APPENDIX 5
Memorandum by the the Campaign for Real
Ale
1. SUMMARY OF
RECOMMENDATIONS
1.1 The introduction of a guest beer right
for all pubco tenants and lessees.
1.2 Pubcos should be obliged to offer every
prospective tenant the option of a free of tie tenancy at a competitive
rent.
1.3 The annual increase in pubcos list prices
must not exceed whichever is the higher of the annual increase
in the producer price index or the RPI.
1.4 Annual RPI increases and upward only
rent reviews should be stopped.
1.5 Tenants should have the right to have
disputes settled by the courts, notwithstanding a provision for
arbitration.
1.6 A legally binding code of conduct setting
out the obligations and duties of pubcos to their tenants.
1.7 The OFT remains vigilant of pubco mergers
and takeovers.
2. INTRODUCTION
2.1 CAMRA welcomes the decision by the committee
to investigate the relationship between pubcos and their tenants.
As a consumer organisation, with 72,000 members, we are concerned
that the anti-competitive practices of pubcos are harming the
consumer as a result of:
— Lack of access to beers from small
and medium sized brewers.
— Beer price increases at above the
rate of inflation.
— Reduced investment in pub estates
— The closure of valued community pubs
made unviable by high rents and beer prices.
2.2 We support the retention of the "Tie"
but believe that the "Tie" should be loosened. CAMRA
supports the tie for the following reasons:
— The tenancy system along with the
beer tie allows thousands of entrepreneurs to enter the pub trade
at low cost in terms of capital outlay, and low risk.
— The beer tie is essential to the
survival of small and medium sized brewers. These brewers currently
own 5,800 tenanted public houses[2]
and are reliant on these tied outlets to showcase their products
and provide access to market.
— Abolition of the "Tie"
could have a number of unintended consequences as rents would
be forced up to compensate, and pubcos might consider selling
their pub estates.
2.3 We recognise that the focus of this
enquiry is the relationship between pubcos and their tenants.
However, in making recommendations we believe that it is important
to consider the impact on the industry as a whole, as a pubco
could always alter its commercial strategy to purchase brewing
operations, thereby changing the vertical integration of the market
distribution model.
2.4 It is our view that a complex monopoly
exists in favour of pubcos with tied estates. Pubcos are protected
from competition in supplying their tenanted estates as other
parties are denied access. Pubcos are thus able to charge a higher
margin on their beer sales to tenants than they would in the absence
of the "Tie", which feeds through into higher retail
prices, business failures and a lack of investment.
2.5 The practice of deep discounting by
the four national UK brewers (Carlsberg UK, Interbrew, Coors and
Scottish & Newcastle) ensures that they are able to secure
supply agreements with the pubcos. There is thus a clear financial
incentive for pub companies to restrict choice to a limited number
of national beer brands in order to maximise their margins on
beer sold on to their tenants.
3. BACKGROUND
TO THE
PUB INDUSTRY
3.1 The pub industry has undergone huge
structural and strategic changes since 1990. CAMRA would summarise
these changes as:
— A reduction in the number of pubs
owned by brewers from 43,500 in 1990 to 9,800 in 2002.[3]
— An increase in the number of pubs
owned by pub companies from 12,700 in 1991 to over 31,500 in 2002.[4]
— Entrance of multinational companies
into pub ownership.
— Consolidation of pub ownership among
pub companies.
3.2 The big four UK national brewers have
maintained their dominance of the market through marketing, discounting,
and distribution. This dominance is reinforced through long term
heavily discounted supply agreements with the large pubcos. Smaller
breweries and small wholesalers who are unable to offer the same
level of discount to win national supply accounts, are effectively
priced out of competing for business, and denied market access.
This in turn denies pubco tenants beers from smaller and medium
sized brewers even if their customers demand it.
3.3 It is not unusual for consumer demand
in community style pubs (which form the backbone of the large
pubco estates) to request beers from local and regional breweries.
Tenants require flexibility to be able to meet changes in consumer
demand, which increasingly are driven by interest in new and innovative
products, including local, regional and heritage products.
