Memorandum submitted by CAMRA, The Campaign
for Real Ale
1. INTRODUCTION
1.1 CAMRA, The Campaign for Real Ale is
a consumer organisation which campaigns for real ale, well run
pubs and the interests of consumers. CAMRA has over 105,000 individual
members and is wholly independent from the brewing and pub industry.
1.2 Since the publication of the Business
and Enterprise Committee (BEC) report on 13 May 2009 ("the
BEC Report"), there has been much activity by the pub companies
but little delivery of meaningful change.
1.3 CAMRA took part in an industry mediation
process initiated by the Association of Licensed Multiple Retailers
(ALMR). It is our view that the pub owning companies did not enter
mediation with any intention of agreeing meaningful substantive
change.
1.4 The British Beer and Pub Association
(BBPA) have since agreed a new Framework Code of Practice on the
Granting of Tenancies and Leases with the Federation of Licensed
Victuallers Associations (FLVA) and the British Institute of Innkeepers
(BII). This agreement fails to deliver any improvement to the
financial situation of existing tied pub businesses and is entirely
non-legally binding.
1.5 Following the BEC Report, CAMRA used
its power as a designated body representing consumers to issue
a super-complaint to the Office of Fair Trading (OFT).[1]
1.6 CAMRA welcomes the Royal Institute of
Chartered Surveyors (RICS) Pub Industry Forum Report and Recommendations,
the result of an investigation into pub companies. We particularly
welcome RICS' endorsement of the key principle that a tied tenant
should be no worse off than a free of tie tenant.[2]
2. BACKGROUND
2.1 The operation of the beer tie in the
highly concentrated local markets appreciably restricts and distorts
competition, causing substantial consumer detriment in high prices,
lack of amenity and pub closures, preventing tied lessees from
buying beer on an open market and foreclosing the market for small
businesses. Urgent reform is required to deliver a sustainable
future for Britain's community pubs.
2.2 CAMRA does not, however, believe that
the tie should be abolished due to its valuable role in ensuring
the survival of regional and family brewers, preventing domination
of the UK pub market by the four largest global brewers and in
providing low cost entry into pub ownership.[3]
Furthermore, abolition of the tie would be contrary to the EC
Treaty.
2.3 We submitted written evidence on the
background and effects of the beer tie to the previous BEC inquiry
into pub companies, and invite the Committee to refer to it again
for further details of CAMRA's position on the tie. The points
that we raised in the initial submission remain valid and none
have been sufficiently addressed by industry.
2.4 CAMRA urges the Committee to recommend
to Government that they overturn the OFT's decision and take immediate
action to ensure that the Competition Commission conducts a full
market investigation into the UK pub market.
3. DEVELOPMENTS
SINCE THE
BEC REPORT
3.1 Following mediation, the BBPA announced
that it had agreed a new Framework Code of Practice on the Granting
of Tenancies and Leases with FLVA and BII. This document categorically
does not represent a solution to the problems facing the pub sector.
3.1.1 The agreement was rejected by all other
parties to mediation including the IPC[4]
because it did not offer any reform that is not already required
by law or that does not represent best practice to which the industry
ought already be adhering.
3.1.2 For instance, the agreement states that
"The Parties agree that, as a matter of principle, contracts
should be fair and reasonable and comply with all legal requirements".[5]
That such principles were previously in question surely signifies
the extent of the failures in the industry and the urgent need
for intervention.
3.1.3 On restrictive covenants, the agreement
states that "Individual pub companies must make their policy
on restrictive covenants clear". This is both insulting and
meaningless to licensees, as of course companies could simply
continue to impose anti-competitive restrictive covenants while
merely announcing their plans to do so.
3.1.4 Of the two signatories to this document,
the BII is a training charity, constitutionally does not represent
the interests of lessees and receives funding from pub owning
companies; and the FLVA represents only a small number of tied
pub businesses. Both of these organisations have signed a non-binding
agreement that does nothing to deliver benefit to existing tied
pub businesses. It is worth noting that groups collectively representing
over 25,000 pub businesses declined to sign the BBPA document.
3.2 The BII have also recently announced
their Independent Pub Rent Review Scheme (PIRRS), which will establish
a panel of surveyors, approved by pub owning companies, to settle
rent disputes. CAMRA is deeply concerned that pub businesses signing
up to PIRRS will forfeit their legal rights, and believes that
PIRRS is open to manipulation by large pub owning companies who
it seems will have clear power of veto over the surveyors that
pub businesses can appoint. It is further worth noting that PIRRS
specifically excludes the involvement of RICS. PIRRS will only
have credibility if pub businesses are free to engage any qualified
surveyor who is a member of RICS.
3.3 CAMRA is a founding member of a new
umbrella organisation, the Independent Pub Confederation (IPC)
which will provide a united voice for pub lessees, small brewers
and consumers and which will work to effect change on many issues
including tying agreements and the rental valuation model.
