Memorandum submitted by the Independent
Family Brewers of Britain (IFBB)
In response to your invitation to submit our
opinions on the Tie to your Select Committee I am writing on behalf
of the Independent Family Brewers of Britain. At the outset of
the (then) Business and Enterprise Select Committee we were informed
that the brewer's tie was not under threat and that the issues
were simply to do with long leases carrying full repairing and
insuring obligations. As your hearings unfolded it became clear
that some parties were arguing for the complete abolition of the
You pointed out in the announcement of the initial
findings that "we would not wish to damage regional brewers"
and we are grateful for that clarification, but nevertheless some
parties are still arguing for limitations on the Tie and, for
example, the right to have a guest beer on every bar from a small
brewer. This move would be hugely damaging to those of us brewing
cask ales for all the reasons we have stated before, and have
summarised in the attached document.
Many commentators seem to continually confuse
long leaseholds with tenancy agreements and we would like to highlight
the latter as a fair and effective way of taking on a small business.
The brewery tenancy operates very like a franchised system with
strong support from the "brand owner", in this case
the local brewer, with strong local beer brands which are well
known, and with effective and relevant support from the centre
in return for the purchasing obligation in the tie. These agreements
are popular with business partners who have modest levels of capital
available, or are risk averse to leasehold or freehold values,
or simply wish to be able to enter and exit their own business
at lower cost.
We have surveyed our tenanted business partners
to understand their views on the fairness of their agreements
and those results are contained in the attached document. It makes
clear that brewery agreements offer strong support to licensees
in many ways and in responding to the key question, "I believe
my rent is fair for the business I do", 56% agreed and 26%
disagreed. We believe that this is a positive finding in the current
The members of the IFBB are all members of the
BBPA as well, as it is the main association for brewing in the
UK. We therefore support the new code agreement drawn up with
the BII and FLVA. It is well thought through and workable.
Brought together in 1993 to defend the
tie, the IFBB in 2009 consists of 27 brewers who represent
a distinct and unique sector of the UK brewing industrythe
family owned and operated brewing company.
Our pubs are at the heart of the communities
we serve. We produce distinctive, regionally brewed cask beers
("real ale") and support regional and local suppliers
through the use of locally sourced raw materials and services.
While our breweries have been family owned and
run for many generations, our businesses are dynamic and innovative,
constantly developing new products and brands and spending millions
each year on pub developments. We share a common goal to "maintain
the traditions of cask brewing in Britain, and to continue to
support and promote this healthy, profitable and vibrant sector
of the industry".
The name of each family brewery is still prominently
displayed on (and in) each IFBB member's pub indicating the main
brand of cask beers sold in the pub. Each of those names embodies
a long brewing tradition.
1.2 Our Members
Member companies are distributed throughout
the regions of England and Wales:
|Donnington Brewery||Stow-on-the Wold
|Hall & Woodhouse||Blandford St Mary
|Hook Norton||Hook Norton
|St Austell||St Austell
SECTION 2MARKET DATA
The total volume of beer (lager, ale and stout) sold in the
UK is 47,965,250
hectolitres, and IFBB members have a 5.9% share of that total.
There are around 54,000 pubs in the UK. IFBB members
own 4,227 of these giving the IFBB members a market share
of the pub market of just under 8%.
There are 150,000
in the UK as a whole. The IFBB share therefore of the total on-licence
market is 2.8%.
Around 75% of our members' pubs are operated as traditional
tied brewery tenancies, with the balance as managed operations,
ie directly owned and operated by the member brewer.
IFBB members directly employ around 19,000
people in brewing and pub estate management, and if we assume
that each pubtenanted or managedemploys an average
of seven people, a further 29,500 are employed.
Our members' breweries range in size from producing 5,000 hectolitres
up to 800,000 hectolitres, and each operates one brewery.
Distribution of beers, ciders, wines, spirits and minerals
to the pub estates is undertaken by most members using directly
employed staff. All members sell not only to their own pubs but
also to free-of-tie ("free trade") accounts and to non
An extensive range of beers brewed elsewhere is also usually
available. Nearly all members offer national and international
brands of beers, especially lager beers which they tend not to
brew. This range offers good opportunities for inter state trading
in the EU and many members have forged partnerships with imported
lager brands from other EU countries.
3.1 Basis of the tie
The traditional pub usually has one of three forms of ownership,
giving rise to different bases for the tie:
1. Freeholdwhere the owner licensee buys the
pub outright and is therefore free to buy all products from any
source. Often the owner licensee will take loan finance from a
supplying brewer in return for a product tie (tie by loan).
2. Long (assignable) leasewhere a premium is
paid for the lease. These leases may operate on a tied or free-of-tie
basis, dependent on the landlord/lease owner.