Figure 1
PUB OWNERSHIP IN THE UK[5]
|
| Pubco Tenanted | 23,800
|
| Pubco Managed | 7,700
|
| Brewery Tenanted | 5,800
|
| Brewery Managed | 4,000
|
| Freehouses | 16,850
|
| Total | 58,150
|
|
3.5 Figure 1 shows that Pubcos have significant market
power, collectively owning over 50% of the UK's 60,000 pubs. It
also shows that 71% of the UK's pubs are restricted in the beers,
which they can sell, thus contributing to reduced choice and higher
prices for consumers.
Figure 2
TOP FOUR PUB COMPANIES[6]
|
| Pubco | Number of Pubs
| % of UK Pubs |
|
| Enterprise Inns | 8,843 (Leasehold and Tenancy)
| 14.7% |
| Punch Taverns | 7,400 (Leasehold and Tenancy)
| 12.3% |
| Spirit Group | 2,470 (Managed)
| 4.1% |
| Mitchell and Butler | 2,077 (Managed)
| 3.4% |
| Total | 20,790
| 34.5% |
|
NB. Acquisition of Unique Pub Co by Enterprise Inns completed
April 2004. Enterprise Inns subsequently sold 250 pubs.
3.6 Figure 2 shows that over a third of UK pubs are in
the hands of only four pubcos. The top four pubcos now control
over a third of UK pubs, with Enterprise Inns controlling 8,843
alone.
3.7 The acquisition of Unique Pub Co in April 2004 by
Enterprise Inns means that two pub companies between them control
over one in four UK pubs. The continued consolidation of ownership
suggests that the dominance of the pubcos will continue to grow,
further undermining competition and consumer choice.
4. BACKGROUND TO
THE BREWING
INDUSTRY
4.1 The brewing industry has also undergone huge structural
and strategic changes since 1990.
4.2 CAMRA would summarise these changes as:
— Consolidation in brewing meaning fewer brewers
with increased market share.
— Increase in discounting by brewers in order to
secure market share.
— Success of brand marketing policies in establishing
"must stock" brands.
— An increase in the number of small brewers from
only 160 in 1989[7] to
over 400 today.
Figure 3
TOP SIX BREWERS—ON TRADE MARKET SHARE (VOLUME) 2003[8]
|
| Company | Market Share
|
|
| Scottish Courage | 26.3%
|
| Coors | 20.3%
|
| Interbrew UK | 16.4%
|
| Carlsberg—Tetley | 13.6%
|
| Diageo | 6%
|
| Anheuser—Busch | 1.6%
|
| Total | 84.2%
|
|
4.3 The brewing market is becoming evermore concentrated
as a result of larger brewers taking over smaller ones. Six national
brewers controlled 67% of the market in 1967, and 75% in 1989.[9]
Today only four national brewers control over 76% of the market,
and as fig. 3 shows the top six control 84.2%.
4.4 The increased concentration of the brewing industry
has been the result of takeovers and mergers. In addition the
use of discounts by national brewers to secure contracts with
the national pub chains has allowed them to expand their market
share at the expense of smaller brewers. The concentration of
the off trade market reflects that of the on trade, and also severely
limits consumer choice.
Figure 4
TOP BREWERS TAKE HOME MARKET SHARE (VOLUME) 2003[10]
|
| Company | Market Share
|
|
| Interbrew UK | 25.5%
|
| Scottish Courage | 22.6%
|
| Coors | 17.23%
|
| Carlsberg—Tetley | 10.7%
|
| Anheuser—Busch | 4.1%
|
| Diageo | 3.2%
|
| Total | 83.3%
|
|
5. CONSUMER CHOICE
5.1 The concentration in ownership of breweries and pubs
has severely restricted consumer choice. The restriction in choice
is to the detriment of small brewers who are denied access to
the market and to the consumer who faces a limited beer choice.
5.2 The use of the beer tie by pubcos means that tenants
are unable to meet the needs of their customers by sourcing a
wider range of beers.
5.3 The industry often asserts that if choice has diminished
then this is because the consumer does not mind. They argue that
if the consumer really did care about choice they would choose
to drink elsewhere. Unfortunately however, the concentration in
ownership of pubs and dominance of pubcos (particularly in the
community pub segment of the market) denies consumers this choice,
which prevents the normal operation of market forces.
