Pub Companies - Business and Enterprise Committee Contents

6  Competition issues

159.  Many witnesses claimed the pubco model violated competition law principles. The Fair Pint Campaign, CAMRA and SIBA all recommended that the beer tie should be investigated by the Competition Commission. Kossway made similar recommendations about the AWP tie. Tim Farron has also tabled an Early Day Motion calling on the Department for Business, Enterprise and Regulatory Reform to "refer the matter of the supply tie and rent formulation to the Competition Commission with a view to addressing the dominance of the big pubcos in the pub market."[244]

The Monopolies and Mergers Commission investigation

160.  In 1989 the Monopolies and Mergers Commission (MMC) (now the Competition Commission) issued a report on the retail market for beer following a detailed investigation.[245] The Report found that a complex monopoly situation existed by virtue of the fact that over half of all public houses were owned by six national brewers who accounted for three quarters of UK beer production. The MMC concluded that this complex monopoly operated against the public interest in the following ways:

a)  the price of a pint of beer in a public house had risen too fast in the previous few years;

b)  the high price of lager was not justified by the cost of producing it;

c)  the variation in wholesale prices between regions of the country was excessive;

d)  consumer choice was restricted because one brewer did not usually allow another brewer's beer to be sold in the outlets which he owned. The same restriction was also often applied in loan-tied outlets;

e)  consumer choice was further restricted because of brewers' efforts to ensure that their own brands of cider and soft drinks were sold in their outlets;

f)  tenants were unable to play a full part in meeting consumer preferences, both because of the tie and because the tenant's bargaining position was so much weaker than his landlord's; and

g)  independent manufacturers and wholesalers of beer and other drinks were allowed only limited access to the on-licensed market.

We believe that many of these conditions can be found in the market today.

(a) and (b) Price of beer and lager

161.  CAMRA have found that the price of beer in pubs has increased faster than brewery beer prices over the last ten years. Between April 1998 and April 2008 the UK producer price index (including excise duty rises) for beer increased by 31.8%, whereas the retail price index for beer on-sales increased by 39.4%.[246] CAMRA have also analysed, from surveys they have carried out in the last year, the difference in the price of beer between the on-trade and the off-trade. Their data shows that in August 2008 the off-trade price of a standard lager was as low as 81p a pint. Surveys carried out pre and post the March 2008 Budget found standard lager selling in the on-trade at between 265p (March 2008) and 282p (June 2008). On this basis, the on-trade price of a pint of beer can be estimated to be about 3.3 to 3.5 times more than the off-trade price.

162.  This graph from Morgan Stanley demonstrates the divergence in price between the on and off trade since a couple of years before the Beer Orders in 1989:


In addition the following chart from Morgan Stanley shows the price difference of beer between managed pubs, leased pubs and supermarkets with recent price increase differences:

Fig. 7

Source: Morgan Stanley

163.  The evidence relating to the tie's effect on prices overall is not altogether straightforward. There is some indication that the differential between tied and managed pubs has reduced recently, and managed and free of tie pubs can, of course, charge lower prices and frequently do so, for example Wetherspoon's much promoted 99p pint. However, it is possible that the large market share held by the pubcos may result in their prices setting a norm which is followed by the rest of the market, subject to occasional discounting. The Good Pub Guide told us "Our impression is that both the higher-than-inflation increases in pub beer prices shown year after year by our annual surveys and the significant regional variations in pub drinks prices owe much to the influence of the biggest pubcos."[247] We believe this needs to be investigated.

(d) and (e) Consumer choice

164.  The fact that tied pubs are restricted to the pubco's list of approved products restricts the lessee's ability to respond to the market. This is detrimental to the consumer. To give one example, the supply of locally brewed beers may be affected. A report in 2007 found that two thirds of licensees were aware of the demand for local beer but only a third were actually offering it to their customers.[248] In addition the Society of Independent Brewers (SIBA)'s figures showed that only 15% of tenancies and 31% of leased pubs stocked a local brewery's beer, compared to 56% of freehouses. The reasons for this are explored more fully in paragraphs 166-168 below.

