The Supply of Beer: A report on the supply of beer for retail sale in the United Kingdom

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Summary

Our terms of reference (see Appendix 1.1) require us to investigate and
report on whether a monopoly situation exists in relation to the supply of beer
for retail sale in the United Kingdom. We have unanimously concluded that a
monopoly exists in favour of those brewers who own tied houses or who have
tying ageements with free houses in return for loans at favourable interest rates.

Although our terms of reference are prescribed by United Kingdom law,
nevertheless the law of the European Community has formed, throughout our
inquiry, an additional and important element in our deliberations. In
particular we have taken into account Commission Regulation 1984/83,
which contains a block exemption for certain beer supply agreements. This
block exemption is qualified and of finite duration. Its existence does not
prevent us from recommending changes. The Regulation will in any case have
to be fully reconsidered before it expires at the end of 1997.

This chapter is only a brief summary of our report, describing some key
features of the market, the main reasons why we believe changes are needed,
and our recommendations. We must emphasise that each chapter of our report
records important details of fact and argument, and that a reading of the later
chapters is essential to a full understanding of our conclusions and recommendations.

The United Kingdom beer market

Sales of beer in the United Kingdom amount to over £9 billion, or over
market 2 per cent of gross domestic product. Total beer consumption reached a peak in
1979 and fell back during the recession. It did not begin to grow again until
1987. The market shares of ale, stout and lager have changed enormously. Lager
has gained ground steadily (from under 4 per cent of the total in 1967 to over 45
per cent in 1987) and the share of ale (bitter and mild) has fallen, as has that of
stout. Lager appears still to be gaining market share.

Ale and lager are marketed in different ways. Lager is generally
promoted by means of national or international brand names. By contrast,
bitter is usually promoted as a product with strong local and regional
characteristics. The demand for a wide variety of bitter, and strong regional
tastes and preferences, are important features of the United Kingdom beer
industry.

Although sales of beer in off-licences and supermarkets are growing, 85
per cent of beer is consumed in public houses, clubs and other on-licensed
premises. The public house remains central to the nation's beer-drinking
habits. Three-quarters of beer consumed in the United Kingdom is draught
beer.

Premises serving alcohol in the United Kingdom require a licence. In
1986 there were some 192,000 licences in issue, nearly 40 per cent more than in
1966. Growth by type of licence has, however, been very uneven. The strongest
growth by far has been in the restricted on-licence sector (eg for restaurants),
where licences have virtually quadrupled, from roughly 7,000 in 1966 to
28,000 in 1986. There has also been strong growth in the number of off-licensed
outlets, from 30,000 to 50,000, an increase of two-thirds. Licences issued to
clubs have grown in number by roughly 30 per cent, to 34,000. But in those
20 years the number of full on-licences has grown by no more than 7 per cent, to
80,000.

Since a public house requires a full on-licence, it follows that the
increase in the number of public houses over the last 20 years has been low.
Although the practice of licensing justices varies, it is still difficult in many
parts of the country to obtain a new full on-licence, especially for a
conventional public house. Entry to the market by opening a new public house
is not therefore a characteristic of the United Kingdom beer market. There has
been very little development of public house chains independent of the
brewers. By contrast, the nature of off-licensed premises has changed no less
substantially than their numbers. Where once the off-licence was part of a
public house, or perhaps a specialist shop, it is now just as likely to be part of a
supermarket owned by one of the nation-wide chains, or a smaller-scale gocery
shop. Brewer-owned off-licences are now under 10 per cent of the total.

One of the most prominent features of the United Kingdom beer
industry is the extent of vertical integation. Brewing companies differ greatly in
size, but the majority of them brew beer and wholesale it and retail it. In order to
retail beer, brewing companies own a substantial proportion of the public
houses. We estimate that brewers own about 75 per cent of the public houses in
Great Britain. Brewer-owned houses fall into two categories - managed, in
which the publican and, as a rule, the staff are employees of the brewing
company; and tenanted, where the publican is not an employee of the
brewer-landlord, but pays the brewer a rent for the premises and earns his living
from the retail profit made by the outlet. In both categories, the brewer specifies
what beers may be sold in the public house, and where they must be bought
(usually from the brewer himself). In the case of managed public houses, the
brewer sets retail prices as well.

The on-licensed trade available outside brewer-owned outlets is
usually described as the 'free trade'. Here, too, brewer influence is strong,
through the mechanism of the loan tie. In order to secure either exclusivity for
his own products in a 'free house', or a minimum throughput, a brewer will offer
a loan to the owner(s) of the house at below market rates of interest. It is open to
the owners of free houses to have one loan, more than one, or none at all, but
loan-tying is a widespread practice throughout the United Kingdom. We
estimate that half of the 25 per cent of public houses that are not owned by
brewers are tied to them by loans. About half of members' clubs are loan-tied as
well. About two-thirds of all the beer that brewers sell, including that supplied
for consumption at home, is sold to premises that they either own or tie by a
loan.