3.3.1 CAMRA believes that the formation of the
IPC represents a significant step forward in ensuring that the
voices of lessees and consumers are heard, and we look forward
to taking a full and active role in its development.
3.4 However, while CAMRA welcomes the recent
media and political spotlight on unfair and anti-competitive practice
in the pub sector, the changes that have been promised have not
yet been delivered and we fear they will not be unless there is
intervention by Government and the Competition Commission.
4. THE USE
OF RESTRICTIVE
COVENANTS IN
THE PUB
SECTOR
4.1 The use of restrictive covenants by
pub companies is one example of a serious failure that severely
restricts and distorts competition in the market.
4.2 Restrictive covenants can be used by
the seller of a pub to prevent the purchaser from operating the
premises as a pub. The impact of this is to reduce competition
within a locality thereby allowing higher consumer prices in remaining
pubs and maintenance of market foreclosure or absolute barriers
to market entry to small brewers and other suppliers to pubs operating
in that locality.
4.3 The BEC report concluded that: "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".[6]
4.4 Even the OFT acknowledged that "the
use of restrictive covenants on the sale of a pub has the potential
to harm consumers… [they] can act as a barrier to market
entry for pub operators, which can limit competition within a
particular area, potentially leading to higher prices and reduced
choice and quality for consumers".[7]
4.5 After this damning indictment of the
use of restrictive covenants in the pub sector, some pub owning
companies including Punch Taverns, Enterprise Inns (which has
imposed restrictive covenants in around 20% of pub disposals since
2004[8])
and Marstons announced a temporary cessation of their use. However,
without Government intervention to ban restrictive covenants it
is likely that they will return to their use when the political
spotlight moves on.
4.6 Furthermore, some pub owning companies
such as Thwaites are continuing to use restrictive covenants in
the sale of their pubs, which has led to pub closures and consumer
detriment in East Lancashire and across the UK.
5. SUMMARY OF
CAMRA'S SUPER-COMPLAINT
TO THE
OFT
5.1 In July this year CAMRA submitted a
super-complaint to the OFT stating our concern that restricted
and distorted competition in the UK pub market, due to the unfair
operation of the "beer tie" and other exclusive purchasing
obligations, is artificially inflating the consumer price of beer,
reducing consumer amenity in pubs and increasing the rate of pub
business failures. The complaint principally related to those
companies who impose a "beer tie" on 500 or more
pubs (around 1% of the UK pub market).
5.2 The complaint argued that a lack of
competition at the wholesale level of the pub market was harming
consumers by reducing the ability of individual pub businesses
to compete effectively on price, choice and quality as well as
establishing barriers to market entry for small brewers and other
small suppliers to the pub sector.[9]
The complaint cited the following as evidence of clear harm to
consumers:
— higher prices in tied pubs of between
7p and 23p a pint;[10]
— reduced investment in pub staffing and
maintenance;
— restricted choice of beer in pubs, especially
locally brewed beers, due to tie agreements; and
— the forced loss of pubs due to the use
of restrictive covenants by pub owning companies to enhance their
local market power.
5.3 The complaint requested that the OFT
conducted a full market study to assess the scale of consumer
detriment and following this agreed legally binding undertakings
with the pub companies in lieu of reference to the Competition
Commission. If it were not possible to agree legally binding undertakings
the complaint requested the referral of supply ties in the pub
market to the Competition Commission for a market investigation.
6. THE OFT'S
RESPONSE TO
CAMRA'S SUPER-COMPLAINT
6.1 The Committee will be aware that the
OFT responded to CAMRA on 22 October, rejecting the super-complaint
in full and refusing to act on our recommendations as set out
above.[11]
In their response, the OFT claimed that they had "not found
evidence of competition problems that are having a significant
impact on consumers".[12]
6.2 CAMRA considers the OFT's response to
be wholly inadequate and believes it to contain serious failings.
It was based on insufficient reasoning and lacked detailed analysis.
Indeed, the OFT even noted that they have deliberately "not
undertaken a detailed analysis of agreements or conduct"
in the sector.[13]
6.3 The OFT have vindicated BEC's fear that
the OFT would not deliver a satisfactory outcome, despite acknowledging
the serious concerns raised about the UK pub market in the BEC
Report. The OFT's rejection of CAMRA's complaint means that the
Government are now empowered to use Section 132 of the Enterprise
Act 2002 to refer this issue to the Competition Commission
for a full market investigation. Without CAMRA's complaint there
would not have been a recent decision for the Government to overturn.
7. FAILINGS IN
OFT RESPONSE
7.1 The OFT relied on selective data provided
to them by the pub companies and the BBPA, the very companies
that CAMRA hoped the OFT would investigate; while paying little
regard to the evidence and experiences of individual licensees.
