Beer Competition comes to a head

Independent brewers have called for a new monopolies investigation into the brewing industry, which they say is dominated by the interests of four giant companies, stifling innovation and threatening hundreds of small breweries with closure.

It was ten years ago this month that the Monopolies & Mergers Commission signalled the biggest shake-up in UK brewing history with its 1989 Supply of Beer report.

But a decade after some of the report’s recommendations were enacted through the Beer Orders, critics say the moves have back-fired, leaving consumers saddled with a lack of choice.

Chancellor Gordon Brown vowed to crack down on anti-competitive practices in last week’s Budget (MW March 11) and with a new Competition Bill on the stocks, this has reignited calls for the industry to be investigated.

The Supply of Beer Orders in 1989 required the national brewers to sell off half their tied pubs – pubs leased by tenants who are obliged to take the brewers’ beer – in excess of 2,000 outlets. A second Order said all remaining national brewery-tied tenants must be free to buy at least one brand of draught cask-conditioned beer from another brewer. They could also choose their own suppliers for non-alcoholic and low-alcohol beers and all soft drinks, ciders, wines and spirits. The concern a decade later is that the national brewers have increased their share of UK beer supply.

In 1989, the then six national brewers (Grand Metropolitan, Bass, Courage, Scottish & Newcastle, Whitbread and Allied Breweries) accounted for 75 per cent of all beer produced in the UK. In 1997, four nationals (Bass, Scottish Courage, Whitbread, and Carlsberg-Tetley) accounted for 82 per cent.

The result has been the creation of giant pub companies, which have acquired the majority of pubs sold off by the brewers after the Beer Orders.

Pubcos – such as Inntreprenneur, Punch Taverns, and the Unique Pub Company owned by Japanese bank Nomura – each own over a thousand pubs, and are able to play the large brewers off against each other to ensure heavily discounted supplies. The pub companies are also keen to get their hands on only the most popular brands. But Peter Thomas, managing director of Punch Taverns, the pubco formed from the purchase of Bass’s 1,500-strong tenanted estate in 1997, says: “The Beer Orders have not achieved what they set out to. There is more choice and the market is competitive but the public perception is still that the big brewers are in control.”

The small brewers, which at first blossomed on the implementation of the Beer Orders, are unable to compete with heavily discounted pricing and have struggled to gain a foothold in the pub chains. They are now closing in increasing numbers, with 25 shutting down last year.

David Roberts, managing director of Pilgrim’s Brewery and a member of the Society of Independent Brewers (SIBA), says: “We are teetering on the edge of another MMC investigation. Choice has not improved, apart from imported beers as a result of cheaper duties.

The public interest question has still not been addressed.”

SIBA’s own position in lobbying Government centres on the introduction of Progressive Beer Duty (PBD), a system that would allow brewers which produce less than 200,000 hectolitres a year, to pay only half the duty on production.

SIBA says the cash saved in lower duty payments would be reinvested in improving production techniques and facilities, as well as allowing small brewers the financial leeway to compete with the major national players on price.

It would also bring the UK into line with the US, Canada and every other European brewing nation, where small breweries thrive. In Germany there are 1,300 independent breweries, and in the US the “micro-breweries” have boomed in recent years.

Philip Parker, managing director of the Freedom Brewing Company, an independent brewer based in Fulham, London, says: “There was a sliding scale of duty among the MMC recommendations in 1989, but somehow it got lost along the way. Since then, small brewers have been banging their heads against a brick wall to get it introduced. But it is so difficult to combat the PR of the larger players.”

The small brewers’ annual battle to have PBD made law has this year brought minds back to the MMC report, when the opportunity for change was given to then Secretary of State Lord Young of Graffham. Ten years on, many feel it was an opportunity missed. Indeed, progressive beer duty was one of the recommendations made by the MMC following its 1989 investigation. The report said its introduction would “encourage the growth of such brewers, and hence improve competition and consumer choice”.

Progressive beer duty was among a number of recommendations which were either toned down or removed completely following intense pressure from the national brewers.

Also among the changes was the lowering of the limit of tied, tenanted pubs which the national brewers had to sell due to concerns over the lack of means of entry other brewing companies had to tied UK pubs.

These changes followed speculation over the funding of a group of 50 Conservative back-benchers who lobbied against the Supply of Beer report through a Commons motion.

In his autobiography, Lord Young states: “It was nothing to do with public opinion, which was uniformly for the proposals. It had nothing to do with the merits, which were rarely discussed. It had everything to do with the brewers’ support for constituency associations up and down the land.”

The brewers denied any impropriety. However, many of the MMC recommendations were diluted before becoming law in spite of Lord Young having said he was initially “minded” to accept the MMC’s conclusions.

Parker says: “There were some very sensible recommendations made in the MMC report, but they were very different from the Orders that were eventually implemented.”

Strangely, the main opportunity for small brewers to establish themselves in brewery-tied pubs, the guest beer provision, was not removed but implemented in full. It obliged brewers with tied pubs to allow tenants to source at least one beer from another supplier.

But most feel this has since become obsolete as barely a quarter of the pubs originally eligible under the Orders are now owned by a national brewery.

Of the 11,000 pubs eligible to take a guest beer, only about 2,200 remain under national ownership, with the remainder having been sold either to regional brewers or to one of the plethora of non-brewing pub companies.

Roger Protz, editor of The Good Beer Guide, says: “The gaping hole in the Beer Orders was that the pub chains were not obliged to take guest beers. That, combined with the huge discounts they can demand from suppliers, means regional brewers are being squeezed out of the market.”

The competitiveness of beer pricing in the free-trade where pub companies operate has led to the loss of many of brewing’s most famous family names, including Eldridge Pope, Gibbs Mew, Morrell’s and Burtonwood. The bulk of these have sold off their brewing arms to concentrate on their more lucrative pub retail divisions.

These companies, while recognised for their brewing excellence, have been unable to compete with the household brand names which are brewed by the national players and backed by multimillion pound advertising budgets.

But the remaining regional players are now coming to accept the arguments of their national competitors, and believe that losses in the sector are a demonstration of a successfully competitive market.

Anthony Fuller, chairman of Fuller’s Brewery, which makes London Pride among other well-known cask ale brands, says: “The decline in family brewers is sad but companies will find it difficult if, as well as brewing good beers, they cannot get them known outside their home area.”

The argument is in accord with that of the national brewers, which feel their growing share reflects only a more competitive market and indicates the hard-earned strength of their nationally distributed brands.

Pugh Philips, corporate communications director at Bass, says: “The structure of this market tends to work against small brands, but that is an inevitable consequence of continued economies by the larger players in what is a highly fragmented industry.”

Philips adds that the British beer market remains one of the most choice-abundant and price-competitive in the world, a view with which neither SIBA nor CAMRA disagrees.

Indeed, both feel that the choice of beers available in UK pubs remains the envy of other European drinkers.

Yet both also feel that some of that choice has become characterised by the national brewers’ own homogenous brands, which are complemented – or otherwise – by similarly homogenous foreign brands that in most are brewed under licence by the same national brewers.

Parker says: “They are all the same and that is the opportunity for people like us. We make beers using only the best ingredients and in a brewing process that takes six weeks rather than ten to 14 days. That is our point of difference.”

The small brewers can offer significant competition and choice in the market to challenge the dominance of the national brewers, a point made by the original MMC report.

But without legislative backing, their chances of gaining a place on the bar next to the national brands in the rapidly consolidating pub companies remain slim.

As the Government sets about assessing competition policy towards monopolistic markets, it may do well to consider the struggle of the small brewers which continue to be shackled.

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