(f) Tenants' bargaining position

165.  This has not improved since 1989. As we have seen lessees are still in a much weaker bargaining position than their pubco. This means that they are unable to negotiate discounts, guest ale provision or lower rents, all of which benefit the consumer through lower prices and wider choice. As one lessee told us "Yes we signed a legally binding contract but I didn't sign up to massive price increases year on year."[249] Fair Pint Campaign gave the following table showing the increase in Enterprise's prices:

Table 13: Enterprise Price Increases
Brand 2002 price/pint 2009 price/pint % increase
Heineken £1.09£1.67 53%
Stella Artois £1.15 (5.1% ABV) £1.55 (5.0% ABV)34%
Hoegarden £1.30 (5.0% ABV) £1.82 (4.8% ABV)40%
Boddingtons Draughtflow £0.88 (3.8% ABV) £1.35 (3.5% ABV)53%
Banks Bitter £0.88£1.22 38%
Greene King IPA £0.86£1.25 45%

Source: Ev 233

Fair Pint highlighted that the average rate of inflation per annum across the same period, excluding mortgage interest, was 2.84%, giving a compound rate for the period from 2002- 2009 of 21%. Price increases in the sample of brands shown demonstrated an average increase of 43.8%; constantly twice the rate of inflation. Duty on a pint of beer had increased by 7p from 29p to 36p (24%) in the same period.[250]

(g) Independent manufacturers and wholesalers access to the market

166.  We have received evidence supporting CAMRA's claim that the pub market is 'substantially foreclosed' to small brewers because they are unable to supply the minimum volumes, discounts and logistics demanded by large wholesale and pub owning companies.[251] Lovibonds Brewery told us it could only supply one out of 15 of its local pubs because all the others were tied. Jeff Rosenmeier, founder of the brewery, stated:

This type of market suppression for the craft brewer is not limited to Henley-on-Thames, but can be found throughout Britain. There are now 600 or so craft brewers like myself whose growth is stifled in these market conditions.[252]

167.  SIBA set up a Direct Delivery Scheme to help small breweries supply pubcos by establishing a single contact point. Pubcos can use the SIBA website to order from a wide choice of suppliers without the need to contact them individually for orders, billing or payment.[253] However SIBA reported that only three pubcos had 'embraced' the scheme which accounted for only 26% of tenanted, leased or managed pubs. A lessee told us that Enterprise, which does use the SIBA scheme, had recently put up prices of SIBA products by just over 5%.[254] She assessed the consequences as follows:

On speaking to a couple of brewers the difference between what I pay and they receive is approx. £30 per nine gal. This money is not staying within the industry but going straight to the middleman. I did 522 different ales last year (mostly from the SIBA schemes) so this equates to £15,660 lost to both the brewers and ourselves. Most importantly if this amount is split equally then this equates to a 20p price decrease for the end consumer, the customer.

These new prices have effectively priced us out of the market where local ales are concerned. We were planning on having local ale as a regular but to make 45%GP on a 3.7% we would have to charge £2.70. Our nearest real ale pubs are selling local beer at considerably less than this (they are not tied to any of the big pubcos).[255]

168.  Similarly, the tied estates of pubcos are becoming increasingly foreclosed to independent suppliers of non-drink products supplied to public houses such as AWP machines. Pubcos demand that their tied lessees take AWP machines only from their approved panel suppliers. Suppliers are admitted to the panel only if they are prepared to pay a substantial royalty to the pubco. As a result tied lessees have to pay substantially higher prices for AWP machines than non-tied retailers (as discussed in chapter 4) and non-panel AWP machine suppliers are prevented from entering that segment of the market.[256]

The Office of Fair Trading's position

169.  Competition in UK markets is overseen by the Office of Fair Trading (OFT). The OFT enforces the following legislation to ensure that markets work well for consumers. In response to an invitation to submit evidence to the Committee, the OFT told us :

We have received no evidence or complaints that lead us to alter the position we submitted to the Trade and Industry Committee in 2004 that there is no significant competition problem in relation to the beer and pub market.[257]

We believe the evidence which we have received to this inquiry demonstrates that there is a case to investigate and we disagree with the OFT on a number of points.


170.  In justifying its view that intervention was not necessary in 2004 the OFT noted that beer discounts were available and noted, "it is now possible for some tied tenants to earn discounts on the list price of drinks; e.g. up to £50 a barrel of beer".[258] This process has continued and brewery discounts have increased substantially. The problem is that little (or even none) of these increased discounts have been passed through the supply chain to the benefit of the consumer. ALMR have told us that at that time beer discounts were 'reasonably equitable' so for example the average discount on a brewer's barrel of beer (36 gals) was about £120 and this would have been divided — £50 for the pubco, £50 for the tenant and about £20 for distribution costs.[259] However since 2004 retail beer prices have gone up and pubcos have been able to negotiate larger discounts from the brewers. As we discussed earlier in the report, pubcos may now receive a discount of between £210 and £250 per barrel but the lessee still only receives the original £50 share. The lessee, and therefore the customer, fails to benefit from the increased discount.

