Ties that bind

When you ask people about how to improve the fortunes of the British pub, one issue that often comes up is the beer tie. Remove restrictions on supply, and allow pubs a free choice on which beers to stock, and they would be in a much stronger competitive position. On the fact of it, this sounds like a great idea, but in reality things are not that simple.

The “beer tie” refers to the ability of brewers to either own licensed premises directly, or control the supply of beer to them. In many countries, this kind of arrangement is prohibited, both because it is seen as anti-competitive, and because allowing alcohol producers to influence retailers is viewed as undesirable from a public health perspective. But this does not preclude large non-brewing companies owning multiple outlets.

One of the most extreme examples is in the United States, where after the repeal of Prohibition a three-tier system was introduced that compels brewers to sell through independent wholesalers rather than dealing with retailers directly. However, this did not stop the US beer market becoming one of the most concentrated in the world, with virtually all small and medium-sized independent breweries having disappeared by 1970. Indeed it could be argued that it encouraged this trend.

In Britain, in contrast, brewers have always been allowed to own pubs and sell their own beer exclusively through them. In the latter part of the 19th century, as the supply of licenses was restricted, brewers increasingly started buying up pubs to protect their own business and keep them out of the hands of competitors. Until the Second World War, the industry remained relatively fragmented, with no brewers having a national presence in pub ownership.

However, in the 1950s and 60s, there was a wave of mergers and takeovers that led to the creation of the infamous “Big Six” national brewers, who controlled around three-quarters of all the pubs in the country and often had local monopolies or duopolies. There did remain a substantial stratum of smaller independent brewers who in some areas, particularly the North-West, still had a significant presence in the market.

In the early days of CAMRA, many members criticised the tied house system on the grounds that it prevented pubs stocking the beers their customers wanted to buy. But without it it is likely that cask beer would have virtually or entirely disappeared. As much through inertia as a sense of commitment, most of the independent brewers continued to produce cask, as did many Big Six subsidiaries that served a distinct local market. Without this, pubs would have tended to go for whatever was most fashionable at the time, as they did in US, and that was nationally distributed and advertised keg beers.

In the early 70s, a “free house” often meant one that served Younger’s Tartan. Those who were around at the the time may remember the advertising slogan “worth passing a few pubs for”. Cask did virtually disappear in Scotland, where the tied house system was much weaker and there were only two small independent brewers. It is no exaggeration to say that the tied house system saved cask beer in Britain as anything more than an obscure niche product.

While considerable disquiet remained about the market power of the “Big Six”, little was done about it beyond some rather half-hearted pub swaps which resulted, for example, in Greenalls acquiring some former Wilson’s pubs in Stockport in return for some of their own in North Cheshire and South Lancs. However, the nettle was finally grasped in the form of the Beer Orders, which came into effect in 1989. These rules prevented any brewing company owning more than 2,000 tied houses, at a time when the biggest had around 7,000 each. Of any pubs above that figure, half would have to be freed from tie. All tenanted pubs belonging to the national brewers were allowed to stock a cask-conditioned guest beer.

At the time, this was widely welcomed, particularly by CAMRA, but ironically it happened at a time when the grip of the Big Six had already started to loosen. The rise of international lager brands was severing the connection between the brewer’s name above the door and the beers stocked, and splitting companies into brewing and retailing divisions put more focus on the actual performance of pubs. The big brewers started selling off large swathes of their “lower-end” pubs, either to independent brewers such as Belhaven and Vaux in this area, or to standalone non-brewing companies which rapidly became known as “pubcos”.

With hindsight, it is difficult to discern exactly what the proponents of the beer orders expected the outcome to be. It was never realistic that the big brewers would split themselves up into regional companies reflecting the pre-merger structure, and the growing dominance of national and international lager brands made regional beer identities less relevant. And the big brewers were never going to accept operating large estates of free-of-tie pubs, as it completely undermined their business model.

So the outcome was progressively selling the surplus pubs off to newly-formed stand-alone pub companies, often headed by former Big Six executives, who would be able to perpetuate the tied pub model because they didn’t brew themselves. Some of the biggest names were Pubmaster, Punch Taverns, Enterprise Inns and Admiral Taverns. To acquire these pub estates, the new pubcos had to load themselves up with large amounts of debt that eventually were to prove problematical. The erstwhile Big Six in general exited both brewing and pub retailing, and most of them no longer exist in a recognisable form. The one exception was Scottish & Newcastle, who barely scraped over the 2,000 pub threshold anyway. They eventually passed into the hands of Heineken and are still a major pub operator in the form of Star Pubs & Bars.

