APPENDIX 26
Memorandum by the Society of Independent
Brewers
Contents
1. Introduction
2. Pub Retailing Industry Structure
3. Small Brewers
3.2 Small brewers' barriers to supplying
pubco tenants
3.3 Pubco role in additional barriers to
supply
4. Conclusions
5. Proposed requirements
6. Recommendations
1. INTRODUCTION
1.1 This paper documents the written evidence
of the Society of Independent Brewers to the Trade and Industry
Select Committee inquiry into pubcos.
1.2 The Society of Independent Brewers (SIBA)
is the trade association of the UK's independent brewing industry
and numbers some 300 brewing members, mainly, but not exclusively
drawn from micro and local brewers.
2. PUB RETAILING
STRUCTURE—PUBCOS'
DOMINATION OF
UK PUBS
2.1 The UK is estimated to number some 60,000
public houses.
2.2 There are three categories of pub owners:
3. Pub operating companies, or pubcos.
2.3 Pub companies' share of pub ownership
has grown inexorably since the introduction of the Beer Orders
and now stands at a minimum of 55% of UK pubs:
Table 1
GROWTH OF PUBCOS DOMINATION
|
| Year | Total Number
| % Share of pubs at a
constant 60,000 universe
|
|
| 1991 | 12,700
| 21.1 |
| 1995 | 18,800
| 31.3 |
| 1998 | 21,700
| 36.2 |
| 2000 | 30,400
| 50.7 |
| 2003 | 32,950
| 54.9 |
|
2.4 A practice of subleasing pubs between pubcos exists.
This has the effect of double counting pubs thus inflating the
pub universe which in turn understates the calculation of pubcos'
domination. Thus the numerical control of the UK pub market by
pubcos is even higher than 55%. The commercial practice of sub-leasing
has distorted regulatory perceptions of market place realities.
2.5 Furthermore the competition threshold is defined
as the ownership of 25% of pubs within a trading area (Petty Sessional
Division) by a single company. This focus on numerical share ignores
the business model of pubcos which, by a process of estate churn
ie the regular disposal of the worst performing pubs and the acquisition
of better performing pubs, results in pubcos' value share of liquor
sales in excess of their numerical share of pubs.
2.6 Pub ownership is also becoming increasingly concentrated
as by the spring of 2004 the three largest pubcos accounted for
31% of UK pubs. In 2002 the top three pubcos only accounted for
23% of all pubs.
3. SMALL BREWERS
3.1 Role in market
3.1.1 The term "small brewer" is intended to
distinguish smaller brewers from the regional, national and international
brewers. HM Customs and Excise further distinguish between micro,
local, regional and national brewers on the basis of annual production
volume. A microbrewer produces up to 5,000 HL, a local brewer
between 5,000 and 30,000 HL and a regional brewer between 30,000HL
and 2 million HL pa
3.1.2 Small brewers number some 450 and account for approximately
2.5% of total on-trade beer volume.
3.1.3 Small brewers employ at least 10% of all those
directly employed in the UK brewing industry. These jobs are typically
located in rural communities assisting the potential to diversify
the rural economy and thus relieve pressure on the infrastructure
of the urban economy.
3.1.4 The flexible smaller brewer is more innovative
than his or her larger counterpart where an overriding commercial
concern prohibits experimentation. There are over 2,000 beers
brewed by small brewers with frequent introductions of new products.
Innovations are made in a wide range of functional product attributes
including colour, flavour and taste. That these are valued by
the drinker is evidenced, for example, by the champion beer at
last year's Great British Beer Festival—brewed by a small
brewery—winning despite having a relatively low alcoholic
strength of 3.8%. This is at odds with national and international
breweries' focus on driving sales of existing higher alcoholic
strength lager brands (eg Scottish Courage acquisition of Kronenbourg,
Interbrew drive on Stella Artois, Heineken premium strength relaunch).
3.1.5 The small brewer thus fulfils an essential role
by offering a breadth of choice of quality beers to the retailer
and drinker alike creating innovation and diversity within an
industry increasingly characterised by commoditization.
3.1.6 Such diversity both encourages and is supported
by an indigenous, entrepreneurial supply chain. This includes
traditional natural ingredients providers such as hops and malt
growers and merchants, small bottling plants, micro brewing plant
manufacturers and consultants, university researchers and regional
wholesalers as well as the free pub trade.
