The so-called "beer tie" operated by a number of Britain's largest pub chains is forcing pubs out of business all over the country and must be regulated more closely, a leading think-tank warned today.
Landlords in tied pubs often pay as much as 45 per cent more for their beer than independent rivals and this is putting them at a huge competitive disadvantage, the Institute for Public Policy Research said.
The warning follows statistics from the British Beer and Pub Association which show that, on average, 25 pubs around Britain are closing every week. Some 1,300 pubs shut up shop in 2010, accounting for the loss of about 13,000 jobs. While the industry has been hard hit by a number of challenges, from the smoking ban to the consumer spending slowdown, the IPPR research shows tied agents are facing a particular handicap.
In a tied pub, the landlord is obliged to buy beer from the company from which the premises are leased, even if this means paying substantially more. Independent publicans, meanwhile, are free to buy from any supplier.
About half of Britain's 50,000 pubs are operated on a tied-agent basis, with the two market leaders, Punch Taverns and Enterprise Inns each leasing more than 6,000 pubs to landlords.
Such companies argue that tied agents benefit from perks that are not shared by their independent rivals – in particular, much cheaper rents. However, the IPPR said such benefits were not sufficiently valuable to compensate for the high cost of the pub chains' beer. Tied agents were much more likely than independents to be suffering financially during the current downturn, it added.
"Thousands of publicans across Britain are being put under significant financial pressure by the beer tie and our survey of publicans shows they have suffered worse through the recession because of this," said Rick Muir, associate director of the IPPR. "The Government should act to reform the way the industry operates and give publicans greater freedom from the big pub companies."
In fact, the tied-agent arrangement has been studied in the past and escaped intervention. The Office of Fair Trading rejected a shake-up of the sector four years ago, while more recently a parliamentary inquiry fell short of calling for fundamental reforms.
Nevertheless, the IPPR insisted its research was compelling. It said 57 per cent of tied-agent publicans currently considered themselves to be struggling financially, compared with only 43 per cent of non-tied. And nine in 10 of those publicans blamed the tie for at least part of their difficulties.
The IPPR also pointed out that 46 per cent of tied landlords earned less than £15,000 a year; the equivalent figure in the independent sector is 22 per cent. Nine in 10 tied pubs make an annual profit of less than £30,000, compared with 74 per cent of independents.
The think-tank is calling for a string of reforms. It wants the largest chains to be forced to liberalise the contracts its tied agents are expected to sign, by requiring the inclusion of a clause to opt out of the tie, for example. It also wants the large operators to be forced to publish and share more information about their costs and turnover.
"The beer tie limits the commercial freedom of tied publicans, who are forced to pay more for their beer than non-tied operators," Mr Muir added.