Examination of Witnesses (Questions 620
- 639)
WEDNESDAY 8 SEPTEMBER 2004
OFFICE OF
FAIR TRADING
Q620 Richard Burden: Something else
that has come out of the FSB has been their thinking that you
were perhaps mistaken in your 2000 Report on the way you calculated
the RPI in that you looked at services in relation to this issue
rather than goods when looking at evaluating whether the price
of beer had gone up or not. How do you respond to that?
Mr Vickers: This may have been
indicated earlier. I am of the look-at-everything-relevant school.
As benchmarks against which to look at pricing trends I for my
part would be interested in looking at the broad Retail Price
Index and movements in that and I think the service element for
pubs probably is more relevant than the goods element, and indeed
in taking its view on the appropriate market definition, the European
Commission (upheld by the courts applying law which is just the
law we have now) has stressed the service element when taking
all on licences as the most relevant frame of reference. So I
would be eclectic and look at a variety of indicators. When you
look at what pubs and other drinking establishments offer I think
the service element is very relevant so that should be part of
the assessment.
Q621 Richard Burden: Could there
have been different results? Have you ever looked at what the
impact would have been had RPI for goods been used rather than
this?
Mr Vickers: I do not know here
on the spot what the RPI goods index is showing. Clearly as a
general trend the service element has been outstripping the goods
element and indeed one would expect that in any event. That has
been the trend over many, many years.
Chairman: Can we suspend the proceedings
because we have got to go and vote but we will continue at a quarter
past four.
The Committee suspended from 4.00 pm to
4.12 pm for a division in the House.
Q622 Chairman: We will start three
minutes earlier, but that is no bad thing. Richard, you were discussing
RPI with Mr MacDowall.
Mr Vickers: In the OFT's 2000
Report there were comparisons against the all items RPI, everything
in the pot, and the service element, and the goods were not reported.
I think that makes sense given the subject matter. If it had been
about the off-trade, if it had been a can from the off-licence
rather than a pint from the pub, then I think goods would have
been a much more relevant thing to look at. Of course anyone can
compare it with the goods element as well but I do think the more
relevant things to look at would be the all items and the service
element. This is all public ONS data. We can of course update
the charts, or the Committee may in any event have that information,
but we are four years on and if you would like that evidence we
would be very happy to send a note.
Q623 Richard Burden: If you were
going to produce a similar report now, from what you are saying
I take it that you would probably adopt the same kind of approach
again?
Mr Vickers: I think those are
the more relevant comparators, yes.
Q624 Judy Mallaber: We have just
received evidence in the last session that the price of beer paid
by the pubcos has fallen by 3% since 2001 but at the same time
the wholesale price, as paid by pubcos' tenants, we were told
has risen by 15%. In your evidence, paragraph 13, you state that
"big pub companies are continuing to lead the way in driving
down the wholesale price of beer". That statement is important
because you use it as one reason to show that some of the issues
that have been raised while of concern do not stem from any failure
of competition. What you say about prices is used partly in evidence
for that. Could you say how you reconcile the different conclusions
we have had, on the one hand wholesale prices rising but on the
other hand the wholesale price of beer paid by pub companies falling.
Mr Vickers: Bob or Christiane
will correct me if the following statement is wrong but I think
the remark that you have quoted from the submission is about the
beer prices from brewers and the competitive pressure, that link
in the chain and the marketplace that is evolving. The figures
you quoted about the wholesale prices paid by the tenants of pubcos
is a different link in the chain. You are saying that evidence
came to you earlier today. It is not something that I am personally
familiar with or in a position to comment on but again it is something
we can always look at.
Q625 Judy Mallaber: It is just you
said in this evidence it is likely that the big pub companies
as well as supermarkets are continuing to lead the way in driving
down the wholesale price of beer, so you are saying that pub companies
have had a role in driving down the wholesale price of beer but
we have been given evidence as to how in fact those prices have
gone up. However, in your submission you quote that as a reason
for saying that any problems there are do not stem from a failure
of competition.
Mr Vickers: Forgive me if I have
not understood this correctly but I think there are two things
here. The first is the price from the brewers to the pubcos. That
is one kind of wholesale price, using the word loosely, and there
is another kind of wholesale price which is the relationship between
the pubcos and the tenants and the tenanted pubs. I thought that
on the first of those in terms of the price of beer from the brewers
there is a consistency of evidence, not a conflict of evidence,
but again forgive me if I misunderstood that.
Q626 Judy Mallaber: If we are saying
that the price of beer when it gets to the pub has gone up substantially
that is the price which is going to influence how much when I
go to the pub I am paying for my pint.
Mr Vickers: Of course there are
different kinds of pubs but yes.
Judy Mallaber: A pub company pub.