3.1.7 The free pub trade is most supportive of the small
brewer and together they play an important role as the social
and economic heart of the local community. There are, however,
significant pressures on the traditional free trade and independent
pubs are reported to be closing at the rate of 20 a month. This
is due in part to increasing consolidation of pub ownership thus
contributing to the loss of business for small brewers as well
as the disintegration of community spirit.
3.1.8 HM Government has sought to assist the financial
stabilization of small brewers and provide investment sources
through the introduction of progressive beer duty (PBD or small
brewers' relief, SBR, June 2002) and its imminent extension (June
2004) to breweries with an annualized output of less than 60,000
HL.
3.1.9 Small brewers are thus being actively encouraged
to play a wider role in the supply of the UK beer market through
the revision of duty legislation. This has reduced barriers to
entry and eased some barriers to growth but small brewers' low
share of the beer market is partly due to remaining barriers to
growth, including their lack of pub ownership, due in part to
pubcos, and the difficulties in trading with pubcos and their
tenants.
3.2 Small brewers' barriers to supplying pubco tenants
3.2.1 Poor freedom of supply and consumer choice
3.2.1.1 The Block Exemption was originally designed to
protect the relationship between brewers and their pub estates
in the context of the UK's unique tie system. The emergence of
pubcos has broken the relationship between brewers and pubs. It
is in no way appropriate that protection from competition should
be permitted to companies which are neither producers nor retailers,
but property companies.
The Block Exemption permits a tie on beer supply restricting
licensees' choice of beers to those which are centrally sourced
and listed. This suppresses the entrepreneurialism of both licensee
and small brewer as well as the freedom of consumer choice.
3.2.1.2 SIBA's membership surveys (November 2002 and
November 2003) indicate that:
— More than 70% of small brewers are not able to
count licensees of the larger pubcos (1,000 pubs and above) among
their customers;
— Typical penetration of larger pubcos' pub estates
by small brewers' beers is a mere 5%;
— There is an overwhelming desire among small brewers
to trade with pubco licensees as 90% of small brewers would be
prepared to deliver directly to pubco-controlled pubs.
3.2.1.3 CAMRA's independent market research (December
2003) indicates that:
— The range of beer brands available in pubs is
considered important or very important by 66% of men and 27% of
women;
— 54% of pub-goers agree that at least one beer
sold in every pub should be locally brewed; this percentage increases
with frequency of pub visits;
— 71% of pub-goers agree that pubs selling locally
brewed beer help sustain the local economy.
3.2.1.4 There is evidence of pubco's disproportionate
focus on lager to increase profitability by demanding discounts
and financial contributions from the largest brewers who are now
frequently able to additionally finance these through global economies
of scale:
"Lager is sold at a higher retail price so
this is good for everybody. Over the last couple of years we in
Punch have, through business relationship managers, pushed (lager)
training more. Marketing consolidation is pushing (this trend)
and Punch is pushing it further." Francis Patton, Commercial
Director, Punch pubco quoted in Morning Advertiser 13 May
2004
3.2.1.5 The disproportionate focus on lager has a consequent
implication for the availability of indigenous beer types. Cask
ale, a beer type unique to the UK, is now available in only 38%
of UK pubs despite the fact that nine out of 10 licensees who
offer it in their pubs claim that demand is either growing or
stable. (source: Nielsen)
3.2.1.6 Restricted ability to develop business through
direct partnerships with suppliers may well play a part in the
high turnover rate of licensees within pubcos. Punch, for example,
declared in their recent interim 6 monthly results to have recruited
445 licenses, equivalent to 6% of their estate.
3.2.1.7 Pubcos tend to outsource beer distribution to
a few centralized third party logistics companies with consequent
implications for food miles. This is the larger retailers' practice
of enforcing the shipping of goods over long distances from supplier
to a regional warehouse, back to a retail outlet which may be
only a few miles from the originating supplier.
3.2.1.8 Third party logistics companies' use inflexible
enterprise resource planning systems, eg SAP, with a resultant
lack of willingness or ability to handle a broad product range
and narrow consumer choice.