We identified over 200 brewers in the United Kingdom, and found it
useful to categorise them as follows:
- 6 national brewers (referred to in abbreviated form as Allied, Bass,
Courage, Grand Metropolitan, Scottish & Newcastle, and Whitbread).
Together these brewers account for 75 per cent of United Kingdom beer
production, 74 per cent of the brewer-owned retail estate, and 86 per cent
of loan ties.
- 11 regional brewers. These brewers together account for 11 per cent of beer
production, 15 per cent of the brewer-owned estate, and 8 per cent of loan
ties.
- 41 local brewers, accounting for about 6 per cent of beer production, 10 per
cent of the estate, and 4 per cent of loan ties.
- 3 brewers without tied estate (referred to en bloc as BWTEs, and
comprising Carlsberg, Guinness and Northern Clubs Federation). These
together supply about 8 per cent of beer production and account for over 1
per cent of loan ties.
- 160 other brewers, all operating on a very small scale. Many are new small
businesses. They have difficulty in getting established because so many
outlets are tied to the larger brewers, and together they represent under
1 per cent of United Kingdom beer production.

The market has become more concentrated in recent years as large
brewers have taken over smaller ones. The six national brewers had 68 per cent
of the market in 1967 and have 75 per cent today.

In Scotland, a much smaller proportion of premises is brewer-owned
than in England and Wales. Loan-tying is, conversely, far more prevalent.
There is greater brewer concentration in Scotland, where Bass and Scottish &
Newcastle share 80 per cent of the beer market. In Northern Ireland there is
virtually no brewer ownership of on-licensed premises. Nor is loan-tying as
widespread as in Great Britain, although it is increasing. Two brewers - Bass
and Guinness - supply 90 per cent of that market.

The brewers' view of the industry

Brewers individually, and The Brewers' Society on behalf of its
industry membership (which collectively accounts for over 9 5 per cent of beer sold in the
United Kingdom), argued that the United Kingdom market for beer was highly
competitive. The Society strongly disagreed with our provisional finding in
December 1987 that a complex monopoly existed, or that there were any public
interest detriments to be found in the workings of the United Kingdom beer
market.

Among the points made by the Society were the following:
- there is self-evident competition between individual public houses locally
and therefore between brewers of every size;
- public houses individually and collectively compete for consumers'
leisure expenditure, and therefore compete also with clubs, restaurants,
home entertainment and many other leisure activities;
- vertical integration in beer retailing has been approved by the European
Commission under Regulation 1984/83;
- vertical integration permits close control of product quality from
producer through to consumer;
- vertical integration has permitted, and competition has encouraged,
brewers to achieve beneficial cost improvements right through the supply
chain;
- the brewing industry has an excellent record of product innovation and
amenity improvement made possible only by the operating and financial
security which vertical integration confers;
- the structure of the industry has, through the tenancy system, allowed
thousands of small entrepreneurs to get into business on their own account
with minimal capital outlay; and
- loan-tying helps the low-throughput public house and club to start up and
stay in business.

The Brewers' Society saw no widespread or focused evidence of
consumer complaint. The industry had adapted readily and well to changing
consumer tastes and social trends. The British public house was an important
institution, arguably unique in the world, and offering the consumer better
value for money than bars in other countries. Neither the public house, nor the
arrangements which kept it as we know it, should be tampered with.

Throughout our inquiry we were struck by the vigour and thoroughness
of The Brewers' Society's response to the many questions we asked and the
points we put back to it. There is no doubt in our minds that the Society is
formidably effective in championing its members' interests.

Our view

Eloquently though the industry's case has been put, we are not
persuaded that all is well. We have confirmed our provisional finding that a
complex monopoly situation exists in favour of the brewers with tied estates
and loan ties.

This complex monopoly restricts competition at all levels. Brewers are
protected from competition in supplying their managed and tenanted estates
because other brewers do not have access to them. Even in the free trade many
brewers prefer to compete by offering low-interest loans, which then tie the
outlet to them, rather than by offering beer at lower prices. Wholesale prices are
higher than they would be in the absence of the tie. This inevitably feeds
through into high retail prices.

The ownership and loan ties also give little opportunity for an
independent wholesaling sector to prosper and offer competition to the
brewers' wholesaling activities, for example by offering a mix of products from
different producers.

