Examination of Witnesses (Questions 640
- 660)
WEDNESDAY 8 SEPTEMBER 2004
OFFICE OF
FAIR TRADING
Q640 Sir Robert Smith: You are not
prevented, in other words, by any statutes?
Mr Vickers: Certainly we do a
lot of work in consumer facing markets and we do a lot of work
further upstream, to put it in those terms.
Q641 Sir Robert Smith: Just one specific
thing, I think you have probably covered some of the wider aspects
of it. Specifically you made the point to the FSB that if a specific
company was named that would make a difference. There was no specific
company named. If a tenant or others asked you to investigate
a named company would that make any difference?
Mr Vickers: In terms of a case
going the full distance, and of course this is a question of compelling
evidence and all the rest, then anonymity will not get you there.
There has to be particularised evidence, it will be challenged,
it may well be appealed and all the rest so that is absolutely
crucial. In terms of helping us direct our inquiries in one direction
or another, evidence that gives rise to suspicion of breach of
the law, which does not involve names, can be useful in helping
us direct our inquiries. We would not want to go on an exercise
on evidence that lacked initial credibility so there is a general
credibility issue. I think the key point is the more specific
and detailed the information the more helpful it is and for going
the full distance it is essential. If it was a question of credible
evidence giving rise to suspicion of a cartel being in operation,
even without names being named, we would want to receive that
too.
Q642 Judy Mallaber: For the market
to work well for me as a consumer, in the phrase you have just
used, obviously I want them to have prices cheap but also I do
not want, as has happened in my local pubs, publicans to be driven
out of business because of the way in which things like the rent
levels are determined, and that has certainly happened that publicans
have been forced out and there has been a period of great instability
in local pubs as a result. In your submission you say you "
. . . are aware that the determination of rent levels has been
a major source of concern amongst tenants" and that "
. . . this can give rise to complaints that rent levels bear no
relation to the business being done in tenants' pubs". Is
this something that you have looked at and have you done anything
to alleviate those concerns because it does have a direct impact
on the consumer if it is creating instability in local pubs?
Mr Vickers: Our job in this area
is principally a competition law job and we have talked about
the main elements of the relevant law in that area. When I am
a consumer there are two things I want, one is that people are
competing to serve my needs and also that I am aware and understand
what I am going into, especially if it is some longer run commitment.
I think one very striking characteristic of the evidence that
has come to the Committee is a contrast between claims that there
are many people who would like to be pub tenants, claims there
is a great queue of people who want to do this, and then evidence
of what the FSB calls the disenchanted tenant, evidence that when
people were in contractual relationships, pubcos and perhaps others,
things did not turn out as they expected them to be. That I do
not see immediately as a competition law issue, but that is not
to deny that it is a problem at all, and we are aware of some
of the evidence that has come to the Committee such as that which
I mentioned, so there is awareness of that. I think the same principle
as in a consumer situation is that understanding the arrangement
one is going into and that the goalposts are not moved in untoward
ways, that is a very important principle. I think that relates
to the contractual and business to business relationships rather
than being a competition law issue or a consumer law issue. I
do stress that is not to say it is not a problem but in terms
of our responsibilities under competition and consumer law that
would be our approach.
Q643 Judy Mallaber: You are saying
there is no role at all for the OFT in dealing with those concerns?
Is that what you are saying? Do you have any views on, say, in
that case, who might be able to take action? Could the Government
do anything to help deal with the kind of the concerns that have
been raised over rents?
Mr Vickers: We would come at this
with our competition law responsibilities. As I mentioned there
have been cases involving tying before the European authorities,
and given that the UK now has competition law in this area which
pre-2000 we did not have in the same way, cases of that kind,
depending entirely on how the facts unfold, might come to us but
I would echo the key point that the arrangements which were found
to come within the scope of the prohibition and anti-competitive
agreements, agreements at the heart of the Crehan case,
for example, are the old style brewer tie arrangements which differ
from the multi-sourcing pubco arrangements. Similarly our merger
job is to deal with markets not getting substantially less competitive
as a result of merger and in a very indirect way that might play
into the amount of choice that is available to would-be tenants.
