Wednesday, 1 July 2009

Freedom in ties

Now this is not yet another post saying how we need the tie to defend John Willie Lees’ dishwater masquerading as beer against the depredations of stuff from Pictish and Thornbridge that actually has hops in it.

But, quite frankly, from the point of view of free market economics, I really see nothing wrong in principle with the tie. If someone owns a pub that they wish to lease out to someone else on the basis that the lessee will exclusively buy and resell some products from the lessor, then why shouldn’t the two of them freely enter into that arrangement? Obviously there need to be safeguards against the abuse of power by the lessor, and against the establishment of local and national monopolies, but apart from that I don’t see the problem, and don’t regard it as stifling competition. The fact that there are so many thriving micro-breweries suggests the tie doesn’t in practice operate as a barrier to entry in the brewing industry.

This kind of arrangement is common in many other retail and service businesses – for example many fast food chains such as Subway, McDonalds and Domino’s Pizza are largely run on a franchise basis. Petrol stations are much the same. Car dealerships have exclusive relationships with manufacturers, yet nobody moans that you can’t buy Fords at a Vauxhall dealer. And surely any business, whether a Tesco or a Wetherspoon’s, that is directly managed, is effectively tied as the owning company dictates what is sold there.

Even if the tie was abolished, then it is hard to see how pub owners could be prevented from switching pubs over from tenancy to management or using a franchise model. Indeed the former is exactly how Sam Smiths’ run their pub estate – put every pub under management and have all products supplied centrally with virtually no purchasing discretion allowed to the manager. Without the tie, other forms of collective running and supplying of pubs would arise, and to imagine that it would result in 50,000 independent freetraders is pie in the sky. And, even if this could be achieved, it is questionable whether the atomisation of the market it would produce would really be to the benefit of consumers.

The problems of the giant pub companies really have little to do with the tie – they essentially stem from a flawed business model that was not resilient to an economic downturn and did not offer any distinctive identity to lessees. They will crumble and fall because of their own internal contradictions.

10 comments:

  1. I agree with most of that except of course the Lees bit. From someone who drinks Robinsons, that's pots and kettles! (-; Of course if you'd have ended up here and me there, the positions may well be reversed.

    The problem is that some people, unlike you, aren't thinking widely enough. The real danger with tinkering with the tie is making things even worse. Babies and bathwater. Family brewers and other small brewers have built up their estate, largely debt free, at their own risk. They plan and invest in it. By and large they treat their tenants well. Why should that be jeopardised by PubCo abuses which arose from previous tinkering - The Beer Orders? There may well be a case to force everyone who owns a pub to sell at least one beer from someone else, though I am yet to be entirely convinced, but the way forward is to end unfairness and abuse, not to wholesale abolish. To tilt the balance back, so that pubs can make a living again.

    Another point is that the small brewers own a very small percentage (under 5%) of Britain's pubs - well - England's really. Why on earth would you monkey about with that? To whose benefit?They just aren't the problem.

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  2. I do actually quite like Lees beer when well kept, but I'm sure you knew that anyway ;-)

    It's a pisstake of certain anti-tie views that end up on here at times.

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  3. Yes but what about the link between the tie and global warming?

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  4. I also agree with much of this post. Whilst the law could be used to make some minor adjustments I do think the market (never thought I'd say stuf like that) will sort out some of the pubco excesses.

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  5. Good points Curmudgeon. I don't agree with you, especially as I'm having difficulty seeing past your false assertion in the first paragraph.

    Sorry, yes I am pulling you leg a little, before you get too upset.

    I think your points are quite complex and deserve a better response than a simple glib comment here. I'll have a longer think and maybe post something.

    A couple of key things though:

    Most food franchises I think are different in as much as the building is often owned by either the franchised business or an independent property management company. The franchisor often just provides branding and products. In the case of McDonnalds for instance, the property owner or operator could easily kick out the brand and put somebody else in if there was an issue with the terms. This is not an option with the pub operator. His only option is often to wind up his business and move his home.

    Likewise, most car deals and petrol station owners I know switch the brand they deal with when it suits. Rarely is the building and building owner tied in the same way as pubs are.

    I think managed chains are a completely different thing. They are fair and provide the mass market hemoginisation that the pubic wants without some poor soul having their life dream shattered by the reality of restrictions.

    Do I know the best answer? No I don't. Do I think there is a danger in it all going terribly wrong? Yes I certainly do. Would a compromising solution create loop holes? That's my worry.

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  6. Oh, and we need to build windmills, that would sort everything.

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  7. A number of interesting points there, Dave.

    The aim of the post was to make the point that, as it applies in the UK at the moment, the tie is not anti-competitive (although I accept it has the potential to be so). Only about 15% of pubs are actually tied to breweries anyway, and that excludes the vast number of clubs, restaurants and hotel bars. There is generally little problem in obtaining new licences, and no shortage of free-of-tie properties available to buy, so it can't be said there are significant barriers to entry either.

    While an individual brewer can't sell directly to a Punch lessee, neither can he sell directly to a Wetherspoon's manager. But in each case he is free to go to the company head office and get his products put on their list, as many do. And from the customer's point of view there is no real difference between a managed and leased pub anyway. The idea that you would ban tenancies but still permit managed pubs seems totally illogical.

    I accept that fast food franchisees and motor dealers tend to own their own premises, or lease them from someone other than their main supplier, but in these industries the suppliers are often major sources of finance too. Historically brewers have ofted imposed an effective tie on nominally free outlets through conditions attached to loans.

    And even in a completely tie-free world, it is likely that most pub operators for simple ease of doing business would end up buying most if not all of their wet stock through a single wholesaler, who no doubt would offer quantity discounts on particular products they wanted to push, which would have a similar end result to the tie anyway. If you go to countries that don't have the British-style tie system you tend to find more homegeneity in the products on offer, not less. Pretty much every French bar seems to sell either Heineken or Kronenbourg!

    The USA has a very rigid separation of powers whereby brewers have to sell to independent wholesalers who then sell on to bar operators. Yes, there are lots of microbrewers and brewpubs in the US, but Anheuser-Busch, Miller and Coors between them enjoy a very high level of market dominance and you have the ridiculous situation where a brewpub can't open a second outlet to sell its beers.

    Be careful what you wish for|

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  8. Martin, Cambridge2 July 2009 at 22:02

    Agree, Curmudgeon. I have a problem with the word tie with it's anti-competitive implications for what is just a normal commercial arrangements.

    The real issue is how Thornbridge etc get their (often) excellent beers to the public in draft form, other than at beer festivals where they seem to have an advantage over the family brewers products. How did Lees/Robbies/Marstons achieve growth - I guess it takes time and the best will prosper.

    By the way, the Lees in the Rifle Range in Chadderton is a great example of their beer.

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  9. Thornbridge are building a small chain of tied houses...

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  10. As indeed are Copper Dragon.

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