3.2.1.9 Alternative beer distribution arrangements are
also dwindling with the recent acquisition of the largest independent
beer wholesaler, Beer Seller, by one of the big three centralised
logistics companies, Scottish Courage. The Beer Seller, previously
positioned as a cask beer specialist, is to be integrated within
Scottish Courage's existing wholesaling operation, Waverley, as
part of their plans to take £45 million out of their supply
chain costs. SIBA is concerned that the loss of focus on cask
beer and job cuts within the newly merged company will further
threaten this company's ability to deliver small brewer's beers
thus narrowing retailer and drinker freedom of choice even more.
3.2.1.10 SIBA has recently unveiled an initiative to
enable direct delivery between small brewer and local pubs owned
by pubcos. The new "Direct Delivery Scheme" offer licensees
the opportunity to have a permanent choice of SIBA members' beers
delivered locally rather than rely on a guest ale programme. This
enables the potential of trading locally while retaining the efficiencies
and economies of central sourcing and administration. Licensees
are thus enabled to participate fully in developing the local
trading community and assist in the reduction of UK road freight.
The scheme has been embraced by three pubcos but has yet to find
broader support, despite SIBA's ability to now demonstrate sales
levels over and above established guest ale programmes.
3.2.1.11 As stated, there is an overwhelming desire among
small brewers to trade with pubco licensees as 90% of small brewers
would be prepared to deliver directly to pubco-controlled pubs.
3.2.2 Financial effects of Beer Tie
3.2.2.1 Pubcos' operating practices, encouraged by the
beer tie, make a requirement for listing fees, marketing contributions
and significant discounts compared to list prices. List prices
are artificially inflated in order to be able to offer ever bigger
discounts demanded by pubco central sourcing departments:
— Punch reported an increase in gross profit margin
on beer sales of 2.2 percentage points in their 2003 financial
accounts;
— Enterprise Inns reported a similar increase of
0.1 percentage points on beer and cider business in 2003, ahead
of their full acquisition of Unique and even greater buying power;
— The Times reported Punch's 2003 acquisition
of Pubmaster would result in estimated procurement savings of
£4 million. Beer represented 84% of Punch's cost of sales
in 2003, thus beer becomes the overwhelming focus for "procurement
savings" or larger discounts.
— Punch's 2003 annual report (p.7) states:
"We successfully renegotiated our supply contract
with Coors and Interbrew. Both supply contracts resulted in improved
margins overall."
3.2.2.2 The increase in pubcos' buying power due to an
ever consolidating pub industry results in a gross imbalance in
the relationship between central buying departments and local
brewers. Ballards Brewery, for example, has not been allowed to
increase its price for the last three years to the one Enterprise
Inns' pub it trades with despite annual increases in list prices.
3.2.2.3 Few small brewers can afford these financial
demands. Those that do pay them are not realizing any growth in
their net selling prices and may even have to reduce net selling
prices in order to be able to trade with pubcos:
Table 2
WHOLESALE LIST PRICE AND AVERAGE NET PRICES OF TITANIC
BREWERY
|
| 2001
| 2004 | Difference
|
|
| £ per firkin
| £ per firkin |
% |
| Wholesale list price | 57.50
| 66.25 | 15.2
|
| Net price after discount | 46.63
| 45.44 | (2.6)
|
|
3.2.2.4 Discounts are thus encouraged by the tie on beer
supply and artificially inflated price lists set to enable a larger
discount to be offered. Brewers are then not discouraged by the
pub groups from regularly raising wholesale list prices. Pub groups
sell to licensees at these wholesale list prices and, therefore,
price increases to the consumer appear to be determined by the
brewer but in fact are partly driven by the retailer. Pub groups
demand maintenance of their discount percentage, pass on wholesale
price increases to their licensees and benefit from directing
the blame for price increases on to the brewer.
3.2.2.5 Interbrew (Market Report 2004) claim that the
price of beer has risen 10% faster than inflation over the last
10 years; that on-trade retail prices have risen by an average
of 8% over the last two years alone and that beer price inflation
is increasingly driven by retailers.