7.2 The OFT accepted assertions that higher
wholesale prices for tied pubs is fully compensated for by countervailing
benefits, including assertions that they provide support to tied
pubs worth between £6-8,000 a year. The OFT have made
no effort to establish what these benefits are worth, if anything,
to tied tenants.
7.3 The OFT acknowledges that tied tenants
are worse off than free of tie tenants, as on average tied pubs
would be between £19,000 and £21,000 better
off each year if they were able to buy beer at open market prices,[14]
but does not accept that this will lead to consumer detriment
through poor facilities and loss of amenity due to lack of investment
in pubs, and lack of consumer choice.
7.4 The OFT found, through a comparison
of tied and free pubs that tied pubs were on average eight pence
a pint more expensive.[15]
However, their analysis excluded managed pubs, where prices are
significantly lower, which in our view demonstrates the inadequacy
of their reasoning.
7.5 The OFT failed to appraise themselves
of the complex issues at play in the UK pub market, as illustrated
by their bizarre conclusion that the "pub companies' commercial
interests would appear to be aligned with the interests of their
lessees".[16]
7.6 The OFT additionally appears to have
mis-directed itself as to what constitutes "reasonable grounds"
to make a referral to the Competition Commission, by setting the
bar to referral considerably higher than in other comparable cases
such as their referral of the Groceries Market in 2006.[17]
7.7 It is CAMRA's view that the OFT has
yet again failed in its Enterprise Act duty to ensure competition
works effectively at all levels of the market, adopting an incredibly
narrow definition of consumer detriment and failing in its duty
to protect the consumer.
7.8 For these reasons, CAMRA does not accept
the OFT decision, and is currently considering a number of routes
to having it overturned. These options include:
— lobbying Government to overturn the decision;
— lobbying the European Commission to instruct
the OFT to reconsider;
— issuing a legal challenge;
— issuing a further super-complaint; and
— seeking an independent expert review/
investigation into the OFT's response.
8. CONCLUSIONS
AND RECOMMENDATIONS
We urge the Committee to include the following
recommendations in its report:
8.1 That, given the failure of the OFT to
sufficiently address legitimate concerns over the potential anti-competitive
effects of the tie as operated by large pub owning companies,
the Government must overturn the OFT's ruling and use Section
132 of the Enterprise Act 2002 to refer this issue to
the Competition Commission for a full market investigation. This
is in line with the original recommendations of the BEC Report.
8.2 That the Government should instigate
a review of the remit and efficacy of the OFT in protecting consumers
in the pub sector following their repeated reluctance to properly
investigate legitimate concerns.
8.3 That it should be made unlawful for
a pub to be sold with a restrictive covenant in place preventing
any purchaser from continuing to run the pub as a pub.
8.4 That the Government give legal backing
to the proposed RICS Code of Conduct so that it can have a real
impact in protecting tenants and consumers.
8.5 That the Government repeal the Land
Agreements Exclusion and Revocation Order 2004, which will force
companies to self-assess their beer tie arrangements to ensure
that they are acting competitively.
8.6 That the Government support CAMRA's
call for the European Commission to disapply the benefit of the
Block Exemption[18]
(under article seven of the Regulation) from any company with
more than a 5% share of the UK pub market.
18 November 2009
1 The super-complaint is available to read in full
online at: http://www.camra.org.uk/media/attachments/305998/Super%20Complaint.pdf Back
2
The RICS Report is available online at: http://www.rics.org/site/download_feed.aspx?fileID=4517&fileExtension=PDF Back
3
CAMRA evidence to the BEC Inquiry into Pub Companies, Point 7 Back
4
Independent Pub Confederation - see point 3.3 below Back
5
BBPA, FLVA and BII agreements, Point 5. Available online at: http://www.fairpint.org.uk/downloads/BBPA_BII_FLVA_FINAL_AGREEMENT_2009_Signed.pdf Back
6
The BEC Report, paragraph 176 Back
7
OFT Response to CAMRA's super-complaint., point 6.4. Available
online at: http://www.oft.gov.uk/shared_oft/super-complaints/oft1137.pdf Back
8
OFT point 6.7 Back
9
Other suppliers would include providers of Technical Services,
Technical Services Equipment, Wholesalers, Insurance Companies
and AWP machine providers. Back
10
CAMRA Prices survey 2009 Back
11
View the response online at: http://www.oft.gov.uk/shared_oft/super-complaints/oft1137.pdf Back
12
OFT p6 Back
13
OFT 8.10 Back
14
OFT 5.51 Back
15
OFT p10 Back
16
OFT p6 Back
17
Competition Commission Inquiry into the Groceries Market, 2006.
Available online at: http://www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm Back
18
The Block Exemption is the term given to the exemption of certain
exclusive purchasing and non-compete agreements (such as the beer
tie) from competition law. Back
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