CONCLUSIONS AND RECOMMENDATIONS
The UK market for beer
1. 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 does
not own a public house estate. 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". There may, however, be higher
concentrations of public house ownership in certain towns, areas,
or regions. (Paragraph 19)
2. Although
concentration in the brewing sector has increased since the Beer
Orders, the sector appears to be competitive. (Paragraph 23)
The impact of pubcos on the sale and distribution
of beer
3. 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. 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. (Paragraph 37)
4. 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. (Paragraph 38)
5. 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.
(Paragraph 46)
6. In order
to get their products onto pubcos' wholesale lists, brewers have
to pay the pubcos listing fees. 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. (Paragraph
53)
7. 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. (Paragraph 61)
8. We are concerned
about the small brewers which are not 'willing' or 'able' to deliver
to the centralised distribution facilities of pubcos. Alternative
arrangements for beer distribution 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, The Society of
Independent Brewers' 'Direct Delivery Scheme' suggests one possible
way forward, especially if operated on a regional basis. (Paragraph
66)
9. 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. (Paragraph 69)
10. 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. (Paragraph 71)
The contractual relationship between tenant and
pubco
11. From the evidence we have
received, it is clear that many tenants experience problems in
enforcing their pubco's duty to maintain and repair their public
house. This is unacceptable. Pubcos would improve their reputation
as landlords if they ensured that tenants' agreements contained
an inexpensive and efficient system of arbitration or alternative
dispute resolution with fully independent arbitrators or experts
to resolve such disputes without imposing legal costs on either
side. (Paragraph 90)
12. We received
evidence which suggested prospective tenants were not being provided
with the quantity or quality of information needed to make a rational
decision on the merits of a lease proposal. Large pubcos offer
tenants the right to information should they choose to look for
it. However, many prospective tenants are unaware this information
exists. This appears to be particularly true of those who become
tenants through taking leases from incumbent tenants on assignment.
(Paragraph 103)
13. Judging
from Punch's and Enterprise's descriptions, their approach to
the application process and the type of information supplied appears
to be extremely thorough. It may well be that not all pubcos follow
best practice. However, prospective tenants must take some responsibility
themselves. Prospective tenants should make themselves aware of
the information available to them from the pubco before committing
to a lease. If there is information prospective tenants believe
should be available but is not, they should ask the pubco for
such information. If the information is not forthcoming, then
prospective tenants should look to other companies. (Paragraph
104)
14. We are
aware that pubcos, as landlords, do not have the right to unreasonably
withhold consent to assignment by and can only offer advice to
these prospective tenants. Pubcos should insist that tenants assigning
leases provide prospective tenants with the same level of information
that their pubco would provide. Prospective tenants entering the
trade through lease assignment should not sign agreements until
they are fully aware of an incumbent's annual profit and loss
accounts for the business they are purchasing. They should also
contact the pubco for information they believe is not forthcoming
from their assignor. (Paragraph 105 and 106)
15. Prospective
tenants should seek independent professional advice before committing
themselves to a lease agreement. This should not be limited to
legal advice but should include advice from a suitable accountant
with expertise in the licensed trade and a qualified surveyor
with experience in valuation in this sector. (Paragraph 110)
16. We believe
that many of the disputes which arise between pubcos and their
tenants would be eliminated if pubcos insisted as a condition
of acceptance that tenants obtained all necessary professional
advice. This should be one element of an industrywide code
of practice. We also strongly commend the example set by Enterprise
in proposing to contribute to the cost of this. In the long run,
ensuring that tenants know exactly what they are committing themselves
to when they take on a lease will be to the benefit of the reputable
pubco itself, as well as to its tenants. (Paragraph 111)
The cost of tie to tenants
17. 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. (Paragraph
124)
18. 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. (Paragraph 125)
19. 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 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. (Paragraph 129)
20. 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. (Paragraph 132)
The benefit of the tie to tenants
21. The industry could and
should establish clear guidelines for the rent valuation process.
Where they do not already exist, new national guidance for rent
calculation should be compiled, and disclosure rules clarified.
The profit assessment method of calculating rent should be carried
out in accordance with national accounting standards and with
knowledge, prudence and due diligence. Pubcos should provide their
tenants with a comprehensive breakdown of how their rent was calculated.
This should reveal the whole detail of the profit assessment and
how the specific requirements of the lease conditions had been
interpreted by valuers. The profit assessment should form an addendum
to leases, with any subsequent review, to ensure transparency.