5.4 Research quoted by the Competition Commission suggests
that the selection of beer or the presence of real beer is an
important factor for 20% of consumers in their choice of pub.[11]
These 20% are likely to be among the most regular pub goers because
of their interest in beer.
Figure 5
AGREEMENT WITH STATEMENT THAT AT LEAST ONE BEER SOLD IN
EVERY PUB SHOULD BE LOCALLY BREWED.[12]
ALL ADULTS WHO VISIT PUBS.
5.5 Research commissioned by CAMRA suggests that there
is huge demand for locally produced beers. The beer tie however
prevents the vast majority of pubs from selling locally produced
beers despite clear consumer demand.
5.6 The same consumer survey revealed that 23% of all
adults who visit pubs would be willing to pay more for locally
brewed beer in a pub.[13]
31% of all adults who visit pubs would buy locally brewed beer
in a pub over non- locally brewed beer.
5.7 The use of the beer tie by pubcos is manifestly failing
to meet the demand by consumers for locally produced beer. CAMRA
therefore believes that the tie should be loosened to allow flexibility
for tenants to source local and regional beers in response to
local consumer demand. Successful tenants know their customers'
needs and need to have the flexibility to respond to changes in
consumer demand. The current situation means that the market is
foreclosed to small brewers and that individual pubs are unable
to respond to local customer demands.
5.8 EU regulations partially justify the existence of
the tie on the grounds that the beer tie must be "to the
consumers benefit, and not to his detriment". The effect
of the pubco "Tie" in restricting consumer choice therefore
undermines one of the very reasons for the existence of "Tie".
5.9 In order to facilitate consumer choice and to tackle
the emergence of anti competitive practices CAMRA makes the following
proposals.
— The introduction of a guest beer right for all
pubco tenants and lessees. This proposal would give 23,800 pubs
the right to source one cask-conditioned beer outside of the "Tie".
As a result two out of five pubs in Britain would be able to offer
consumers greater choice.
— Pubcos should be obliged to offer every prospective
tenant the option of a free of tie tenancy at a competitive rent.
This proposal would give prospective tenants the freedom to choose
whether they wish to sign up to the beer tie or whether they would
like a free of tie tenancy. In case of dispute over the setting
of the rent for a free of tie lease prospective tenants should
be able to have the matter settled by the courts, notwithstanding
any provisions for arbitration.
5.10 These recommendations would transform the pub industry;
increasing consumer choice and competition. 23,800 pubs (39% of
UK pubs) would benefit from the option to supply one cask-conditioned
beer outside of the "Tie". The benefits of opening up
the market in this way would be:
— Improved consumer choice.
— Increased access to the market for small and regional
brewers.
— Improved profitability of pubs benefiting pubco
and tenant alike.
5.11.1 We believe that a guest beer right would help
improve market access for over 2,000 cask conditioned beers brewed
in Britain to which tenants currently only have access to a very
few. Tenants would also have access to cask conditioned beers
brewed throughout the European Union.
6. BEER PRICES
6.1 The retail price of beer has consistently increased
at a faster rate than both the rate of inflation and the producer
price of beer. We believe that this is indicative of the monopolistic
position of the pubcos. Whilst it is clear that the price of beer
for the consumer have been increasing faster than the rate of
inflation (which in itself helps stoke inflation), and faster
than the supplier price charged by the brewers, it is not clear
what margin is being made by the pubco and what margin by the
pub lessee. We would contend that the balance of advantage in
the split of profit margins lies with the pubcos, i.e. there has
been a demonstrable shift in market power to the pubcos.
