Pub Companies - Business and Enterprise Committee Contents

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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