(Paragraph 144 and 145)
22. We commend
pubcos which have already removed upward only rent review (UORR)
clauses from their agreements. We consider this best practice
within the industry and we call upon those pubcos which have not
already done so to remove such clauses as soon as is practicable.
(Paragraph 151)
23. The pubcos
have argued that if tenants do not agree with their rent assessment,
they should not have entered into the lease or accepted the rent
review. We do not share this view. In the relationship between
pubco and tenant, the tenant is in the weaker bargaining position.
Pubcos should recognise that they have a responsibility to ensure
they do not exploit their position of economic strength. All tenants
should be treated fairly and rents should be reasonable and sustainable.
(Paragraph 158)
24. Some pubcos
are willing to offer rent concessions in cases where tenants are
experiencing financial difficulty through no fault of their own,
for example because of demographic changes or because of public
house is closed for repairs. We recognise this as good practice
and commend it to the industry as a whole. (Paragraph 162)
25. It is clearly
to the benefit of both pubcos and their tenants that pubcos should
encourage prospective and incumbent tenants alike to improve their
business knowledge and performance through courses such as those
run by the British Institute of Innkeeping (BII). Some tenants
who would benefit might be deterred by the cost. We suggest that
pubcos should consider providing support to their tenants to attend
these courses through the payment of course fees or grants to
enable them to employ cover for the period when they are absent
from the public house. (Paragraph 165)
26. It would
appear that the performance of business development managers (BDMs)
varies across the industry from excellent to dire. We found no
consensus within the industry as to their role and function. Some
seem to be more concerned with the policing of operations in the
public houses under their supervision rather than the provision
of genuine assistance to tenants. We recommend that the industry
should review the support offered to tenants to ensure the application
of best practice in the provision of support to individual businesses.
(Paragraph 171)
27. Dealing
with tenants' complaints quickly and efficiently is good business
practice for all companies. Pubcos should ensure that a higher
level of sales support and technical service is provided to tenants
than they might achieve on their own. The terms of these procedures
and details of the consequences should complaints and problems
not be dealt with to the satisfaction of both parties should form
part of tenants' agreements or a binding code of practice. (Paragraph
177)
Balancing the costs and benefits of the tie
28. It should be remembered
that this Inquiry stemmed from complaints about inequalities in
the contractual relationship between pubcos and their tenants.
On the basis of the evidence presented to us we feel that the
immediately quantifiable cost of the tie is usually balance by
the benefits available to tenants. However, this does not mean
that for every tenant the costs equal the benefits, leading to
some tenants getting into financial difficulties. In such cases
pubcos could do more to redress the imbalance. Indeed, it became
clear as the Inquiry progressed, that some pubcos demonstrated
greater sensitivity to tenants problems than others. (Paragraph
188)
29. It is not
clear that removing the beer tie would make tenants better off.
In practice, pubcos, as property companies, would offset their
loss of income from the wholesale price differential (wet rent)
they charge by charging higher rents. The pubcos have the right
to do this through clauses in their leases and would undoubtedly
do so. Pubcos would maximise the rent for their properties as
they would have no interest in expanding tenants' businesses.
(Paragraph 198)
30. There is
a danger that splitting the wholesaling and property functions
of the pubcos would only benefit the international brewers who
currently control the national distribution of beer. In the main,
distribution companies owned by certain international brewers
already deliver to the majority of tenanted public houses for
the pubcos. Removing the tie would enable them to supply free
from tie tenants with wholesale products directly. The national
brewers would then have a virtual monopoly on the wholesaling
of beer, as they did in the days before the Beer Orders. (Paragraph
199)
Code of conduct
31. Since the British Beer
& Pub Association (BBPA) code of practice was updated in 1997
the industry has changed and we suggest that this code of practice
should be revised as a matter of urgency. This should involve
consultation with the widest range of interested parties. The
areas we believe a code should cover include: rent reviews, the
role of BDMs; complaint and dispute procedures; disclosure and
the availability of information; and the taking of legal and professional
advice by prospective tenants. (Paragraph 203)
32. At this
stage we do not think a legally binding code of practice necessary,
but if the industry does not show signs of accepting and complying
with an adequate voluntary code then the Government should not
hesitate to impose a statutory code on it. (Paragraph 204)
33. We hope
that our successor Committee in the next Parliament will review
the situation in the public house industry, in particular whether
the code of practice is working. (Paragraph 205)
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