PRESS RELEASE

Campaign for Pubs

Campaign for Pubs expresses grave concerns about the Government’s recent move towards deregulation of UK competition

The Campaign for Pubs has expressed grave concerns about the Government’s decision to replace the head of the Competition and Markets Authority (CMA) last week in an apparent move to ‘deregulate the economy in order to attract oversees investment’ but in reality, meaning doing the bidding of huge corporations and private equity, whose interests are so often at odds with British small and medium-sized businesses, with the pub and brewing sector being a stark example.

The interference by the Government in what is supposed to be an independent regulator has caused serious concern in Parliament and amongst competition law experts but the move to deregulate in favour of offshore companies is of significant concern to many smaller businesses and consumer groups, with the inevitable outcome of such a strategy being reduced competition and the increasing dominance of global companies. The Government claims it has interfered to be ‘pro-growth’ however the real vehicles for growth are small and medium sized businesses, who are already reeling from shock announcements in the Government’s budget, which will lead to significant rises in wages, employer’s NI payments and business rates costs this April.

The announcement of the shift in tone coincided with a meeting last Wednesday between Campaign for Pubs representatives and Justin Madders MP, the Parliamentary Under Secretary for Employment Rights, Competition and Markets in the Department for Business and Trade.

At the meeting the Campaign raised concerns directly related to competition and weak and failed regulation, pointing out the way much of the UK pub market is subject to a deeply anti-competitive practice in the form of the supply tie (often called the beer tie) whereby a pub owning company is allowed to restrict its own tenants’ ability to purchase goods and services on the open market, instead compelling them to buy a restricted range through the pub company itself at hugely inflated prices.

Over recent decades the supply tie has been routinely abused and exploited by pub owning companies in order to extract excessive returns from tied leaseholders, a fact that was recognised and acknowledged by no fewer than four successive business Select Committees before the Coalition Government was finally forced to intervene in November 2014 when a new Code of statutory regulation was proposed as part of the Small Business, Enterprise and Employment Bill. The debate on the introduction of the Pubs Code included a vote on a backbench amendment tabled by Greg Mulholland – then the MP for Leeds North West, now Campaign for Pubs Campaign Director. The intention of the Market Rent Only clause was to introduce the simple right for tenants to fully opt out of their tied supply obligations at certain trigger points and pay an independently assessed market rent.

This amendment passed in a rare defeat for the government at the time against a three-line Government whip. It had the full support of the Labour Party and was voted for by Labour MPs, many of whom are still in office now, including current Chancellor Rachel Reeves and her Business Minister colleagues Jonathan Reynolds and Douglas Alexander, and led to the inclusion of the legal right to a Market Rent Only (MRO) option for tenants as part of the Pubs Code when it came into force in 2016.

However, the Pubs Code has turned out to be a serious disappointment to publicans and to the campaigners whose efforts had led to the historic vote, as the Code, and the MRO option itself, was watered down in the drafting stage by both the Coalition Government and then especially by the Conservative Government elected in 2015, with the weakened Pubs Code being subsequently introduced as law in 2016.

Greg Mulholland, Campaign Director of the Campaign for Pubs explains:

“The Pubs Code legislation has failed to deliver the will of Parliament as had been very clearly expressed in the vote in November 2014.

“In 2015 the Conservatives won a majority and they then watered down the legislation and failed to deliver the true Market Rent Only option as defined in my original amendment. The Conservatives had never supported the MRO option and ensured it was stitched up to deny tenants the simple but vital right to go free of tie and pay an independently assessed market rent within 90 days of requesting it. What replaced it is not actually a genuine Market Rent Only option at all and can be delayed and thwarted by the pubcos. Even those who finally manage to get a free-of-tie lease have to accept other detrimental changes and face discrimination. Many are still being kicked out of their pubs for having taken their legal right, it is a disgrace.

“To compound and cement this disgraceful sabotage, the same Government installed a conflicted adjudicator to oversee the weakened Code. They appointed a prominent industry property agent, a director of the largest pubco estate agency, who remained in office despite the Business Select Committee Chair explicitly recommending his removal and replacement due to the inescapable perception of a conflict of interest.

“With a Code and Adjudicator that were both unfit for purpose the regulation of the sector ended up being weak and ineffective. Risk and reward has not been rebalanced as Parliament intended and the pubcos continue to be free to discriminate and evict tenants who dare to go free-of-tie. The regulated companies, many of whom were in serious financial difficulties due to their accumulated debts, were gifted ample time to pivot to new business models that escaped the scope of the Code, and also to completely restructure and refinance where necessary. This is the kind of behaviour that it seems the Labour Government wants to encourage, when it should instead be challenging it.”