Chairman: Who has been benefiting? It
is not the customer, it is not the publican, it is not the brewer,
it is the pubco because they are getting the beer at a lower price
and selling it at a price that does not reflect the drop that
they are receiving.
Q627 Judy Mallaber: This is one of
the key areas of complaint and why people are asking for an inquiry
into this whole area of the industry.
Mr Vickers: I cannot comment on
the particular evidence source that you quoted because it is not
something I have personal familiarity with. I would however say
two things. First, there is a complex contractual arrangement
between the pubco and tenant if we are talking about pubco pubs
that have tenants in them. There are all sorts of different elements
of that which can evolve in different directions through time.
The second thing is if the wedge just described is opening up,
the key issue for competition law and for us is if that is happening
as a result of competitive market forces in a setting where the
property prices, property rents and many other elements in the
chain are moving around, or is it happening because of anti-competitive
collusive agreements between the pubcos for example? If we have
evidence of the latter we will be absolutely on the case.
Q628 Judy Mallaber: Have you carried
out any recent analysis of the actual prices in practice of the
wholesalers, the retailers and the prices that consumers pay for
beer and what the various factors are that lead to those prices?
Has any analysis been done by the OFT in the recent past on that?
Mr Vickers: Bob, do you want to
comment on that aspect?
Mr MacDowall: We have kept track
of the prices paid by the consumer in pubs but because we have
not found the need to do any in-depth inquiries, as Mr Vickers
has explained, we have not found it necessary to go out to the
pub companies and everybody else and actually obtain these data.
I would say that certainly the data on the prices paid by the
pub tenant to the pub company would require a lot of in-depth
inquiry.
Q629 Judy Mallaber: But that is precisely
what is being asked. We are being told that because of the distribution
system, the power that the pub companies have and so on, in relation
both to the brewers, the people they get the beer from, and the
people that they are required to buy beer from off that list,
it is precisely that relationship that should be investigated
because it is creating a problem and is having an influence on
what happens to prices to the consumer, to you and me when we
go to our local.
Mr Vickers: I really would want
to stress again that the key thing is why this development is
happening. If it is collusion on anti-competitive agreements between
pubcos, which we do not currently have evidence of, if that is
happening we would love to have the evidence of that, and I want
to say that loud and clear.
Ms Kent: I would add, also, the
way we have looked at this issue is, well, is the retail market
competitive? Is access to the market competitive? The view that
we have come to is that the retail market is competitive. We note,
and have received evidence in the past about the differences in
the wholesale price from the brewer and the price to the tenant
but, as my colleagues have said, we have not investigated that
in detail because to do that would require significant resources,
and we see no need to. We have no evidence that the pubcos are
dominant. It would only be if they were dominant and therefore
could be excessively pricing that we would look at it. We have
no evidence of that. We have to deal with the legislation that
we have and the resources that we have and we have to allocate
them carefully. Merely because there is this differential that
has grown has not given us cause to believe that is a priority
for us to look at.
Q630 Judy Mallaber: So the argument
presented just to us, for example, as one element in this range
of arguments by the Society of Independent Brewers that they are
being squeezed out of the market by the way in which the system
operates is not one that you would think should be considered
or taken as one part of the reason why you might look at this
whole area?
Mr Vickers: The question of foreclosure
of the market to brewers has been at the heart of a series of
these competition cases before the European Commission and before
the courts and of course in the Crehan case, continuing
before the courts in this country, in relation to the pre-existing
type of arrangement, that has been looked at very closely. In
aggregate there are more brewers and more beers in British pubs
today than was the case under the previous arrangements. The fact
is there are more beers from more brewers.
Q631 Chairman: That should mean that
the rate of beer inflation should not be so great then, should
it, there will be more competition?
Mr Vickers: Yes, we are all for
competition.
Q632 Chairman: If you have more suppliers
and there is competition then prices should fall or they should
not rise as much as perhaps they are rising.
Mr Vickers: Some of the recent
price trends updating the 2000 report, we can give you the update
on that. It is ONS data.
Q633 Chairman: I have to say I would
have thought you would have had that with you.
Mr Vickers: We have some of that
evidence.
Q634 Chairman: Yes, I know. The feeblest
excuse that we get from civil servants and public bodies is that
the information that we want can only be acquired at disproportionate
expense. That is the mantra of the civil servant, the public servant,
who is hiding. It is a while since your organisation has been
here, Mr Vickers, but the OFT came before us on petroleum pricing
some years ago—Dr Berry will remember—and at that
time it was quite clear that there was not the requisite degree
of resource applied to that particular issue. Now I have to say
that petroleum prices are perhaps rather more important than beer
prices, although if you are a beer drinker you might dispute that,
but the point is that in terms of the economy it is a bigger issue.