When you ask about Government more generally, that is going beyond
our remit but you have asked the question. I think of the review
that started in the spring of commercial lease law, possible reform
in that area. I think of the issues around upward only rent reviews,
it is not unique to pubs by any means but that is a very interesting
set of issues and, speaking personally, I think it is puzzling
how prevalent upward only rent reviews remain. It is good that
is the subject of a Government inquiry and it will be interesting
to follow and see how that evolves. I think another striking point
to come out of some of the survey evidence, I cannot comment on
the comprehensiveness of it, was the very substantial proportion
of tenants who are going into extremely serious contractual relationships
with large financial consequences without legal advice. If that
survey evidence is a true reflection of the wider picture that
seems very important and a potential source of major problems.
A lot could be done in terms of business support in that area,
that seems a quite important set of issues. I think the responsibility
is on both sides of any contractual relationship. I do not want
to stray too far beyond my brief but I think there are problems.
I do not think they are competition or consumer law problems which
is what matters for the job that we have.
Q644 Chairman: Have you looked at
franchising arrangements, because that is basically what we are
talking about here in one respect. The pubco is offering the franchise
of a licensed premise to someone, and we can arm wrestle about
the differences. Have you looked at that? Does that fall within
your remit?
Mr Vickers: If there were competition
law questions relating to franchises then, yes. Pubs are not exactly
a franchise arrangement. There are branding issues, and there
are similarities and there are differences. Another thing which
comes to mind which we certainly have been much involved with
is car dealerships, which would be an example in a completely
different sector. The Competition Commission, ourselves, the Consumers'
Association are very much involved at differing stages in that
issue which is, again, in a way being led at European level but
there are important developments here.
Q645 Chairman: We have taken an interest
in this matter in the past.
Mr Vickers: Absolutely. There
are issues about undoing the other kind of tie, the service tie,
so that is an example of a yes in response to your question where
we have been involved.
Q646 Chairman: There is the rental
issue, the nature of the lease, there is the fact that when the
person goes into the deal they are not always given access to
all of the information. Now I am not clear why that is not allowed
and we are not quite sure who we should be talking to in this
respect. Is it just the consumer issue, the party entering into
the contract is not being given all of the information. If it
was the pubco that was providing the information would they be
liable if the performance did not follow through? There are aspects
there that we have touched on and we are not quite sure, I think,
but what I want to do is to discount you as a potential player
if that does not fall within your terms of reference.
Mr Vickers: Business to business
contract law and contract issues are generally outwith our remit.
If they are caught by the competition law prohibition on anti-competitive
agreements then they are within it but as a general matter they
are outside it. On business to consumer contract issues there
is a branch of law and regulations where we do have responsibility.
B to C, to use the shorthand, we do have a role in certain context,
B to B generally not.
Q647 Linda Perham: We have mentioned
the beer tie before, it was obviously originally designed to protect
the production and supply of beer but as most pubcos are not brewers,
and they offer a range of different brewers' products, do you
have a view on whether the beer tie can still be justified?
Mr Vickers: It is now, of course,
a different kind of tie from how it was even 15 years ago when
it was tied to the beers of a single brewer. If one went into,
let us say, a Bass pub one would typically find Bass beers only
or principally. Of course there are a number of pub owners now
who are brewers too, though not the big nationals of the kind
who were at the centre of the 1980s inquiry, and multi-sourcing
is what the pubcos typically do. There is not a tie to any particular
brewer, a variety of options are there and are taken up and are
periodically retendered so these key points about the multi-sourcing
and periodic tendering, those are at the heart of the competition
cases before the European Commission. The principal change in
factual circumstance, as to why the European Commission took a
quite different view about those than it had about the kind of
arrangement that existed previously, means there is more opportunity
for more brewers to get in on the scene in a multi-sourcing arrangement
than in the old world where many, many pubs were tied to single
brewers. I think the options have opened up in that way.
Q648 Linda Perham: In the present
situation do you think as far as the consumer is concerned the
existence of the beer tie is not a disadvantage?
Mr Vickers: I think in a multi-sourcing
world, when you go into let us say the same pub as you did 15
years ago, you will now typically have more beers on offer from
more brewers and I think that is to the consumers' benefit.