Figure 6
PRICE INDEXES OF PRODUCER PRICE OF BEER; RETAIL INDEX
OF BEER COMPARED TO RPI INFLATION
|
Year
(Jan) | Producers
Price Index[14] For Beer
| % Rise on Previous
Year
| Retail Beer
Price Index On Sales (Jan)[15]
| % Rise on Previous
Year
| RPI Prices Index
(Jan)[16]
| % Rise on
Previous
Year
|
|
| 1997 | 98.8 |
0.2% | 185.3
| N/A | 154.4
| 2.8 |
| 1998 | 103.1
| 4.2% | 193.7
| 4.3% | 159.5
| 3.3 |
| 1999 | 105.3
| 2.2% | 202.4
| 4.3% | 163.4
| 2.4 |
| 2000 | 103.6
| -1.6% | 206.4
| 1.9% | 166.6
| 2 |
| 2001 | 108.3
| 4.3% | 212.1
| 3.7% | 171.1
| 2.7 |
| 2002 | 110.8
| 2.3% | 218.1
| 3.8% | 173.3
| 1.3 |
| 2003 | 112.1
| 1.2% | 224.3
| 2.8% | 178.4
| 2.9 |
|
6.2 The producers price index for beer is inclusive of
excise and in theory reflects actual wholesale prices, however
the increase in discounts means that particularly in the early
1990's actual wholesale prices did not rise as steeply as indicated
by the index. Figure 7 below clearly depicts that even given this
the retail price of beer has increased at a faster rate than the
producer price of beer.
6.3 Between January 1997 and January 2003 the producer
price of beer increased by 11.9%, which was below the rate of
inflation of 13.5%. The retail price of beer however increased
above the rate on inflation, increasing by 17.4%. This suggests
that while pubcos have been enjoying real terms reduction in the
price paid to brewers; the prices charged by pubcos to their tenants
has been increased.
Figure 7
INCREASE IN PRICES JANUARY 1997-2003
6.4 Between 1997 and 2003 the retail price of beer has
increased at 22.4% against the rate of inflation, despite a real
terms decrease of 13.4 in the producer price of beer against the
rate of inflation. This disparity is a result of the increase
in the margins pubcos have taken from the sale of beer to their
tied tenants. The absence of competition as a result of the tie
has allowed pubcos to increase their margins on beer sales at
the expense of tenants and ultimately the consumer.
6.5 Excise duty is often wrongly blamed for the above
inflation increase in the retail price of beer. Between 1997 and
2003 excise duty increased by 12.1%, which was just below the
rate of inflation of 13.5%.
6.6 The monopolistic position of pubcos in the supply
of beer to their tenants is leading to above inflation increases
in the retail price of beer. This is having the following negative
impacts:
— Fuelling a shift of beer consumption from the
on trade to the off trade as consumers are deterred by high prices.
In 1989 81% of beer was consumed in pubs compared to only 63.3%
in 2002.[17]
— Fuelling the decline of the market share of beer
compared to other alcoholic drinks. In 1989 beer accounted to
56.7% of alcohol consumed in Britain. This figure had fallen to
46.4% in 2002.
— An increase in the retail price of beer above
the rate of inflation impacting on consumers.
— Undermining the viability of smaller community
orientated pubs.
6.7 To stop pubcos from abusing their market power to
benefit from ever increasing margins on beer sold to tied tenants
as a result of their monopolistic position we propose that:
— The annual increase in pubcos' list prices must
not exceed whichever is the higher of the annual increase in the
producer price index or the RPI.
7. RENTS
7.1 We are concerned by the continued increase in rents
faced by tenants when there are a number of reasons why rents
should be falling. Falling beer sales and a shift to consumption
at home[18] reflect tougher
trading circumstances, which should logically be reflected in
reduced dry rents. But, the existence of inflexible contracts
specifying annual RPI increases or upward only rent clauses mean
that even where trade is falling rents continue to increase.
7.2 Given that the producer price of beer has fallen
in real times while the prices paid by tenants for their beer
has increased then in an equitable relationship this would be
reflected by a pound for pound reduction in rent. It has not.
We believe that the ability of pubcos to negotiate huge discounts
in the price they pay for beer should be clearly reflected in
rent reviews.
7.3 There needs to be a review of the two main methods
used by the industry to calculate rents. Using turnover to determine
rent (turnover method) is potentially damaging as premises with
identical turnover can have vastly different profits. The other
method of basing rents on those paid by comparable pubs is in
our view open to abuse. Our concern is that these two methods
can lead to unsustainable rents, which will lead to:
— Rapid turnover in tenants as new tenants quickly
realise the pub is not viable.
— Lack on investment in the premises.
— Increased possibility of closure.
7.4 In an attempt to ensure rents more accurately reflect
the profitability of a business we suggest that:
— Annual RPI increases and upward only rent reviews
should be stopped.
