Beer prices to fall as OFT opens inquiry as OFT inquiry start

The price of beer could fall as a result of an Office of Fair Trading investigation launched yesterday into the big brewers' wholesale prices.

With brewing shares under assault after the surprise decision was announced, there were also suggestions that the inquiry could hasten the decline of the tied public house system operated by the beer industry.

The OFT believes brewers are charging free trade customers 15p to 30p a pint less than their own tied tenants - a 20 to 40 per cent difference in the wholesale price of around £200 a barrel.

It wants to know why this is happening and is threatening a new Monopolies Commission investigation if it does not get satisfactory answers from the brewers - or alternatively their agreement to a policy change.

Brewers claim the high prices are offset at least in part by other more favourable terms of their leases, including the rents.

The immediate concern is the price charged to tenants of Inntrepreneur, the chain of 4,300 pubs owned by Grand Metropolitan and Courage.

The inquiry is a victory for the Inntrepreneur tenants, who have been campaigning for a fairer deal from their landlord and have taken it to court.

But the OFT made clear that the inquiry is a much wider one into pricing policies among all the large brewers which operate similar systems.

The probe began at the European Commission, which raised concerns that Intrepreneur tenants are obliged by their leases to buy beer from Courage at significantly higher prices than those charged to free trade customers, with whom they are often in competition.

The differentials were spotted when the commission examined an application by Inntrepreneur for exemption from EC competition law, which would otherwise lead to a ban on the tied house system.

The OFT said it had agreed with the commission that as the UK authority it was better placed to inquire into industry-wide beer differentials. The European exemption application is on ice while the three-month OFT inquiry takes place.

Sir Bryan Carsberg, director general of Fair Trading, said: "My aim will be to identify the effects of the differentials in wholesale prices of beer on the competition between tied and free pubs and decide what, if any, action is needed to ensure that competition and choice develop as effectively as possible.''

The decision led to buckpassing in the industry, with some big firms privately claiming that the real targets were Inntrepreneur and Courage rather than their own operations - and the latter two insisting that it was a genuinely industry-wide investigation into all big brewers with tied houses.

Inntrepreneur said the inquiry focused primarily on pricing policies and it rejected suggestions that it would extend to the UK's tied house system. It was "confident that the structure of the Inntrepreneur lease is lawful and enforceable.''

Sir Bryan made clear that the OFT inquiry would take into account lower rents to tied tenants and the benefit to consumers of price competition among the large brewers.

The OFT acknowledged that the price differential has existed for a long time but has widened sharply in the last couple of years. Analysts blamed this on intense bargaining for discounts on beer by large independent chains of free houses, exploiting the intense competition among brewers as off-sales rise and consumers switch to cheap cross-Channel imports. Scottish & Newcastle has already begun to give wholesale discounts to tied tenants.

John Spicer of SG Warburg, said `'Beer prices will come down. Whether they get passed on to the consumer is another thing altogether.''

Geof Collier of NatWest Markets said that if the tied houses all won the discount now offered to free houses, pre-tax profits of Allied would fall 2 per cent, Bass 3 per cent and Whitbread 5 per cent. But yesterday's share price falls fully reflected this. He believed the inquiry would be the prelude to an eventual removal of the tie for pub tenants.