The major pubcos in their various guises remain the largest owners and operators of pubs in Britain, but have never won much, if any, affection, and have attracted criticism for restricting choice, selling off viable pubs, exploiting tenants and failing to invest in their estates. The issues with the relationship with tenants have led the government to create a Pubs Code overseen by a Pubs Adjudicator to oversee it. Given the precipitate decline in the pub trade in the past twenty-five years, which was not foreseen in the last century, the debt burden has proved an enduring millstone around their necks. In particular, they failed to predict the disastrous outcome of the 2007 smoking ban, with some executives even painting it as a business oppporunity.

It has even been questioned whether this is a legitimate business model at all. Why should a company be able to control the supply to lessees when they don’t make any of the products themselves? However, if you look at most of the remaining family brewers, most of the beer sold in their pubs is bought-in keg and lager brands. I remember listening to a presentation by the directors of Robinson’s where they said they had a target of 30% of sales being their own production. Hydes can’t be much more than 15%. This is surely a difference of degree, not principle. Only a handful of brewers such as Holt’s and Samuel Smith’s are honourable exceptions who seek to make all their draught sales their own products.

There are many parallels in other markets and industries where self-employed people or independent companies operate businesses where they are operating under the banner of a parent company and purchasing stock from them. Examples include convenience stores, restaurants, fuel retailing and domestic and industrial services. It’s by no means unique to pubs and can offer people a relatively low-cost and low-risk route into self-employment, as pubs have long done.

The charge is also laid that pubcos are primarily interested in property rather than actually running pubs. Yes, they do have a keen eye for property market considerations and are not going to hang on to pubs for sentimental reasons, but the same is true of Wetherspoon’s and family brewers. They do have area managers and business development officers, they offer training, marketing and financial advice, they invest in refurbishing pubs, they introduce new branding concepts. They may not do these things well, or sufficiently, but it cannot be argued that they do not do them at all and have no interest in pubs as ongoing businesses.

In response to this, various groups and social media accounts have grown up that purport to “champion” or “campaign for” pubs. But they are not doing so in a wider sense, but merely articulating a sense of grievance against pubcos. This may be justified to some extent, but they never seem to be able to get beyond moaning to put forward any positive alternative vision for the industry. As I said back in 2014,

So you have to wonder what is the motivation for these people? Are they basically living in a fantasy world, or are they spurred on by a visceral anti-capitalist agenda that completely ignores the real reasons pubs are closing – often combined with an animus towards the evil supermarkets who have the cheek to sell us a wide range of stuff at keen prices? It almost comes across as a deliberate distraction technique. The one thing that is certain is that they aren’t really interested in the long-term viability of pubs.

The idea that tied leases could be scrapped is entirely fanciful. The raison d'être of pubcos is operating pubs, so, as with the Big Six before them, they are not going to hold on to estates of free-of-tie properties. They would convert the best of them to direct management, or the franchise models that are becoming increasingly common, and sell the rest off. A few might go to sitting tenants, but most would be snapped by true property companies who would milk them for all they were worth and have no interest in maintaining them as pubs. And independent free houses are only guaranteed survival as long as their owner wants to stay in the business. Whenever they want to retire or move on, the pub is put “into play” and its future is at risk.

It is certainly not my intention here to defend pubcos. They are operating a fundamentally flawed business model that only exists because of historical factors. There is a rationale for operating an estate of managed pubs following specific trading formats, as Mitchells & Butlers do, but nobody would invent unbranded tied leased pubs if they didn’t exist already. The industry would be a lot stronger if many more pubs were owned by brewers. But we are where we are, and abolishing tied leases would make things a lot worse. Plus it isn’t going to happen anyway, so perhaps people would be better off devoting their efforts to campaigning against the anti-drink lobby and high alcohol duties.

Imagining that the pub landscape can be transformed into one of independent freeholders all able to choose beers from the whole breadth of the market is a “three acres and a cow” fantasy that simply isn’t going to happen. The reality is that most of the pubs in the country, particularly the bigger ones with higher volumes, will continue to be owned by large commercial companies who want to control what they sell and how they are run. Any attempt to improve the competitive environment in the industry has to recognise that.