Q649 Linda Perham: We have heard
a range of opinions as to whether it should be abolished or not.
I want your view.
Mr Vickers: There are different
business formats, there are completely free houses and there are
more of those than there used to be. At the other end of the spectrum,
there are the managed outlets where it is employees rather than
tenants. Then there are the tenanted arrangements where there
is a combined relationship which is, of course, at the heart of
the inquiry of the Committee, where there is a broader choice
than there used to be, maybe a changing choice appears on offer
but it is a restricted one, and where there is financial, property
and other support from the pubco to that tenant's operations.
If that intermediate business format disappeared I think there
would be some losses all round from that. It has been called a
halfway house, it is an intermediate way of doing it, one element
of the variety that now exists and I do not see anything intrinsically
problematic about it. In a number of ways it increases choice
relative to what would otherwise be available.
Q650 Linda Perham: Thank you for
that. You issued a press release about the acquisition of Laurel
by Greene King and you have said that you will not be referring
it to the Competition Commission because you are considering whether
to accept undertakings from Greene King to divest 13 pubs in seven
petty sessional divisions to purchasers approved by yourselves.
What steps are you taking to ensure that these purchasers will
continue to use premises as on-licensed premises so that competition
is not reduced further?
Mr Vickers: As you say, we issued
a press notice with our proposed decision on that case. It is
still open for public comments so that case has not closed, and
it would be quite wrong for me to pre-empt what is mid-consultation.
Q651 Linda Perham: How long is being
allowed for the consultation?
Mr Vickers: I believe it is 20
September, if I am wrong about that I will send a correction note.[1]
Q652 Linda Perham: Okay.
Mr Vickers: It is a period of
just a few weeks, which is normal in cases of this kind. Any pub
that changes hands, the future owner, I presume, may be subject
to lease requirements or licensing authority requirements but
would be free to operate the business as they saw fit. I imagine
that freedom includes the freedom to change it from being a pub
to being something else, just as things which used not to be pubs
can become pubs, that is just the normal business freedom.
Q653 Linda Perham: It is not anything
you would want to have control over, or expect to have, that they
remain as on-licensed premises? It is free to them, you have just
said, to do what they want with it?
Mr Vickers: I do not think there
is more I can say now on the circumstances of approval in a merger,
especially a live merger context.
Ms Kent: I was just going to comment
my land law is probably not as it should be but obviously the
properties will have the user classification for the property
and obviously if they wish to change the user classification they
would have to apply to the local authority to change the user.
There are restrictions on the use of the property, ie if it is
currently restricted to use as a pub.
Mr Vickers: In past cases the
pubs have carried on being pubs. I do not think this has been
a practical issue.
Q654 Linda Perham: It is a competition
issue, is it not?
Mr Vickers: It could be. I can
see that it could be yes, and it arises in other contexts too.
We have had previous cases involving many more pubs actually than
in this case where the pubs have carried on being pubs in other
competing hands.
Linda Perham: I will leave it there.
Q655 Chairman: I think we are almost
at the end here and I just want to clear up a couple of points.
The old order was where the brewer was the producer of the beer
and the owner of the property and they dictated the terms to the
tenant. The new set up is that the brewer produces the beer, brews
the beer, sells it on to a wholesaler who also owns the property.
Now it would be possible for someone to be the tenant of a property
company and still have a tie with a wholesaler who would be separate.
Have you considered the possibility of requiring the pubcos to
divest themselves of their wholesaling function? Is this form
of vertical integration anti-competitive or not or could it be,
given the problems which arise over leasing and the confusion
that arises over leasing?
Mr Vickers: Obviously there is
no universal model in the market now. There is a mixture, a variety
of things that one sees but what you describe has grown very rapidly
in recent years. I do not see, for reasons we discussed earlier,
a competition law basis to mount a case of divestment of the kind
that you mention. I do not think that question has arisen and
it has not arisen for that very reason.
Q656 Chairman: There seems to be
in your case, if I can put it this way, some recognition that
there is a virtue in diversity. When does diversity stop and confusion
and anarchy begin?