At the retail level the effect of the high wholesale price is that free
houses cannot offer effective competition to the brewers' own managed and
tenanted outlets. Because wholesale prices are too high, there is pressure on the
free trade to accept loans, which then fetter their ability to attract customers by
offering their own distinctive range of products, drawn from many brewers.
The development of independent retail chains of the sort seen in the
off-licensed trade is also severely restricted. Although the brewers have been
investing heavily in their public houses, and use this as a justification for higher
prices, there is no opportunity for these developments to be tested by
competition to see whether consumers are getting the mixture of price and
amenity that they really want.

Chapters 11 and 12 set out in detail the detriments which we see as
arising from this lack of competition. In summary, the main ones are:
- the price of a pint of beer in a public house has risen too fast in the last few
years;
- the high price of lager is not justified by the cost of producing it;
- the variation in wholesale prices between regions of the country is
excessive;
- consumer choice is restricted because one brewer does not usually allow
another brewer's beer to be sold in the outlets which he owns: this
restriction often happens in loan-tied outlets as well;
- consumer choice is further restricted because of brewers' efforts to ensure
that their own brands of cider and soft drinks are sold in their outlets;
- tenants are unable to play a full part in meeting consumer preferences,
both because of the tie and because the tenant's bargaining position is so
much weaker than his landlord's; and
- independent manufacturers and wholesalers of beer and other drinks are
allowed only limited access to the on-licensed market.

In summary, we believe that the complex monopoly has enabled
brewers with tied estates to frustrate the growth of brewers without tied estates;
to do the same to independent wholesalers and manufacturers of cider and soft
drinks; to keep tenants in a poor bargaining position; and to stop a strong
independent sector emerging to challenge them at the retail level. We believe
also that, overtime, the monopoly has served to keep the bigger brewers big and
the smaller brewers small.

These are serious public interest detriments. Since significant growth
in the number of full on-licences issued is unlikely, we believe that structural
changes are essential to secure a more competitive regime which will in turn
remedy the detriments.

Our recommendations

The property tie

It has been put to us repeatedly that smaller brewers in particular need
their tied estates to stay in business. In present circumstances, if the tie were to
be abolished altogether we believe that many regional and local brewers would
withdraw from brewing, concentrate on retailing, and leave the market to
domination by national and international brand owners. This would substantially
reduce consumer choice. We therefore recommend, not the complete
abolition of the tie, but a ceiling of 2,000 on the number of on-licensed
premises, whether public houses, hotels or any other type of on-licensed outlet,
which any brewing company or group may own. This ceiling will require the
divestment of some 22,000 premises by United Kingdom national brewers.
(No regional or local brewer currently reaches the 2,000 ceiling we recommend.)
We do not believe that United Kingdom property or capital markets will have
any difficulty in absorbing the change; we are recommending a maximum of
three years for the divestments to take place.

We recommend also that when on-licensed premises are sold there
should be no product-tying covenant attached to the sale. Similarly premises
should not be sold with a covenant precluding them from being used as public
houses.

The loan tie

We recommend the elimination of all loan ties. Those in force at the
date of publication should be allowed to run their course. We intend that this
measure should restore a substantial measure of genuine freedom to the 'free'
trade. It should force competition at the wholesale level on to prices, discounts
and quality of service, and should permit the emergence, over time, of a more
flourishing independent wholesale sector.

The product tie

In order to improve the market opportunity in the tenanted trade, we
recommend that a tenant should be allowed to purchase a minimum of one
brand of draught beer from a supplier other than his landlord. We also
recommend that there should be no tie whatever for non-alcohol or low-alcohol
beers, nor for wines, spirits, ciders, soft drinks or mineral waters.

Terms and conditions of tenants

Given the imbalance of negotiating power, we recommend that
tenancies of all on-licensed premises should be brought within the provisions of
the Landlord and Tenant Act 1954 Part II. We also recommend that the
Director General of Fair Trading negotiate a revised Code of Practice to be
incorporated into each tenancy agreement of premises still subject to a tie in
respect of the supply of beer.

Wholesale price lists

We recommend that brewers should publish wholesale price lists for
the on-licensed trade which set out the discounts that are generally available.
Brewers should also allow beer to be collected from their brewery or depot by
wholesalers at a price below delivered prices. These measures should provide
greater transparency of pricing.

Our recommendations are set out in full in Chapter 12. One member
of the group does not agree with some of the findings and recommendations
made by the other five members. A note of dissent follows Chapter 12.

Overall effect of our recommendations

The majority of us believe that these measures will increase
competition in brewing, wholesaling and retailing, encourage new entry, reduce
prices and widen consumer choice. At the same time they will preserve the good
features of the present system such as the variety of local beers available to the
consumer.

If no changes are made we believe it is inevitable that a very small
number of brewers will increasingly dominate the supply of beer in the United
Kingdom.

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