3.2.2.6 The British Beer and Pub Association (BBPA) published
data (September 2003) sourced from the Office of National Statistics
which indicate that beer prices through the on-trade have the
highest inflation of any itemised drinks category:
Table 3
UK RETAIL PRICE INDEX OF BEER AND OTHER DRINKS (JANUARY
1987=100)
|
| | | Beer
| |
| All items
| All alcholic drinks
| All sales | On sales
| Off sales | Wines and Spirits
|
|
| April 2003 | 181.2
| 199.5 | 215.3
| 227.6 | 157.3
| 178.1 |
|
3.3 Pubco role in additional barriers to supply
3.3.1 Loss of customers
3.3.1.1 Small brewers are losing customers because of
the acquisition of customers by pubcos who may then refuse to
allow their new tenants to trade with smaller brewers.
3.3.1.2 In SIBA's latest (November 2003) membership survey
two out of three small brewers had lost customers to pubco acquisition
in the past 12 months. The average number of customers lost in
this fashion is six. Almost a quarter of small brewers reported
losing 10 or more customers to pubco acquisition.
3.3.1.3 This weakens the link between local pub and brewer
and adds to the disintegration of the social and economic role
of community pubs and brewers
3.3.1.4 Small brewers' response to this is to:
— Increase delivery distances to find new customers
thus adding to the problem of food miles and lowering profitability;
— Introduce bottled beers, frequently obliging the purchase
of bottling equipment, to enable off-trade sales, albeit at an
even lower profit margin.
3.3.2 Low level of pub ownership
3.3.2.1 The savings from reduced beer duty payable by smaller
brewers were partially intended by the Government to enable brewers
to buy their own pubs in order to secure distribution. SIBA's
membership survey reveals, however, that purchase of a pub is
the least likely use of these financial savings; was achieved
in 2003 at levels even less than those foreseen a year earlier
and remains unlikely in 2004.
3.3.2.2 A low level of pub ownership is due to a number
of factors including the low availability of suitable pubs to
buy and that when pubcos sell off pubs as part of their estate
churn business model they are frequently only made available in
large batches of poorly performing pubs, clearly beyond the means
of individual brewers.
4. CONCLUSIONS
4.1 Pubcos arose from the 1989 report by the Monopolies
and Mergers Commission entitled "The Supply of Beer".
The report was concerned with the market power of integrated brewers
and required the divestment of pubs by those brewers with an estate
in excess of 2,000 pubs. This gave rise to the pub operating companies.
4.2 The oligopolistic pubcos have increased in size to
the stage where they now enjoy a complex and growing monopoly
in the UK market for point of sale consumption of beer. This is
resulting in:
an ever increasing concentration of buying power;
an imbalance in the power relationship between buyers and
suppliers;
the erection of barriers to entry into the pub ownership market.
4.3 The exercise of greater buying power is facilitated
by the existence of the beer tie where the volume benefit from
successful negotiations with pubcos is hugely significant as is
the risk to volumes of failed negotiations.
4.4 The exercise of buying power within the context of
the beer tie is to the detriment of freedom of trade, consumer
choice, innovation, entrepreneuralism, diversity, social cohesion
and wider economic well-being.
5. PROPOSED REQUIREMENTS
Proposed umbrella themes to be addressed in making recommendations
include:
— Finding ways to increase access for all to the
beer supply market;
— Assistance of development of local communities;
— Creation of an environment more favourable to
entrepreneurial investment;
— Creation of greater transparency in rental agreements.
6. RECOMMENDATIONS
6.1 Explore ways to weaken or abolish tie on beer supply,
especially for cask ale, thus:
(a) amend the Block Exemption allowing only small
estates to retain the tie;
(b) increasing choice of products for licensees to
offer consumers;
(c) encouraging greater innovation and diversity
in beer market;
(d) encouraging greater price competitiveness in
beer market.
6.2 Explore ways of improving the pub's role in the community
through:
(a) direct delivery schemes;
(c) extension of rate relief to include all community
pubs and based on turnover rather than property value.
6.3 Explore ways to encourage new free trade licensees
by:
(a) encouraging pubcos to sell individually rather
than in blocks and to parties other than pubcos and/or property
companies;
(b) improve funding availability to individuals;
(c) offer first refusal to tenants whose pubs are
to be sold.
6.4 Encourage pubcos to apply rents at rates commercially
appropriate to tenants:
(a) based on individual pub turnover;
(b) which encourage licensee entrepreneurialism.
This would encourage greater pubco interest in increasing
pub turnover through a more diverse product range and licensee
freedom in developing sales partnerships with suppliers.
| 