— Tenants should have the right to have disputes
settled by court, notwithstanding a provision for arbitration.
8. A CODE OF
CONDUCT
8.1 We support the retention of the "Tie".
The brewer's "Tie" is justified because it is essential
to the survival of small and medium sized brewers and enables
them to maintain a distribution network. The loss of the tie for
small and medium sized brewers would lead to brewery closures
and therefore reduce competition and consumer choice.
8.2 We also support the retention of the beer "Tie"
for pubcos as long as the net cost of the tie is not to the financial
detriment of the tenant or the consumer. Whether the tie as currently
operated by many pubcos is really to the benefit of tenants is
open to question.
8.3 A key benefit of the beer "Tie" should
be that the tenant receives proper levels of support from their
pubco. Unfortunately many pubcos conspicuously fail to provide
this support as shown by the comments below from individual licensees.
These comments are taken from the Publican newspaper's website.
8.4 A recent survey conducted by the Publican
newspaper revealed that over 70% of licensees think the beer tie
is weighed in favour of the landlord. The results are based on
a poll of over 350 licensees on thePublican.com. Below are comments
posted by two former tenants on the publican website:[19]
— We just had to leave our pub, in debt, after almost
five years of hard slog getting nowhere, due in significant part,
to the crippling nature of the pubco-tenant relationship. It was
certainly not due to lack of commitment or effort on our part."
Former tenant.
— I was tied to many things as an Enterprise tenant,
we all know about the extortionate prices for beer etc, and the
cost of cellar maintenance, but what about the tie on building
insurance? I now find myself paying per year for insurance what
I paid Enterprise per month." Former tenant.
8.5.1 A number of pubco bosses have spoken out against
the unfair relationship between pub tenant and some pubcos:
— The real issue that the Government should consider
is the mechanism for beer price rises in long-term pubco lease
agreements. In fact the owner can put up the price of beer in
a manner which is beyond the control of the tenant and this effect
can be very damaging over the long term." Tim Martin, Wetherspoons[20]
— A lot of lessees feel they are being screwed over,
that when times get tough there is no relationship. When do lessors
ever sit down with lessees and say, well times are bad, here's
a brief break or reduction in the rent level?" Peter Linacre,
managing director of Massive Pubco[21]
— The lease is not a partnership. Tenants are virtually
penalised in their rent reviews and it is the company that benefits
from an increase in barrelage in a pub, not the tenant."
Peter Salussolia, chief executive of Glendola Leisure pubco[22]
8.6 It is difficult to escape the conclusion that many
pubcos are more interested in maximising short-term profits rather
than building a long-term partnership with tenants. The decision
in May 2003 by Punch Taverns to reduce its business development
managers from 90 to 70 despite an increasing number of pub tenants
is an illustration of the lack of client focus and investment
in assisting tenants to secure long term business growth.
8.7 Pubcos have been criticised by London police chief
London Borough Commander Dick Quinn for failing to offer proper
support to their tenants. He said "the licensees in these
pubs were under a lot of pressure . . . The company must take
more responsibility because these pubs have a massive effect on
the surrounding community".[23]
His comments follow a series of shootings linked to pubs in Lambeth.
8.8 Lack of support for pubco tenants undermines the
whole purpose of the tie's existence. It also contributes to a
high turnover of pub tenants and poorly run pubs. In order to
ensure that pubcos actually fulfil their responsibilities to tenants
to provide them with proper support CAMRA proposes that:
— A legally binding code of conduct setting out
the obligations and duties of pubcos to their tenants. Such a
code of conduct should ensure that tenants are offered an appropriate
level of support and should encourage pubcos and tenants to work
together in partnership.
9. CONSOLIDATION OF
OWNERSHIP
9.1 The consolidation of pub ownership and the emergence
of ever larger pubcos acts to exacerbate problems inherent in
the tenant pubco relationship. As pubcos grow larger so does the
impact of anti competitive practices on the market as a whole
9.2 Enterprise Inns currently own 14.7% and Punch Taverns
12.3% of the UK's pub stock. Given the existence of the beer tie
we believe that these concentrations of ownership undermine competition
and choice.
