Examination of Witnesses (Questions 580
- 599)
WEDNESDAY 8 SEPTEMBER 2004
SOCIETY OF
INDEPENDENT BREWERS
Q580 Judy Mallaber: I think this
is for Mr Bott because you have helpfully given us the price for
Titanic Brewery which is your own brewery. Table 2 in your memorandum
shows the difference between the wholesale list price that the
tenant is paying and the net price after discount for your brewery
has gone up from £11 in 2001 to £31 in 2004, which suggests
that the discount secured by retailers from yourselves has increased
from 19% to 31% over those three years. Is that correct?
Mr Bott: That is correct.
Q581 Judy Mallaber: What are the
factors that have contributed to this increase in the margin?
Mr Bott: We as a business have
attempted to expand and to increase our trade, as any business
does, and because of the barriers to trade that are there in my
local area the only way I can solve that problem is to go to the
pubcos and attempt to trade with them. This really is because
as you move to bigger and bigger customers they are looking for
bigger and bigger margins and so that is why our margin as Titanic
Brewery is slipping. We are having to offer it in terms of discount
to increase the level of trade that we are doing. We are taking
on bigger and bigger contracts to do that which is putting more
and more pressures on the business. It increases the peaks and
troughs within the trade so that we have to grow and unfortunately
as a company our economies of scale do not grow at the same rate
as the expectations in terms of discount.
Q582 Judy Mallaber: Do you see this
increase in discount—and I assume it is both—primarily
of pub companies putting the pressure on you to give them a better
deal or the pub companies putting pressure on the tenants to raise
their prices?
Mr Bott: The price that the tenant
is buying the beer for will almost certainly be the list price
that I declare. That list price has increased over that period
but, unfortunately, I have not seen any benefit from that. The
benefit has all gone to the middle man who in return for very
little is taking a bigger and bigger slice of the cake.
Q583 Judy Mallaber: They are stretching
both sides?
Mr Bott: Both sides.
Q584 Judy Mallaber: Just to be clear,
the list price that the tenant has, what would you expect the
cost to the consumer to be if we are taking the current £66.25?
How much do you think they are selling that in their pubs at?
Mr Bott: The current price that
we are selling our beer at of £66.25 is the price that the
licensee will be charged for the beer. His margin will depend
on his operating costs, so it is very difficult to tell you exactly
what price the beer drinker is paying.
Q585 Judy Mallaber: Do you have any
idea?
Mr Bott: It would be around the
average price for beer. There is no increase in the price of Titanic
Beer, a craft produced and small produced product, over the price
that is charged for beer from a major brewery. So we are looking
at the average price depending on where you are in the country
for a pint of beer.
Q586 Judy Mallaber: So you are saying
that the price to the person in the pub of your products has changed
how over that period?
Mr Bott: It has increased in line
with inflation over that period of time but what we have seen
is a bigger and bigger tranche of the profitability going to the
middle man.
Q587 Judy Mallaber: Does it also
mean that the publican is being squeezed as well?
Mr Bott: He is forever being charged
a higher price for his beer as beer goes up in price. He has to
then pass that on to the consumer. Does that turn into reduced
sales? Is that one of the reasons that people are not going to
the pub when they can buy cheap beer from the supermarket and
stay at home? Why are they not going out to the pub, if there
is that reduction in people? It is because the price is forever
going up.
Mr Stafford: I think it is very
important to consider the price mechanic that operates in the
beer industry. There is this thing called the wholesale list price
which acts as the benchmark and it is this wholesale list price
that determines the price to the consumer. To add extra to Keith's
answer, the publican needs to make 45 to 50% GP on that wholesale
list price to make any sense out his pub. It is 45% GP in towns
and 50% and over in a rural pub. The licensee has no option. If
the price of his beer goes in at a higher price he has to pass
that on. If he absorbs that increase in cost he is not going to
make any money. We have seen that the price of beer has increased
faster in the last ten years or so than the Retail Price Index.
The pricing mechanic is why our beers are going up. On this wholesale
list price the pubcos rely on discounts on the wholesale list
price. Pubcos—and I would do the same in their shoes—do
not discourage the brewers, large and small, from putting up their
prices at any time because within their contracts with their supplying
brewers they demand margin maintenance. They will always make
the same margin so the prices can go up and up and they will still
make the same margin. Of course pubcos are sensitive to the fact
that if the price goes up too quickly it is going to knock back
sales and so on and so on, but we are seeing the effects. The
net price that the brewer receives has gone up less than the increased
discount to free trade and pubcos have taken a further increase
than the free traders have been getting and that total increase
has been comparable to what the consumer increase is. I would
like to say that in my particular brewery in the last 13 years
the net price I have received has gone up by 58%, the discount
to free traders has gone up by about 120%, the price to the consumer
has gone up by about 135%, and the pubcos are taking more than
the free traders are so they are taking more than 120%.
Q588 Judy Mallaber: Can I clarify,
if the Titanic Brewery or your brewery was selling direct to local
pubs through the Direct Delivery Scheme though SIBA, do pub companies
take a cut of that?
Mr Stafford: Yes.
Q589 Judy Mallaber: How does that
work? What sort of cut do they get of that?
