MPs put pub companies on the spot over tenants' complaints

Parliament is once again probing the pubs industry. This time it's beer sales and rents

While the nation's pubs are full to the rafters thanks to England's Euro 2004 performances, a powerful group of MPs is taking a closer look at the £18bn business behind the bar.

While the nation's pubs are full to the rafters thanks to England's Euro 2004 performances, a powerful group of MPs is taking a closer look at the £18bn business behind the bar.

The Department of Trade and Industry Select Committee kicked off its inquiry yesterday into the vice-like grip that pub companies have on their tenants and the price of beer.

"There does seem to be a problem here," Martin O'Neill, the Labour MP and chairman of the committee, said after listening to evidence from the Federation of Small Businesses (FSB) and the Campaign for Real Ale on the pubs market.

The committee's inquiry follows a long history of government and regulatory investigations into the sector. A competition inquiry in the late 1980s resulted in the Beer Orders, which called time on the dominance of brewers as pub owners. The Government wanted an end to the vertically integrated chain and demanded limits on the number of pubs that brewers could have in their estate. Thousands of pubs were put up for sale as a result, and from here emerged separate pub companies, or "pubcos", which snapped up pub properties and leased them out to individual, self-employed entrepreneurs. These licensed tenants pay rent on their property and must buy all their beer from the pubco through what is known as a "beer tie".

Despite clearance in 2002 from the Office of Fair Trading on the nature of the beer tie, there are renewed fears that pubcos, like brewers before them, are too dominant in the market. More than half of pubs in Britain now operate this tenanted model, with the rest either managed by in-house staff or independently operated. Pubcos, which act as a rent collector on one side and a large-scale beer purchaser on the other, are accused of creaming off the profits they have squeezed from their suppliers and not passed on to their publican tenants.

The publicans have started to fight back. The FSB, which represents about 10 per cent of publicans, told MPs yesterday that customers pay 45p more per pint through a tenanted pub because of the stranglehold pubcos have on pricing. Its evidence is so far convincing the committee.

"Tenants appear to be entering into a major financial commitment with only a rudimentary knowledge of what it means and are becoming the creatures of pretty ruthless companies. Most of the power seems to be with the pubcos and not enough with the tenants," Mr O'Neill said.

His inquiry will focus on the margins made by the pubcos on the beer they buy from brewers and what they then charge their tenants. He also wants to examine the link between rents charged to tenants and the beer prices charged by pubcos, as well as establish the basis on which rents are set and increased.

At present, the pubcos keep the methodology behind their rent and beer rates a closely guarded secret. Estimates from Investec Securities suggest there is a hefty mark-up between the wholesale price and what is charged to tenants. It believes pubcos buy an average barrel of beer for £130 from the brewer and sell it to their tenants for £300. If the tenant had bought the same barrel from an independent wholesaler, it would have cost about £190. Tenants are then often forced to pass this increase on to their customers, making them less competitive.

David Bishop, of the FSB, said: "And it is not just the beer tie that is making life difficult for tenants. Pubcos are increasingly forcing their tenants to buy their spirits and soft drinks from them at their prices as well, and they are taking a larger and larger share of their fruit machine takings."

Guest beers, introduced with the Beer Orders, will also be scrutinised. Pubs were allowed to sell guest beers not from their pubco, but this was often at a much increased price. This is now all but non-existent and the MPs want to ensure tenants have the freedom to support their local ales.

Both Enterprise Inns and Punch Taverns, by far the most dominant companies in the tenanted pubs market, declined to comment yesterday on the issues at the heart of the select committee inquiry. But in a statement issued when the committee announced its inquiry last month, Enterprise defended the high price tenants pay for their beer by pointing to the low rents they enjoy to be part of the pubco estate.

"The average rent charged by the company to its tenants represents just 4.6 per cent of the average value of pubs in its estate. In return for this discounted rent, the licensee is required to buy its beer from Enterprise at prices higher than might be available to some licensees in the free market. Taking account of this discount foregone, the average rent charged is still just 7.3 per cent of the average pub value, very much in line with normal commercial rental yields," the company said.

The pubcos also argue that the model provides a very cheap method of entry in to the pubs market for entrepreneurs, and that tenants benefit from the wide variety of drinks products that the pubcos have the purchasing power to supply. They also say tenants benefit from pubcos paying for the maintenance of their properties, as well as training support.

Ted Tuppen, the chief executive of Enterprise, said in the statement: "The tenanted business model, when fairly managed by both parties, represents a tremendous, low-entry-cost opportunity for entrepreneurial licensees. Research shows that the majority of tenants are happy with their agreements, and profitable, with the average licensee profit in the Enterprise estate in excess of £37,000 per year."

But according to a recent survey by The Publican magazine, an average publican earns less than £25,000 a year. Losing out on some £15,000 from unfathomably high beer prices, as the FSB suggests, will be hard to swallow. Enterprise Inns, the largest tenanted pubco, has admitted its tenants lose out on some £67m a year by having to pay its beer charges.

The parliamentary committee has so far heard only one side of the story. The pubcos will put forward their cases next month and many are confident that their trading relationships with tenants will be largely left unchanged.

But the pubcos may be in line for some serious reputational damage and could be forced to a set up a more transparent code of conduct on their rent and beer charges. A further inquiry can also not be ruled out.

As James Wheatcroft, an analyst at Investec, said yesterday: "There is concern that the dominance of pubcos is affecting the price not only to tenants, but to the end consumer. The tenanted pub model works on some sense of partnership between the licensee and the pubco. Beer supply terms from the brewer have improved for pubcos, but the wholesale price to tenants is going up. Rents are also going up. Tenants may well ask where the element of partnership is in that."