Mr Vickers: Yes.
Q635 Chairman: In the past there
have, therefore, been questions raised about the priorities for
the allocation of resource within your organisation, but that
is not for us today to consider. It is the easiest hole into which
a civil servant can dive and we have been at this game long enough
to know that one. I just make that point to you.
Mr Vickers: We are a transparent
organisation. In time past none of our mergers advice ever saw
the light of day at all. Now that is all out there published on
the website for everyone to see, form their own views of and so
on. You mentioned petrol prices. I get a monthly report on petrol
prices which I look at very closely because as you say there are
a number of very important questions in that area. On beer prices,
including consumer prices, we do have facts and figures with us
here now and we can give you that now, I just thought it might
be more convenient if you had that later.
Chairman: It is like the distribution
area, I think it is something we are going to be a wee bit more
specific about in written form to you. We will discuss the matter.
We have aired it here but it is the second area that we are going
to have to come back to with you, distribution is one and this
price question is another.
Q636 Mr Clapham: Could I just carry
the point on because you have made comparisons between the off-trade
price and the on-trade price of beer. I think it is your evidence
that suggests the off-trade price as sold from supermarkets has
dropped quite considerably whilst at the same time over a three
year period we have seen the retail price of beer sold on-trade
increase. Surely there it raises questions, the questions being
is this because of the suppliers' prices? Is it the suppliers
that are driving that increase? Is it the margins of the pubcos
or is it the margins of the tenants that are driving the price?
Surely there is a need to look very closely at what is driving
the retail price of beer because that determines the sales and
that determines whether a pub is going to survive. In my particular
constituency, which is rural, we are seeing pubs actually closing
down. There is a real need, I suggest, to examine this. Given
that you have made this point in your evidence, what do you suggest
is driving the retail price of beer in the local pub?
Mr Vickers: If I could just give
two facts, and a richer set will be sent later. Price changes
in the four years from the end of 1999 to the end of 2003—so
close to the four year period since our report—for draught
bitter and draught lager have both moved pretty much in line with
the all items retail price index. Draught bitter a fraction under,
draft lager a fraction over. Against the services price index
they have both come down relative to that. The services price
index has been moving ahead of the all items one. If you like,
that is a snapshot of the picture in recent years. When one goes
into a pub, it is not just liquid in a glass, there is more to
it than that so in comparing the off-trade and the on-trade and
the wider service element, and whether that is getting better
or worse, and how that is evolving, from a consumer perspective
that is part of the overall picture. When, for example, comparing
a pub price to what is the can in the supermarket shelf price,
one is comparing different things and needs to be careful in doing
that (and of course the can is perhaps more likely to be fizzy
inside than what one might personally want to order in a pub).
There is that difference too. It is the deal for the consumer
overall. Price is the key but price is not the only thing.
Q637 Mr Clapham: The price being
very, very important.
Mr Vickers: Absolutely.
Q638 Mr Clapham: In particular in
the rural communities. We heard from evidence previously that
there is a feeling that some of the small brewers could revive
some of the rural public houses if only we were to look at the
tied situation. I would suggest that is an area that could be
studied.
Mr Vickers: I completely agree
price is the key. Again I refer back to the big change in the
market over a 15 year period from sole sourcing being very prevalent
to multi-sourcing. Now multi-sourcing obviously does not mean
every brewer that wants to get in gets in but it gives a range
of opportunities which is perhaps a wider one than existed in
the big brewer sole tied arrangement of old.
Q639 Sir Robert Smith: Can I just
pin down one thing in your submission, in paragraph 3, exactly
about where your remit is. You talk about what matters to you
is a focus on the consumers and " . . . when enforcing competition
law, or studying markets, we focus on how competition is working
. . . We do not hold a brief for any particular part of the economy
. . ." Clearly we have had a lot of concern from tenants
of pubcos coming to us in evidence directly and indirectly. Are
you saying that as long as the consumer is getting a good deal
you have no concern as to what happens between the raw material
and the consumer?
Mr Vickers: The OFT has been given
responsibilities by Parliament under quite a wide range of legislation,
broadly speaking, competition law and consumer law. The way we
try to summarise what is a large and rather diverse range of jobs
that we have to do is try to make markets work well for consumers.
That is a very summary statement but I think it is in that context
that you see the remark there. If in business to business dealings
there are cartels, anti-competitive agreements or mergers that
are making markets substantially less competitive, it is our job
to be in there and doing something. That is also for the consumer
benefit. It is not that we are saying "Well, let us ignore
that bit of law because we cannot see the immediate flow through
to the consumer". I think nearly all we have to do actually
does have benefits for the general public as consumers, that thread
is constant through that. This is not at all to suggest that we
turn a blind eye to responsibilities we have under the law.
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