP machines than tenants who are not tied. This is due to pubcos' practice of extracting royalty payments from AWP operators to become a pubco's nominated supplier. We feel many tenants may not be aware of these arrangements. If the AWP machine tie is not to be removed quickly, there is no reason why pubcos could not immediately introduce more transparency about their contractual relationships with their nominated AWP operators.

137   For example see Appendix 25, page 4; Appendix 27, page 3; and Appendix 15, para 9 Back

138   Appendix 8, para 2.2 (iii) Back

139   Appendix 1, para 26 Back

140   Ibid., para 27 Back

141   Appendix 17, para 2.2 Back

142   Appendix 23, para 420 Back

143   Appendix 12, para 5.1  Back

144   Appendix 13 Back

145   Appendix 13, para 1 Back

146   Q 5 Back

147   For example see Appendix 25 and Appendix 27 Back

148   Appendix 17, para 2.3.1 Back

149   Appendix 23, para 32 Back

150   Ibid., para 36  Back

151   Appendix 12, para 2.10 Back

152   For example see Appendix 25, para 6 and Appendix 12, para 2.1 Back

153   Q 345 (Mr Tuppen) Back

154   Investec Securities, Tenanted Pubs, 14 May 2004, page 3 Back

155   Appendix 8, para 3.5 (iv) Back

156   Appendix 23, para 24 Back

157   Ibid. para 123 Back

158   Deutsche Bank, UK Pubs Sector Report - The bear pit, 31 October 2003, pages 32-33 Back

159   Appendix 17, para 2.3 Back

160   Appendix 14, para 15 Back

161   Q 304 Back

162   Ibid. Back

163   Q 305  Back

164   Q 339 (Mr Tuppen) Back

165   Appendix 8, Annex 14a Back

166   see Appendix 18, Executive Summary  Back

167   Ibid. Section 4 Back

168   Q 553 (Mr Thorley)  Back

169   Q 339 (Mr Tuppen)  Back

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Prepared 21 December 2004