APPENDIX 13
Supplementary memorandum by the Federation
of Small Businesses
FSB RESPONSE TO
TRADE AND
INDUSTRY COMMITTEE
LETTER DATED
19 JULY 2004
On the basis of reports from licensees about the
price of beer
The FSB has a large amount of correspondence
from members stating that the difference in the beer prices that
are charged to pubco tenants and the prices at which beer is available
on the open market is in the region of 35p to 45p per pint.
1. Alan Dunton of EasyBars Ltd, who has
given both written and oral evidence to the Committee, wrote:
"An example (I can verify) below:
Carlsberg lager supplied by Punch to my pub = 80.7p
Carlsberg lager supplied by Carlsberg-Tetley = 41.2p
to a competitor (Freehouse) adjacent.
Almost double! This makes my business uncompetitive
in the extreme."
In this example the difference is 39.5p. To
assess the "cost" of pubcos to the consumer VAT must
be added to this figure.
Therefore on the basis of the beer prices that
are charged to tenants, the "cost" of the pubco is 46.4p.
2. An Enterprise tenant wrote:
"As an example I have listed below some
of the beers we sell and the price from Enterprise as well as
the price from (a small independent):
For Stella Artois the small independent charges
£67 compared to £102.94 from Enterprise— a
price difference of £35.94 or 53%."
These prices are for eleven gallon/88 pint barrels.
So the prices per pint are 76p from the independent and £1.17
from Enterprise—a price difference of 41p or 48.2p
including VAT.
3. An Enterprise tenant in south east England
has stated that 24 bottles of Holsten cost £22.86 from Enterprise
and are available on the open market at £12.69. Therefore
the price that is charged to pubco tenants is 95p compared to
the free trade price of 53p—a cost to the consumer of 49.4p.
So on the basis of the beer prices that are
charged to pubco tenants, consumers are out of pocket by anything
up to 50p a pint.
On the basis of reports by analysts about the
price of beer
We recognise that the prices paid (discounts
achieved) by free of tie pubs can vary according to their location
and volumes purchased. As such it is worth considering the views
of analysts about the average difference between beer prices in
the tenanted sector and on the open market.
According to the model quoted in our submission
dated 2 June 2004, "lessees forego some £70 per barrel
of beer by buying from their pubco as opposed to buying on the
open or free market."
This figure equates to 24p per pint, making
the "cost" to the consumer of inflated beer prices 28.6p
once VAT has been taken into account.
In our evidence we state that we have no reason
to doubt the accuracy of this figure but point out that there
are instances where the disadvantages rise to more than £100
per barrel.
Phil Dixon of the British Institute of Innkeeping
has stated that: "licensees who are tied pay about £320
for a barrel (36 gallons) of standard lager; a "free of tie"
publican £190; and a pubco £150, perhaps less?"
(Morning Advertiser 3 June 2004.)
On this basis the average "cost" to
the consumer is £130 per barrel of standard lager, or is
45p per pint or 53p per pint including VAT.
As such the "cost" of pubcos to
the consumer on the basis of the price of beer is in the region
of 30p to 50p a pint according to analysts.
Of course pub companies achieve significant
discounts on beer purchases. The difference between the price
paid by pubcos for a 36g barrel of standard lager, and the price
at which they sell it to licensees is £170 according to both
the British Institute of Innkeeping and the enclosed analysis
by Investec Securities. This represents a gross margin for the
pubco of 59p.
On the basis of reports by analysts about the
pubco business model
The pubcos will argue that higher beer prices
are offset by lower than commercial rents.
In our submission we demonstrate on the basis
of an analyst's model that even where countervailing benefits
are taken into account, the net deficit to the lessee of the pubco
business model is £15,300 (para 5.5.) This analysis is based
on a pub selling 210 barrels of beer per annum so the "cost"
of pubcos to the consumer would be 25.3p or 29.7p including
VAT.
The enclosed report from Investec Securities
states that a tenant's "obligation to maintain the assets
as well" should also be taken into account which is estimated
"to cost the tenant between £5k and £10k."
In this case the analysis is based on a pub selling 200 barrels,
and so this obligation to maintain the assets would add an
additional 10p to 20p to the "cost".
As such the total "cost" of pubcos
to the consumer according to analysts is in the region of 30p
to 50p a pint.
Recent analysis on the impact on retail prices
As a result many pubco tenants face significant
difficulties in competing with other local "on trade"
outlets. (See paragraph 5.8 of our submission.)
I expanded on this in evidence to the Committee
(Q50) on 22 June 2004 quoting data from independent researcher
AC Nielsen:
"We have looked into some figures by
analyst AC Nielson which show or that we think demonstrate, that
the tenanted sector is finding it harder and harder to compete
against managed houses in town centres, and the figures show that
since the start of 2003 beer prices to consumers in the managed
sector have increased by less than 2%, but at the same time beer
prices in the sector controlled by pubcos have increased in the
region of 8%. For our members who are tenants of pubcos, that
means that they find it impossible to compete with a pub down
the road which can sell beer at 90p to £1 less pint."
The AC Nielsen figures point to an increasing
disparity between the tenanted sector and other "on-trade"
outlets. The data covers the period to March 2004 and is quoted
in a report by Investec Securities dated 14 May 2004 (enclosed).
The report states that:
"The trend line clearly shows an increase
in price by the tenanted/leased outlets of +8% since January 2003
(c 15p) versus a 1.8% increase in the Consumer Price Index (CPI)
over the same period."
The impact of the unequal partnership on consumers
In our submission we demonstrate that "the
pubco receives 71.5% of all profit and the lessee 28.5%"
(para 4.4.) Even where a notional enhancement to represent the
value of free accommodation is taken into account "the earnings
available are shared approximately 32:68 in favour of the pubco"
(para 4.6.)
As such it is worth re-emphasising the point
I made in evidence to the Committee on 22 June 2004 (Q50) that:
"I think the difficulty in giving an
estimate about what the changes would result in, in terms of savings
on beer, is that clearly the tenant is struggling at the moment
and there could be a genuine argument that more of the profits
being made by the pubco actually need to be shared with the tenant
as the priority and then with the consumer."
Not only would a more equitable sharing of profits
between pubcos and licensees potentially lead to lower prices
for consumers, it would also give licensees greater resources
to invest in their premises.
Mr Benner of CAMRA stated in his evidence to
the Committee on 22 June 2004 (Q72) that improved amenity levels
are as important to consumers as lower prices. He said:
"Of course, for consumers this is half
of the problem. The fact that they (licensees) cannot charge
enough for their beer to stay competitive means that they cannot
invest in their own pubs, and that has an effect on amenity levels
and demand for their pub eventually enters a spiral of decline."
David Bishop
Deputy Head of Parliamentary Affairs
9 August 2004
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