Since the introduction of the Code in 2016 there have been major changes at all six large regulated pub companies, especially in terms of their financial backing. Five of the six are now entirely owned by offshore interests, with the largest, Stonegate, having its headquarters in the tax haven of the Cayman Islands. In common with Punch Pubs and Admiral Taverns (both now controlled by US private equity), Stonegate are a property company not a brewery despite often being erroneously referred to as such.

The second largest pubco, Star Pubs and Bars are owned by Dutch brewing giant Heineken, while Greene King is now owned by Chinese capital. Only one of the six, Marston’s (now itself a non-brewing stand-alone pub company since divesting its brewing operation to Carlsberg) is still UK-based, but even they have a mixed portfolio of shareholders, largely based oversees. Despite not brewing any beer, Marstons’ tied tenants are forced to buy their beer from Carlsberg, at unreasonably high above market tied prices.

Between them these six regulated companies control around 35% of the UK’s pubs, with Stonegate alone owning around 12.5%.

Furthermore, by far the most dominant supply partners in the closed loop of the tied supply chain are global giant brewers, also based offshore. Beneficial UK producers within the tied sector are limited to established large regional brewers, with only a tiny amount of independent UK craft brewers getting any sort of look in at all via specific, highly restricted (and costly) supply arrangements. Over the industry as a whole the global brewing giants along with a handful of the larger regional UK breweries account for 90% of our beer market, whilst around 1800 independent SME UK craft breweries are left to scrap it out over the remaining 10%.

Chair of the Campaign for Pubs, Paul Crossman (a working publican with extensive experience of both the tied and free-of-tie pub sectors) is appalled at what has happened:

“The weak Pubs Code and lax enforcement by a disinterested Adjudicator has solved nothing. The market is still stitched up between a few dominant companies and more of the wealth than ever is now being syphoned out of the UK economy. The pubs they control are still wide open to the type of dreadful extractive practices that statutory regulation was supposed to prevent. We have seen no end to the profiteering that has for so long starved pubs of innovation and investment, and we are still seeing licensees in impossible situations driven to desperation and failure, while communities across the UK continue to be blighted by the resulting pub closures.

“The free-for-all of profiteering has been allowed to continue unchecked and has inevitably attracted an influx of rapacious offshore private equity intent only on exploiting our unique and historic pub infrastructure in order to simply extract the maximum amount of wealth, unhindered by any genuine feeling of responsibility for the welfare of either the licensees or the communities they serve. What we now have is industrial-scale wealth extraction from the UK pub sector via an organised and cooperative principally offshore network that strongly gives the impression of being a complex cartel.

“The fact that this is happening at the direct expense of smaller UK brewers and producers who are being actively and quite openly excluded from the bulk of their own domestic pub market, is surely the epitome of anti-growth behaviour. It is scandalous to see such potential being supressed and squandered.”

UK Pub numbers are now at an all-time low, having recently dipped below 39,000, and beleaguered UK small breweries are also struggling to stay afloat in the chronically restricted market that is left to them. Last year saw one independent brewery a week fail and close. Meanwhile the share of the market of each of the largest pub-owning companies continues to far exceed the modest 3.1% limits that were set in the 1989 Beer Orders, which marked the last major competition review into the sector.

It has now been 35 years since that review, and the intervening period has seen pub numbers decimated by over a third, while an exciting, innovative and diverse domestic craft beer revolution has been largely choked off in its prime. The Campaign has long argued that another full competition review is well overdue and notes, in the light of recent government rhetoric, that appropriate remedial action, far from being anti-growth, would be a quick, easy and low cost way to boost growth in our domestic economy via the stimulation of the SME UK craft brewing sector, not to mention unleashing the potential of the other myriad independent suppliers of goods and services that are currently denied access to the foreclosed pub sector.

As Crossman puts it:

“The UK pubs sector is currently in deep crisis, and we desperately need a truly open and fair market to help domestic SME producers and small business pub operators deliver the kind of characterful, idiosyncratic, independent pubs the UK population so love, want and deserve.

“When we have already seen the dire consequences of one chronic failure to regulate, we certainly do not believe that deregulating the market further in order to attract yet more “investment” by rapacious, extractive offshore private equity capital will be the answer to any of the woes that are already being caused by such capital flooding the sector.

We do have major issues with our current regulation in that we have an ineffective Adjudicator failing to uphold an inadequate Code, but as long as the Government is intent on allowing the horrendously anti-competitive supply tied system to remain in place what we actually need for domestic economic growth is much more effective regulation to stop large corporations strangling small business, not less.”

ENDS