Downward price pressure

171.  The OFT also said in 2004 that "big pub companies […] are continuing to lead the way in driving down the wholesale price of beer".[260] However, we believe there is little pressure from pubcos' to resist increases in beer list prices (upon which the consumer retail price is based) because pubcos discounts actually increase pro rata with brewery list price increases. As a Morgan Stanley report said "It is […] not in the pubcos' interest to push back too hard on list price increases, because they get a proportion of the price increase as additional discount. Some even argue that pubcos like it when brewers put up prices."[261] Nigel Wakefield said:

The pubcos without exception have forced the discounts to comparatively extreme levels, some three years ago the Coors Area Manager was having to raise the price of one of their beers way above their selling norm so that certain pubcos could achieve their £200 per brewers barrel discount, likewise a colleague who runs a small brewery has to do the same to supply a particular pubco.[262]

ALMR concluded that pubcos have "forced retail prices up in a difficult market and contributed to the widening gap between the pub and the supermarket where maximum discounts are passed on to customers."[263] This retail price divergence has in turn contributed to the rate of pub closure as consumers choose to drink at home rather than accept the artificially inflated beer prices which tied lessees are forced to charge.

Market Definition

172.  In its comments on market definition in 2004, the OFT did not recognise the public house market as a separate market from other on-trade premises, although it gave no evidence to support that view. On the contrary, the OFT noted that: "there is a difference between going out for a drink at a pub and going out for a meal at premises where alcohol may be consumed."[264] Furthermore, the OFT said in 2004 that "the retail on-trade market has become increasingly differentiated and subject to changing fashion."[265] We are of the view that public houses do form a distinct segment of the on-licence market in England and Wales. Although it may be difficult to distinguish between many food-led pubs and restaurants, in general we believe there is a distinction between pubs and other on-trade outlets and the existence of such a distinction is well recognised by the consumer. For example, the presentation of a pub both externally and internally, the range of services provided in a pub and the prices, are, in the vast majority of cases, readily distinguishable from restaurants, fast food outlets, social clubs etc. Public houses, in both urban and rural locations, also perform an important social function strengthening local community adhesion and the spirit of community as highlighted in the All Party Parliamentary Beer Group inquiry on Community Pubs.[266]

173.  Surprisingly, the OFT's submission to the 2004 inquiry did not include an analysis of the geographical market — the territory within which competition operates with regard to a particular product or service. In relation to public houses, the geographical market is likely to be narrowly defined. Arguably the geographical market for substitutable pubs is likely to be within a radius of, say, 10-15 miles representing the maximum distance which a consumer is likely to travel to visit a pub for a drink. The All Party Parliamentary Save the Pub Group suggested that a few companies should not be able to dominate all the pubs in a particular region or town.[267] The OFT told the Trade and Industry Committee that they looked at data only on a local licensing authority basis.[268]

Consumer detriment

174.  OFT's submission to the present inquiry states that its "mission is to make markets work well for consumers".[269] We are both surprised and disappointed by the OFT's apparent reluctance to investigate whether the pub market is working well for the consumer. The failure of the pubcos to pass on the benefit of their discounts to the lessees prevents the lessees from passing on the benefit to the consumer in terms of reduced prices. This has led to an ever increasing disparity between the on-licensed price of beer as compared with the off-licence price of beer. This disparity has played a major role in undermining the viability of pubs, as lessees are forced to increase retail prices, so increasing the trend to home consumption. It is to the overall detriment of the consumer if pubs are forced to close due to uncompetitive practices in the market.

Restrictive covenants

175.  Some pubcos sell pubs on the proviso that they can no longer be used as pubs thus restricting a consumer's choice on where they wish to drink. Ted Tuppen, the Chief Executive of Enterprise Inns, told us:

We tend to put these covenants in if we have an area that is substantially 'over-pubbed'. I think there is agreement that there probably are too many pubs and the current economic climate is probably making it less possible for the unviable to survive. Were we to have a pub for sale in a village or a suburb where there were already five or six pubs, it may be in the interests of our licensees and indeed all the other licensees in the area for this to be sold not as a pub. This may well mean less money for us. In normal circumstances, we will always be looking to get the best price, but in some instances, and I would think it is probably about 70% of the pubs that we sell, we will seek to put in a restrictive covenant because, genuinely, we think these are pubs that have lived their life.[270]

We have heard claims that changing social trends and economic factors lie behind the spate of recent pub closures. We reach no conclusion about the validity of these claims, but we acknowledge that pubs, like any other commercial institution, cannot be isolated from such changes. However, the first observation we would make is that it is not for pubcos to decide what degree of competition is appropriate to any geographical market. We have already noted that prospective lessees may be attracted to particular premises rather than to a tied pub. Restrictive covenants reduce their choice. Reducing the number of premises available in a particular area, when a pubco wishes to sell a building, also reduces the competition in the market.

