Memorandum submitted by Chris Swift
In the days when brewers owned pubs there was
perhaps a need for the "beer tie", it was a mechanism
that provided a market for the brewer with the tenant benefiting
from subsidised rents. In reality there was little difference
between the wholesale price for the "tied trade" and
for the "free trade".
As a tenant licensee in 1985 I was able to sell
beer at under a pound a pint, the brewery maintained the building
and my rent was considerably lower. I could happily operate on
a 38-40% gross profit percentage. An EU directive meant that for
a small addition to my rent I could be freed from the wine and
spirit tie. I could buy my minerals, snacks, cider and sundries
anywhere I wanted. After the implementation of the Beer Orders
I enjoyed the freedom of a guest beer. The Beer Orders pushed
the brewers with over two thousand houses to sell them and concentrate
on brewing.
The large PubCos were created out of this with
the two major companies eventually each owning in excess of seven
thousand units. Not classed as brewers, fully repairing leases
became the norm, rents increased many fold to "market rents"
and gradually the "tie" was strengthened to cover not
only all products but even services. The PubCos now were in a
position to not only control the supply but to dictate the price
charged. Brewery price increases became much larger than previously
seen. As cost prices increased the discount demanded by the PubCos
increased and I am sure that these discounts have merely added
to the massive cost price hikes that we have seen over the past
few years in particular.
The cavalier approach to price increases can
best be seen in the latest increase where for instance Enterprise
wrote to their licensees stating clearly that "prices would
increase by an average of 6%". One of my clients has Theakstons
Bitter as his best seller. On 11 February a cask containing 11
gallons would have cost him £103.22 but a week later, on
18 February that same cask would have been charged at £113.99—an
increase of £10.77 or 10.43%. This would amount to an amazing
£35.25 per brewers barrel. Prior to the increase he was charging
£2.55 which resulted in a 47.1% Gross Profit. This is lower
than his target GP% of 50% but he feels it is all that the market
will stand. As a rule of thumb for every £2.50 the cost of
a barrel of beer increases two pence needs to be added to the
selling price. In this case an increase of at least 27p-28p would
be needed merely to maintain margins. The same beer direct from
the brewery has a list price of £110.32 according to their
February 2009 price list. How Enterprise can justify charging
more than the brewer is difficult to ascertain particularly as
few licencees will pay the list price—one of my true "free
trade" accounts pays just £57.15 for the same beer.
The amount of discount obtained by the PubCos
is a closely guarded secret but in view of the level of damages
they see fit to charge, when licensees buy from a local wholesaler,
a figure of £180-£220 would probably be conservative.
Another of my clients attempting to prepare a business plan was
offered a discount of some £75 per brewers barrel. This was
probably 40% what the PubCo received but would have meant a cost
reduction to him of around £48,000 per year. It is the public
house that makes the sale, earns the discount but it is the PubCo
that retains the discount—that cannot be correct. I accept
that the PubCo can often negotiate much better discounts than
individual accounts but a significant part of that discount should
benefit the licensee. For the brewer offering much lower rents
and taking on repair obligations there may well be a case for
retaining the tie, but lets have the transparency of the "wet
rent" been seen in the rent calculations.
At a time when the future of "The Great
British Pub" is under threat I feel it necessitates the need
for a detailed scrutiny of the "tie", what exactly it
is, why is it needed and who does it serve? In conclusion I would
point that should I want to rent an office I would not then expect
my landlord to insist that I buy all my office supplies from him
at inflated prices—why then has the "tie" been
allowed to thrive in this industry?
19 March 2009
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