9.3 In order to gain access to the pubco estates brewers
are forced to offer huge discounts not on offer to the rest of
the market. The larger the pubco the greater its power to squeeze
greater discounts from brewers. The increasing prevalence of discounting
is allowing the large national brewers to block access to the
market to smaller brewers unable to deliver the same economies
of scale or to cross subsidise sales.
9.4 To prevent the strengthening of the complex monopoloy
created by the pubcos we propose that:
— The OFT remains vigilant of pubco mergers and
takeovers.
10. CONCLUSION
The Beer Tie
10.1 CAMRA supports the continuation of the "Tie",
as we believe that it can work in the interests of consumers,
pubcos and brewers. At present however the market power of the
pubcos means that the "Tie" works to the benefit of
pubcos and against the interests of brewers and consumers. The
beer tie has allowed pubcos to establish a complex monopoly in
the supply of beer, which is undermining competition, restricting
consumer choice and leading to excessive retail price increases.
The tie is in clear need of reform hence our proposals for:
— The introduction of a guest beer right for all
pubco tenants and lessees.
— Pubcos are obliged to offer every prospective
tenant the option of a free of tie tenancy at a competitive rent.
Beer Prices
10.2 The retail price of beer has consistently increased
at a faster rate than both the rate of inflation and the producer
price of beer. This increase has been a direct result of the market
power exercised by pubcos at the wholesale level of trade. The
prices paid to brewers by pubcos have decreased in real terms
while the prices charged to tenants have increased. The increase
in the profit margins pubcos have earned on beer sold to tenants
has not been reflected in reduced rents.
In order to protect pub tenants and ultimately consumers
from excessive price rises in the future we suggest that:
— The annual increase in pubcos list prices must
not exceed whichever is the higher of the annual increase in the
producer price index or the RPI.
Rents
10.3 The setting of unsustainable rents threatens the
future of public houses by ensuring a rapid turnover in tenants
as a result of consecutive business failures. The relationship
between pubco and tenant should ideally be one of partnership
and this should be reflected in the setting of rents. We therefore
propose that:
— Annual RPI increases and upward only rent reviews
should be stopped.
— Tenants should have the right to have disputes
settled by court, notwithstanding a provision for arbitration.
Code of Conduct
10.4 Pubcos are failing in their obligations to provide
proper support and advice services for their tenants. This failure
is resulting in increased business failures and a hostile relationship
between tenants and pubcos who believe that the relationship is
one sided. We therefore propose:
— A legally binding code of conduct setting out
the obligations and duties of pubcos to their tenants.
Consolidation of ownership
10.5 The emergence of ever larger pubcos increases the
impact of anti-competitive practices. We therefore propose:
— The OFT remains vigilant of pubco mergers and
takeovers.
2
British Beer and Pub Association-2003 Statistical handbook (BBPA,
London 2003) p 66. Figure from 2002. Back
3
BBPA Statistical Handbook 2003. p 66. Back
4
ibid. p 66. Back
5
Ibid. pp 66-67; and Publican newspaper Industry Report
2004 (London, January 2004). Back
6
Publican newspaper Industry Report 2004 (London, January
2004). Back
7
MMC Report-The Supply of Beer (London, 1989) p 2. Back
8
AC Nielsen/GB/YE Dec 2003. Back
9
MMC Report-The Supply of Beer (London, 1989) p 3. Back
10
AC Nielsen/GB/YE Dec 2003. Back
11
Competition Commission-Interbrew SA and Bass PLC. p 61. NOP/
Mintel Survey, April 2000. Back
12
RSGB Omnibus-Beer Omnibus Survey 2-6 July 2003. p 69. Back
13
Ibid. p 81. Back
14
National Statistics UK Producer Price Index-BBPA Statistical
Handbook 2003, p 43. Back
15
National Statistics UK Retail Price Indices (On Sales). p 45 Back
16
National Statistics-Economic trends-Annual Supplement. (National
statistics, London, 2003) Back
17
BBPA-2003 Statistical Handbook. p 20. Back
18
Refer to 6.6. Back
19
www.thepublican.com Back
20
Letters-Morning Advertiser newspaper-20 May 2004. Back
21
Pubco bosses attack tough operators-Publican newspaper,
2nd October 2003. Back
22
Ibid Back
23
The Publican newspaper-13 May 2004. Back
| 