3. Traditional brewery tied (non-assignable) tenancya
shorter term tenancy agreement tending to be for a three to six
year term, with a full or partial drinks tie, as offered by our
The property tie originated when brewers started to buy their
own pubs to guarantee an outlet for their own beers. This meant
(in the days before mass distribution) that brewers could ensure
the delivery of their cask beers to their own pubs and thus guarantee
beer quality without there being concern around the short shelf
life of the product. Cask conditioned beers have a secondary fermentation
in the barrel so it is essential to use them within, ideally,
three days from starting to serve from the barrel.
With the tie agreement, the licensee tenant rents premises
from the brewer and is supplied by that brewer with a range of
products. The brewer has a marketing outlet, and the tenant the
opportunity to run his or her own business.
Traditionally, the vast majority of pubs in the UK have been
operated on short-term tenancy agreements with rents calculated
on the trading potential of the pub rather than on a commercial
market rent. In the late 1980's national brewing companies (not
IFBB members) began to offer longer-term leases, with a right
to assign, and therefore build a goodwill premium.
The Beer Orders of 1990 stimulated the break-up of the
national brewers into separate brewing companies (now all owned
by overseas global brewing companies) and large pub owning companies.
Institutional investors favoured the latter, as the long leases
(with upward-only rent reviews) allowed steady profit growth from
property income for these investors. With property values escalating
in the last two decades, pub companies were bought and sold routinely
and consolidation produced today's two large pub companies.
The recession has meant that values of freehold pubs and
long leases have fallen, which has caused difficulties for individuals
who have invested large amounts of capital in a pub business in
recent years. By comparison, the tied brewery tenancy provides
not only a low cost entry for a licensee starting a small business,
but also offers a low cost/low risk exit as neither the freehold
nor the lease need to be sold to another investor. A tied brewery
tenancy is a less risky financial option (and requires less capital)
than either buying a freehold or taking on a lease premium.
3.2 How it works
The Tie has the effect of creating a dry rent and a wet rent
payable to the brewery by the tenant licensee.
The dry rent is fixed (subject to rent reviews, which
are covered within the tenancy agreement) and is the element for
renting the building from the brewery. The rent is determined
by the pub's past beer sales volume and on predicted Fair Maintainable
Trade. The latter is the level of trade agreed to be achievable
at the pub, if that pub is run by an average competent operator
The wet rent is variable, since it is a percentage
of the prices paid to the brewer for stock ie beer and other products.
This wet rent then varies in line with the pub's beer sales and
the tenant pays rent only on what he sells. This offers the tenant
some protection during a downturn because, if sales reduce, so
will this element of rent. If the tie were to be abolished, then
this protection would disappear and the fixed cost to the tenant
would increase significantly
4.1 Entry into the trade
In principle, the traditional brewery tied tenancy system
operates as follows (although there may be some small variances
between member brewers):
the brewer owns and insures the pub, and pays for
repairs, improvements and alterations, and
the tenant will buy the inventory (tables, chairs
etc) and stock at value, this being his only capital investment.
A traditional brewery tied tenancy (inventory and stock)
can be acquired for as little as £5,000 and would rarely
cost more than £50,000, depending on the size of the inventory
and ingoing stock value of the pub in question. This offers an
excellent opportunity for those with relatively limited capital
to run their own business.
4.2 BDM support
The brewer provides a full support package to tenants, headed
by access to a Business Development Manager (BDM) to advise on
how to operate the pub and help deliver business growth.
Within IFBB members' tied estates, the BDM manages an average
of just 34 pubs, which is considerably fewer than most other
pub companies which can be as high as 55 pubs. Taking into
account other "head office" staff who visit the outlet
to bring help and advice, the ratio is even more favourable, at
approximately one to 20 pubs.
As with any individual business, the brewery and the tenant
will agree a business plan and invest, for example in capital
expenditure, training or marketing. The brewery brings long experience
of owning and operating the property, essentially providing retail
knowledge and the intellectual property of decades' worth of successful
pub operations. This invaluable insight helps ensure that the
tenant makes progress in growing his own business. Free house
operators do not have access to this type or level of business
4.3 Special Commercial and Financial Advantages (SCOFA)
For newcomers and for experienced licensees, the brewery
provides extensive support in order to ensure the success of the
pub operation. The mutual benefit to be gained from a successful
pub is at the centre of this support and licensees will be able
to look to their brewery for a range of benefits.
Each IFBB member provides a range of services and support
free of charge, or at reduced cost, to its tenants. The value
of this support is typically around £8,000 per pub in
the first year depending on the family brewer in question. As
these are not available to free house pub operators and any other
on-trade outlet, they constitute a unique (and critical) aspect
of taking a brewery tenancy. The majority of new licensees need
this level of support in their first 12 to 18 monthswithout
it many would cease to trade very quickly.