176.  We believe it is for the market to decide whether a pub is unviable and not for a pubco to restrict a building's use. We therefore recommend that the Government makes the use of restrictive covenants to prevent the continued use of premises as a pub illegal.

The Legal position


177.  Article 81(1) EC Treaty prohibits agreements which prevent, restrict or distort competition and give rise to an effect on trade between Member States. Chapter I of the Competition Act 1998 ("the Chapter I Prohibition") applies a substantially identical prohibition in respect of such agreements where they give rise to effects limited to the UK or a part of the UK.

178.  The prohibitions under Article 81(1) and Chapter I are not absolute. Agreements falling within either prohibition may nevertheless be exempted under Article 81(3) EC Treaty or its equivalent under Section 9 Competition Act 1998 where it can be demonstrated that notwithstanding the anti-competitive restrictions, the agreement gives rise to improvements in distribution or technical progress, the restrictions are indispensable to that objective and the consumers receive a fair share of that benefit.

179.  Tied pub leases are generally considered to qualify for exemption from the prohibition under EC Regulation 2790/99 ("the Vertical Restraints Exemption") on the basis that the tied pub lease model offers low cost entry to the business for lessees accepting the tie and that pubcos offer a wide range of brands within the tie so that there is little risk of market foreclosure (i.e. restrictions on manufacturers of beer and other drinks accessing the retail market).

180.  Tied pub leases also benefit from the exclusion from the Chapter I Prohibition under the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 ("the 2004 Order") under which restrictions such as a beer tie contained in a pub lease are excluded from the Chapter I Prohibition altogether.

181.  The OFT has taken the view that the exemption under the Vertical Restraints Exemption and the exclusion under the 2004 Order justifies its refusal to investigate the impact of the tie on competition grounds.

182.  However, the exemption under the Vertical Restraints Exemption and the exclusion under the 2004 Order may be withdrawn if the competition authority thinks it appropriate to do so. Articles 6 and 7 of the Vertical Restraints Exemption provide as follows:

Article 6

The Commission may withdraw the benefit of this Regulation, pursuant to Article 7(1) of Regulation number 19/65/EEC, where it finds in any particular case that vertical agreements to which this Regulation applies nevertheless have effects which are incompatible with the conditions laid down in Article 81(3) of the Treaty and in particular where access to the relevant market or competition therein is significantly restricted by the cumulative effect of parallel networks of similar vertical restricts implemented by competing supplies or buyers.[271]

Article 7

Where in any particular case vertical agreements to which the exemption provided for in Article 2 applies have effects compatible with the conditions laid down in Article 81(3) of the Treaty in the territory of a Member State, or in a part thereof, which has all the characteristics of a distinct geographical market, the competent authority of that Member State may withdraw the benefit of application of this Regulation in respect of that territory, under the same conditions as provided in Article 6.[272]

183.  The evidence before the Committee suggests that the benefit of low cost entry offered to retailers through the pubco lease model should not be overstated. There is no evidence demonstrating that a tied lessee receives benefits not available to free of tie tenants or freeholders. Nor are we in a position to say with confidence that rents for tied pubs are invariably lower than rents for equivalent free of tie premises. We have been given examples where free of tie premises cost more to rent than tied ones and examples where they cost less.

184.  Furthermore, the evidence to the Committee shows that the wholesale prices offered to tied lessees by their pubcos have increased at a much faster rate than wholesale prices to the free trade or the off-licence sector with the result that lessees of tied pubs are at a significant competitive disadvantage as compared to free of tie tenants and freeholders. This could be a major factor in the failure rate of tied public houses in recent years.


185.  Article 82 EC Treaty prohibits any abuse "by one or more undertakings" of a dominant position giving rise to an effect between EU Member States. Chapter II of the Competition Act 1998 ("Chapter II") contains a similar prohibition where the dominant position arises only in the UK or a part of the UK. Dominance may arise where one or more undertakings have a market share in excess of 40%.

186.  An analysis of the application of Article 82/Chapter II will depend upon the definition of the relevant market. Markets are defined primarily by reference to demand substitution, (i.e. viewed from the perspective of the customer, what products/services are reasonably substitutable). In relation to the on-licence drinks market, it seems to us that the public house market is a discrete segment of the on-licence drinks market as a whole, i.e. the market including pubs, clubs, restaurants, hotels and other on-licence premises.

