Select Committee on Trade and Industry Second Report


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)

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 21 December 2004