All this contrasts with the free-of-tie leaseholder, who
normally pays a large capital sum to acquire the lease and is
then obliged to keep the building in good repair and fully insured,
both at his own cost. He will receive little or no support from
In addition to these specific support services, the brewery
regularly alerts its tenants to issues such as new legislation
which require their attention. This may lead to providing free
follow-up advice given by experts on how to meet obligations cost-effectively.
These benefits are substantial but not included in the quantified
4.4 Rental benefit
A traditional brewery tied tenancy offers lower fixed rents
than commercial property transactions. Rent has traditionally
been calculated on beer volume and Fair Maintainable Trade figures
as opposed to a full commercial rent based on the value of the
property, its location and total square footage of the building.
The variable "wet" rent paid to the brewer for
stock, ie beer and other products varies according to trading
conditions and offers the tenant some protection during a downturn
because it reduces if sales reduce.
If the tie were to be abolished, the protection of the variable
"wet" rent would disappear and the fixed cost to the
tenant would increase significantly.
4.5 Survey of tenants experiences of running a brewery
Seven IFBB members have participated in a survey of their
tied tenants, led by independent industry experts. A total of
719 surveys have been completed, representing just fewer
than 24% of the total tied brewery tenancies across the IFBB members'
The survey results were collated on a member-by-member basis,
and have been amalgamated to form a benchmark for the IFBB members.
The survey results have been shared with each participating member,
on both an individual brewery and collective IFBB member basis,
but individual surveys have not been shared with the members,
allowing their licensees to remain anonymous.
The Independent Family Brewers of Britain represent a relatively
small but distinctive part of the UK beer market. Our members
are companies owning regional breweries and pub estates and the
majority are private, family run, businesses. We rely largely
on the "beer tie" to operate as both brewers and pub
With the security of the tie, the brewers buy, insure and
maintain the properties operated by their tenants. This provides
a very low entry cost for tenants setting up in business, creating
new employment opportunities for entrepreneurs. When sales increase
or decrease, the system causes the financial impact to be shared
between the pub and the brewery, thus lowering the tenant's risk.
As the businesses are co-dependent, IFBB members provide
extensive support services to tenants which are not available
to licensees operating in the free house market. This is particularly
helpful in a difficult economic climate. Not surprisingly then,
IFBB members have an extremely low turnover of tenants compared
to the industry as a whole.
The tie also allows IFBB members to plan brewing plant capital
expenditure over future years, secure in the knowledge that there
are guaranteed outlets for their beers; the majority of which
are Britain's best cask conditioned beers. Brewing is a highly
capital intensive business and brewing, packaging and supplying
beer on a large scale requires substantial capital. The tie system,
therefore, plays a vital role by enabling smaller brewers to compete
with the much larger enterprises.
Brought together originally in 1993 to defend the tie,
IFBB members meet periodically to discuss industry issues. However,
they compete with each other, as well as with more dominant enterprises,
and all their business relationships are conducted independently.
There is no commercial agreement or network of agreements between
As we have shown, the tie works because of the mutual benefit
between landlord and tenant. Their goals are aligned and commercial
success is the shared vision. The mechanisms upon which that mutuality
rest are the lower fixed rents and counterbalancing wet rents.
There is a differential in pricing between wholesale prices
in tied and free-of-tie pubs, and this has become more pronounced
in recent years. However discounts to tied pubs have also increased
and there is no valid evidence of differential retail prices between
tied and non tied pubs.
A comparison of the financial models for our tenancies and
free-of-tie pubs shows that multiple valuable benefits accrue
to our tied tenants by way of special commercial and financial
advantages. The lower cost of entry and exit and the value of
these advantages are also well illustrated by the evidence from
tenants themselves. Moreover, the cost of property maintenance
(borne by the landlord in the brewery tenancy) and the cost of
business support are increasing.
Pub closures in the recession have attracted publicity. The
greatest difficulties are faced by those who invested shortly
before the recession in long leases with full commercial rents
and a product tie. The IFBB members have very few pubs operated
on this arrangement. In the recession, it is apparent that a minority
of these leaseholders are in economic hardship, often having paid
substantial sums to buy their leases.
Blame for such closures is sometimes attributed to the tie
system. In fact, they face the same difficulties as other small
businesses purchased for high prices before the recession. They
should not be taken to be representative of the business model
which the tie allows. On the contrary, the shared risk and reward
approach contained in the traditional brewery tenancy is of greatest
benefit to licensee tenants.
17 November 2009
British Beer & Pub Association (BBPA) Statistics Handbook
BBPA Statistics Handbook 2009 Back
On-trade means licensed for consumption of alcohol on the premises-a
definition of a "pub" Back
IFBB annual members survey, August 2009 Back