187.  It is difficult to calculate an exact breakdown of the pubco share of the market as we have been presented with different ownership figures. No single pubco has 40% of the pub market, but if the ALMR figures are used the combined market share of all the pubcos is approximately 40%.[273] Accordingly, it is arguable that the pubcos collectively may hold a dominant position in the market. The OFT Guidelines on the abuse of a dominant position define collective dominance in the following terms:

"4.23  Article 82 and the Chapter II Prohibition prohibit conduct on the part of one or more undertakings which amounts to the abuse of a dominant position. A dominant position need not be held by a single undertaking. Separate undertakings may be found to hold a dominant position together where certain conditions are met. Their conduct may then be dealt with together under Article 82 and/or the Chapter II Prohibition.

4.24  A dominant position may be held collectively when two or more legally independent undertakings are linked in such a way that they adopt a common policy on the market. The European Court confirmed the principle of collective dominance in the Italian Flat Glass case: "There is nothing, in principle, to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of the fact, together they hold a dominant position vis a vis the other operators on the same market.[274]

4.25  The links may be structural or they may be such that the undertakings adopt a common policy on the market.[275] For example, the nature of the market may be that undertakings might adopt the same pricing policy on the market without ever explicitly agreeing on price (see the competition law guideline Assessment of market power, OFT415)."

The pubcos operate the same business model and apply a substantially identical policy on the market which would seem to be sufficient to give rise to collective dominance.

188.  The European Court has defined a dominant position as: "…a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers".[276]

189.  The evidence before the Committee suggests that Punch, Enterprise and the other pubcos having a tied estate operate without any significant competitive constraint applied by competitors, customers or the consumer. Various analysts have commented on the possibility that a pubco's financial difficulties might lead to over-renting[277] pubs and increasing pressure on lessees. If that is the case, then significant numbers of pubs (and customers) will suffer because of factors beyond the control of the individual business.

190.  We believe that the supply ties operated by pubcos may well be anti-competitive and may have a detrimental effect on the public house market. We are disappointed that the OFT has failed to act on this matter in the past and has refused to acknowledge the current problems in the market. Since the OFT is unwilling to initiate an appropriate investigation, we recommend that the Secretary of State uses powers set out in section 159 of the Enterprise Act 2002 to refer supply ties in the public house industry to the Competition Commission for a market investigation. Given its clearly stated position, we do not believe an OFT investigation would be satisfactory.

191.  Our provisional view is that the tying of beers, other drinks and ancillary products should be severely limited to ensure that competition in the retail market is restored. However, we note that interventions can have unexpected consequences. The Beer Orders led to the emergence of pubcos, simply replacing one group of powerful players with another. Displacing pubcos without considering the market as a whole may put too much power into the hands of brewers and wholesalers. The position of local brewers operating a small tied estate also needs to be considered; we would not wish to damage regional brewers. For these reasons we are calling for an urgent investigation rather than making a policy recommendation.

244   EDM 1909 December 2008 Back

245   MMC, The Supply of Beer, CM 651, 1989 Back

246   Ev 121 Back

247   Ev 277 Back

248   Beer Report, The Publican, November 2007 Back

249   Ev 283 Back

250   Ev 233 Back

251   Ev 120 Back

252   Ev 160 Back

253   Ev 254 Back

254   Ev 283 Back

255   Ev 283 Back

256   Ev 68 Back

257   Ev 277 Back

258   HC (2004-05) 128-II Ev 233 Back

259   Ev 84 Back

260   HC (2004-05) 128-II Ev 233 Back

261   Leisure and Hotels, Leased Pubcos: Avoid, Morgan Stanley Research, September 2008 Back

262   Ev 273 Back

263   Ev 84 Back

264   Fourth Special Report of Session 2004-05, Pub Companies: Responses to the Committee's Second Report of Session 2004-05, HC 434, p2 Back

265   HC (2004-05) 128-II Appendix 2 Back

266   Community Pub Inquiry, All Party Parliamentary Beer Group, October 2008 Back

267   Ev 287 Back

268   HC (2004-05) 128-II Q 615 Back

269   Ev 278 Back

270   Q 262 Back

271   Emphasis added Back

272   Emphasis added Back

273   Ev 82 Back

274   Cases T-68/69 etc Societa Italiano Vetro SpA -v- Commission,[1992] II ECR 1403, [1992] 5 CMLR 302 Back

275   Joined Cases C-395/96 P andC-396/96 P Compagnie Maritime Belge SA & Others [2000] ECR I-1365 paragraph 45 Back

276   Case 27/76 United Brands -v- Commission (1978) ECR207 (emphasis added) Back

277   Charging rent at a higher rate than the business will bear. Back

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