Mr Vickers: There is no intrinsic
virtue in diversity, there is a virtue in choice and it goes back
to basic fundamental consumer reasons. I was just pointing out
the fact that there were a variety of arrangements across the
marketplace not a universal model.
Q657 Chairman: The difficulty is
that the hapless would-be tenant goes to one of ten property companies
wanting to become a publican. They are then offered a variety
of leases: wet, dry, discount, variable. Do you just hide behind
the fact that there are a number of different leases? Have you
tried to identify them? Enumerate that there is classification
A, B, C, D, there are 29,000 properties I think approximately
and there are ten big players accounting for them. Have you asked
the ten property companies to provide you with a list of the various
leases that they have and have you compared and contrasted them?
Mr Vickers: No. This is not a
question of hiding at all.
Q658 Chairman: Why do you not?
Mr Vickers: I will tell you why.
The competition cases were looked at at European level, then the
standard forms of leases were scrutinised very closely indeed
and we have had regard to that. There would be reason for us to
investigate that set of issues if and only if we had grounds to
suspect that competition law might be breached. We have not had
evidence of that kind and we are not near the thresholds—I
will avoid the word "trigger"—where the provisions
on abuse of dominance come into play. So that is the reason.
Q659 Chairman: Where does the need
to prove abuse of dominance stop and just force majeure
start? The fact is that these individuals, sometimes badly advised,
might well be confused by the range of leases available to them.
Would it not be better to try and get a set of standard leases
for what seems to be a confused area of the market?
Mr Vickers: I think the concern
you highlight underlines the importance of good advice being available
to people contemplating going into these contractual arrangements
and having appropriate business support. I think that would be
a very positive thing to do. It would not be the hapless would-be
tenant, it would be the informed would-be tenant who would go
in knowing the score better than perhaps some have been able to
go into these arrangements. On the competition law question, the
prohibition on abuse of dominance comes into play when and only
when there is a dominant market position in the competition law
sense of the word, and that is not where we are currently. As
the facts move on and change who knows? You can ask similar questions
about many, many other industries and markets and there are commercial
arrangements and all the rest of it.
Q660 Chairman: There are not 30,000
or 29,000 outlets, there are not that many of these quasi-franchising
arrangements in a lot of other markets, this is a rather unique
industry. The post office has 17,000, it is the biggest retail
chain in the UK. This is rather bigger stuff, even though it is
broken up. We have had expressions on the one hand of, you might
almost say, arrogance from the pubcos saying "We have all
this range of stuff, we can suit anybody's purpose, if they do
not like it they can walk away because there is always another
one coming along who will accept it"; that is the one side
of it. The other side of it we have had people who have burnt
their fingers but there are others who have not burnt their fingers
but who are nevertheless working within the terms of leases which
they find as they get more experienced are not what they would
want but really have no means of addressing the situation. Perhaps
what there should be is clarity of option open to people. Now
I am not sure if you are supposed to do that but it is certainly
in the interests of the pubcos to confuse people.
Mr Vickers: I think that is not
part of the job that we have been given and it is not the job
that we would seek. This area of business to business contract
problems not only can arise but they do arise. A lot of evidence
has come to the Committee in relation to pubs, and we are not
for a moment saying that those are non problems but we are saying
that our competition law job applies in the way that we have described
and we are constantly on the case, and particularly want evidence
on any anti-competitive agreements. Our consumer law job deals
with business to consumer dealings but since tenants are businesses
the law where we have responsibilities is not on target as far
as these problems are concerned.
Chairman: Thank God for that says you.
I take the point. I am grateful for the evidence you have given
us. We will get back to you on some of the points we want to get
clarified. We wanted as much today to find out what you were responsible
for and what you were not and your frankness has enabled us to
say "Well, we will have to chase after somebody else or make
recommendations elsewhere". We are most grateful. I do not
think we have any other questions at the moment so thank you very
much for the time and thank you for your trouble.
1 Note by witness: The
OFT accepted undertakings from Greene King on 6 October 2004.
These undertakings require that any proposed purchaser must be
approved by the OFT as having the "financial resources, expertise
and incentive to maintain and develop the Licensed Premises as
a viable and active business in competition with Greene King and
other competitors". Back
| 
