The Pubs Code: A Very British Compromise

Wonder why your beer is so dear? Resigned to not getting much change from a tenner for two drinks down the local? Your landlord is probably paying wet rent, a product of the beer tie. Under such arrangements, leaseholders and tenants are contracted to purchase drinks from their freeholder. An estimated 48 per cent of pubs are tied to a brewer or pub company.

While these companies offer rent discounts and business support services, such benefits are more than offset by wet rent. As a licensee complained recently to the Morning Advertiser about pubco Enterprise Inns:

All “wet” products must be purchased from the pub company. At full discount that means approximately a minimum of 30 per cent above market value. Some tenants can pay as much as 60 per cent over the going rates. All pumps are measured and monitored so as to make sure you are keeping in line with your “tie”. Large fines are there to discourage you. … We were paying an extra £40 per cask than the local brewery would supply direct. Enterprise kept the difference.

Since the enactment of the Pubs Code last month, government puff proclaims:

All businesses owning 500 or more tied pubs in England and Wales are now covered by the new code. This gives around 12,000 tenants new rights and protections such as increased transparency about the tied deals available, a fair rent assessment and the right to move to a free-of-tie tenancy in certain circumstances.

The Pubs Code applies to the “big six” pubcos: Admiral Taverns, Enterprise Inns, Greene King, Marstons, Punch Taverns and Star Pubs & Bars (Heineken UK).

This new legislation is a response to a campaign to combat the monopoly of the “big six” over the pub trade. The Guardian castigated the “downright bullying between the big pubcos, such as Enterprise Inns and Punch Taverns, and their tenants”. Private Eye damned the pubcos for being “greedy property companies with a cuddly name – and they own nearly half the country’s pub freeholds.”

How did this cartel come to pass? Back in 1989 the Monopoly and Mergers Committee reported on the pub trade. Of concern was above inflation beer price rises in pubs and the lack of competition. Particular attention was paid to the “big six” brewers – Allied Lyons, Bass, Courage, Grand Metropolitan, Scottish & Newcastle and Whitbread -who produced 75 of beer drunk in British pubs. Over half of hostelries were in turn owned by the “big six”.

Put simply, these companies were too big, with beer not their sole concern. Whitbread (current owners of Beefeater Grill, Brewers Fayre, Costa and Premier Inn) generated nearly half of its profits from retail, including businesses Beefeater and Pizza Hut. Grand Metropolitan invested £3.5 billion in Burger King. And if “economies” forced a village pub to close, customers would probably patronize the nearest pub, often owned by the same freeholder.

This report blamed price rises on monopoly practices. To encourage competition the ensuing Beer Orders of 1989 compelled the “big six” to sell 11,000 pubs, just under a third of their estates.

Out of the ashes of this sales blaze rose the phoenix of the pubco. Allied sold 1,800 pubs to Punch Tavern in 1999, a company formed two years earlier when 1,450 boozers were bought from Bass.Enterprise Inns was born in 1991 from the purchase of 368 pubs from Bass, with further acquisitions from Scottish & Newcastle and Whitbread’s portfolios. By 2004, Enterprise was the UK’s largest leased and tenanted pubco, owning 8,700 establishments. In the year to October 2015, Marstons made nearly 50 per cent of its operating profit of £160 million from the beer tie.

The cost of a pint didn’t fall, the Independent in 1997 cited evidence from the Campaign for Real Ale that pub prices had continued to rise above inflation since the passing of the Beer Orders. Former pub landlord and tenants’ rights campaigner Bill Sharp laments:

That all changed with leases and it became a poorer business arrangement because the new owners really didn’t care as long as you bought beer off them and paid the rent.

The day the Beer Orders came in, the relationship between the publicans and pub-owning companies changed. Before, your district manager would come to your kids’ christenings because you were all part of a big family.

The better you did, the more encouragement you got. Since the Beer Orders, it’s been a constant struggle to achieve a normal relationship because it’s been “us and them”. You have to wonder whether it was all for the best.

A monopoly of brewers and freeholders gave way to a cartel of property companies and drinks suppliers.

Once again, a government has promised to shake-up the pub trade. Will such a move result in more competition? Some say you should never talk politics in a pub. Yet the backrooms of Westminster have always been open to the boardrooms of the brewers. Historian Peter Clarke notes of the political economy of early twentieth-century Britain:

Liberal propaganda pointed to the significant number of Tory peers with interests in brewing. It is true that the “beerage” comprised the largest section of British industrialists to become ennobled, partly because brewing was the longest-established large-scale British industry. It is also true that “the trade” was a significant financial contributor to Conservative funds.

Brewers funded 5 percent of the Tory Party’s war chest for the 1987 general election. And the Sunday Express reported in 2014 that opponents to pub reform donated £187,850 to the Conservatives since 2008.

Politics, property and pubs continue to converge and confound competition. Of the eight peers who scrutinized the Small Business and Enterprise Bill promulgating the Pubs Code, one such noble included Tory peer Lord Hodgson of Astley Abbots, director of Marstons 2002-14. Private Eye indicts the code for being:

a complicated, legalistic system of arbitration … It is so complicated, in fact, that even seasoned tenants’ representative at the Pubs Advisory Service can’t make sense of it.

Under the terms of the code compliance will be overseen by an independent adjudicator, Paul Newby. According to business minister Margot James:

Paul Newby is the right person to oversee the code. He knows the challenges pubs are facing and is committed to providing a fair and robust service.

Newby is more than familiar with the challenges pubs are facing. Until April of this year Newby was a director of pubco adviser and valuer Fleurets. In the year to September 2014, Fleurets earned around £1.1million, 23 percent of total fee income, from the “big six” pubcos. Since resigning as director of Fleurets, Newby continues to own an 11.52 per cent stake in the business.

I won’t be calling time on the beer tie just yet.

Sources

 

 

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