Mr Stafford: Currently SIBA negotiates
the prices with the pubcos for convenience's sake enabling them
to get started. As you have heard, this has only been going less
than 12 months. It is based on banding of particular brands on
alcoholic strength. The price has been agreed with pubcos. There
is absolutely no reason why once these systems are bedded down
that the prices can then be determined individually between the
brewer and the pubco so there can be individual negotiation. That
is the way the system can work.
Q590 Judy Mallaber: How would the
cut that the pub company take compare with this 31% mark-up?
Mr Stafford: It will be similar.
Q591 Judy Mallaber: They are still
getting as big an extra amount, the only benefit is you are doing
it centrally?
Mr Stafford: The way in which
the beer is supplied to the licensee is not the whole story. It
is not our remit to comment on the lease agreements but inevitably
the lease agreement comes into it.
Q592 Richard Burden: Just in relation
to that scheme, for you to be able to run it presumably SIBA must
take a cut?
Mr Stafford: It does. SIBA is
non-profit making, we like to think that we are non-partisan,
and we make enough money to cover our administrative costs which
at the moment are £13.20 per brewery barrel.
Mr Martin O'Neill took the Chair.
Q593 Richard Burden: Among some of
the pub companies there has been some reluctance to name their
prices.
Mr Stafford: Yes.
Q594 Richard Burden: They are claiming
commercial confidentiality for the cut they take there. Do you
see that there is any legitimate case for commercial confidentiality?
Mr Stafford: Yes. I would not
tell you specific contracts that I have available for supply but
everybody in the industry really knows what is going on anyway,
I think, and it is not—
Q595 Richard Burden: It would be
helpful for us to get a handle on the scale of it.
Mr Stafford: Well, I can tell
you exactly what is happening with our breweries. I am offering
on average a free trade discount of £70 a barrel. I have
probably just lost ten customers by telling you that! I know pubcos
are asking £100 a barrel. If pubcos, and they are generally
and they do genuinely mean to be sympathetic to small brewers,
are offering me £100 a barrel then they are screwing the
bigger brewers for a damn sight more than that.
Q596 Mr Clapham: Mr Stafford, despite
the fact that the impact of the pubco actually seems to determine
the wholesale price of beer that your members sell to them, are
there any other factors there that are likely to impact on decisions
regarding wholesale price?
Mr Stafford: Certainly the brewer's
own position has to be that it is he who is making a decision
on how much of a discount the pubcos are demanding and what is
the brewer's own essential increase to cover the cost of living.
At the end of the day it is down to the brewer. The pubcos cannot
tell a brewer what their wholesale list price should be. It is
down to the brewers to decide themselves, so as much as on the
one hand I am wanting to slap the pubcos I have to put the other
side of the coin.
Mr Bott: Within the dynamic if
you increase your list price too far then obviously the licensees
will choose a different beer off the list. So all the breweries
who are being listed by a pub company have to be aware of both
the level of discount they have to give to the pub company but
also their selling price to the publican because that will affect
the level of sales. We are all paying the same level of marketing
support or whatever we want to call it. If I agree to pay £1,000
marketing support to get on to a list I have to make sure I sell
enough barrels of beer to cover that. There is an upper limit
to the wholesale list price which is how the licensees will react
to it when it is offered to them.
Q597 Mr Clapham: Given what Mr Stafford
said about the level of discount, how does the level of discount
that you are able to give to pubcos compare, for example, with
the level of discount that you are able to give, say, to an untied
tenant?
Mr Stafford: There is a 50% difference.
Q598 Mr Clapham: Which is quite a
considerable difference.
Mr Stafford: It is a considerable
difference. It is a benefit to some larger small brewers because
they probably have large trucks and they can go to distribution
networks and they are happy to receive less money for the fact
they have can deliver a whole tanker load of beer to one depot
and they can take advantage of it. However it is horses for courses.
You cannot necessarily take advantage of that. Again it comes
back to the retailer being in their own local community and using
what the small brewer has to offer but, yes, there is a considerable
difference.
Q599 Richard Burden: You recommend
ending the beer tie in your evidence. I can see the advantage
of that in terms of the local brewery trying to capture the market
that you were referring to earlier on in that local area where
they would want a direct relationship with local pub managers
and so on. Are there any other advantages that you see to publicans
other than those who do happen to have a brewery locally?
Mr Stafford: The removal of the
tie is a difficult debate for us as small brewers. We have seen
what happened with the Beer Orders of 1989. Nobody knew that the
pubcos would come about so God knows what is going to happen if
the tie is removed. As a general principle we are in favour of
the removal of the tie because as small brewers we are in favour
of the free market economy and anything that allows that to happen,
then great, we are not frightened of competition. We campaigned
for 25 years for small brewers' relief, I knew that it would result
in a flood of new breweries setting up, all in competition with
us. We have been around for a few years and we have got scores
of new breweries. We are not frightened of competition. The advantage
that we would see for small brewers is that the under-utilisation
of the small brewers' production capacity would disappear. There
is plenty of capacity out there that could be used. We see that
being in-line with the Government's policy of introducing small
brewers' relief in the sense that the Government's policy is to
see the beer industry more inclusive of small brewers in supplying
beer to the beer industry. So it will be of great benefit to small
breweries many of whom (95% of our membership) are rurally based.
The pubs under the greatest threat are rurally based and the communities
that are needing support are rurally based. So there will be a
huge benefit there from the removal of the tie.
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