by David Gredley
The controversy over the Monopolies & Mergers Commission’s report into the Supply of Beer has yet to be settled. The only certainty is that there will be changes which are likely to affect the licensed property market.
It appears to have become a trend for governments to unsettle the brewers from time to time. The last Labour Government, at Roy Hattersley’s instigation, caused three of the major brewers (Courage, Allied and Bass) to swap some pubs between them in the mid-1970s. This was a gesture to break any possible monopoly by diluting the concentration of public houses owned by these three in certain areas of the country, for example, Bass in the Midlands and Courage in the Thames Valley.
The most recent attempt to break any monopoly happened earlier this year when the present Government appointed the Monopolies & Mergers Commission (MMC) to produce a report with the specific brief to investigate whether a monopoly existed in relation to the supply of beer for retail sale in the UK. The commission unanimously concluded that a monopoly does exist in favour of brewers who own tied houses or who have tying agreements with “free” houses in return for loans at favourable interest rates. The MMC report produces the following figures:
The MMC’s recommendations are summarised as follows:
1. The property tie
— a ceiling of 2,000 on the number of on-licensed premises which any brewing company or group may own.
This ceiling will require the divestment of some 22,000 premises by UK national brewers (no regional or local brewer currently reaches the 2,000 ceiling);
— when on-licensed premises are sold there should be no product-tying covenant attached to the sale and premises should not be sold with a covenant precluding them from being used as public houses.>
2. The loan tie
— the elimination of all loan ties except those in force at the date of the publication of the MMC’s report.
3. The product tie
— a tenant should be allowed to purchase a minimum of one brand of draught beer from a supplier other than his landlord.
— there should be no tie whatever for non-alcohol or low-alcohol beers nor for wines, spirits, ciders, soft drinks or mineral waters.
4. Terms and conditions of tenants
— tenancies of all on-licensed premises should be brought within the provisions of the Landlord and Tenant Act 1954, Part II. This recommendation actually goes further in that it suggests that a landlord may not take back a premises at the end of a lease for the purposes of:
- installing his own manager if the existing tenant wishes to continues in business at the premises on the terms agreed;
- redevelopment or reconstruction without first offering the tenant reasonable alternative business premises with reimbursement of reasonable relocation expenses;
- disposing of the premises to a non-brewery purchaser without first giving the tenant a reasonable opportunity of acquiring the premises at market value; and
- tenants may assign the premises without restriction and may receive a goodwill payment.
5. Wholesale price lists
— brewers should publish wholesale price lists for the on-licensed trade which set out the discounts that are generally available to produce greater openness in pricing.
If these recommendations are accepted, the effect on the licensed property market would be dramatic.
In response to the ceiling of 2,000 public houses for each brewer, the following are examples of courses of action open to the brewers:
- to sell off their breweries and keep their on-licensed properties;
- to sell off their on-licensed properties and keep their breweries; and
- to split their operations into components parts.
It is unlikely that the big six brewers would wish to sell off public houses they own above the ceiling of 2,000 since this is the most profitable area of their business. There may be, however, intense activity in brewers disposing of their less profitable, low-barrelage public houses.
If the brewers decide to keep all their on-licensed premises and sell off their breweries, there would be an ideal opportunity for overseas brewers such as Anheuser Busch of America or Kirin of Japan to strengthen their foothold in the UK market. If that happens then the new owners may eliminate the production of smaller brands and concentrate on the main brands to increase profitability, which might well reduce the customer’s choice.
If the big six brewers should sell off their on-licensed premises and keep their breweries, this could lead to some 22,000 public houses being placed on the market over the recommended three-year period. This sudden supply of property could lead to a drop in value for all on-licensed properties and again provides overseas breweries with an ideal opportunity to increase their UK presence.
A further consequence of the fall in prices could be that smaller public houses in rural communities and with low turnovers may be more valuable for other uses, such as residential, and instigate the demise of the British country pub.
If brewers were to split their operations into their component parts, each owning a maximum of 2,000 public houses, the industry would go back to the 1960s before the major takeovers occurred and this could lead to inefficiencies and increased overheads.
Elimination of the loan tie would remove a popular and growing source of finance for public house operators. This would leave a vacuum which the banks may try to fill or, perhaps, encourage wholesalers to become money lenders who, being non-brewers, will be able to offer tied loans.
Bringing public houses within the protection of the 1954 Act for the first time could increase their attraction to property investors as it will bring them in line with other forms of commercial premises. However, removing two grounds with which the landlord can regain possession at the end of the lease term, ie for his own occupation or for redevelopment, may introduce an element of uncertainty.
Lord Young has now, however, given the brewers the opportunity to put forward their own suggestions. One of their ideas which is currently being debated is the redistribution of on-licensed premises throughout the UK so that no one brewer dominates any one area. This would have an osmosis effect where brewers with a concentration in one area would be diluted by other brewers, establishing a more homogenous representation by all breweries throughout the UK. The debate in the House of Lords on June 14 indicated that if the brewers are able to convince the Government that they will loosen their hold on premises which are known as free houses, even if a freehold is in the brewer’s ownership, then the recommendation of the commission to dispose of all bar 2,000 may not be enforced.
It will be a considerable time until the full ramifications of the report are realised and the Minister for the DTI announces his final decision as to which recommendations and in what form they are to be implemented. It now seems unlikely that thousands of public houses will be coming under the auctioneer’s hammer. However, it is the responsibility of Government, brewers and publicans to recognise and maintain the popular tradition of the British pub as an important UK institution which is, arguably, unique in the world.
