Thursday, December 04, 2008

Brewer's backing for the 'beer tie'

From the Burton Mail.

Brewer's backing for the 'beer tie'


A BURTON brewery boss has sided with the pub companies in what is becoming an increasingly bitter Parliamentary review of their power.

News - Geoff Mumford of the Burton Bridge BreweryGeoff Mumford, the joint owner of Burton Bridge Brewery, in Bridge Street, says trade heavyweights such as Burton-based Punch Taverns need to have some hold over the running of their pubs so they can make a profit to pay staff and shareholders.

His comments come as seven MPs on the House of Commons' Business and Enterprise Committee prepare for the second stage of their probe into the 'beer tie', an agreement under which pubs are obliged to buy all or some of their beer from the pub company or one of its suppliers.

The review was set up to investigate if pub companies were following the recommendations of the 2004 Trade and Industry Select Committee into their relationship with tenants.

This said that it was not clear that ending the beer tie would benefit tenants because pub companies would offset any losses by charging higher rents.

The latest probe has already heard from the pub companies' opponents.

Last month, Brian Jacobs, co-founder of campaign group Fair Pint, said the beer tie was proving a 'killer' for struggling tenants and that axing it would 'open up the opportunity for more pubs to survive'.

"The 'pubcos' are in a mountain of debt and they are trying to service it out of a trade that is slowly imploding," he said, arguing that turnover was falling but that rents were still linked to the retail price of inflation.

Enterprise Inns lessee Paul Daly said the beer tie was an 'outdated model' and that it was now 'not a question of if but when it goes'.

However, Mr Mumford, whose company also owns a small estate of pubs in Burton, said: "Beer has become an emotive issue and what we are witnessing here is a clash between emotion and good business practice.

"If you own a property, you have got to have some sort of hold over it because you are running that pub to make a profit."

He said pub companies which made surplus cash needed it to keep their workers in employment and to pay shareholders a dividend.

Mr Mumford's view is likely to be backed by Punch's chief executive Giles Thorley and his Enterprise Inns counterpart, Ted Tuppen, when they appear before the next session of the Parliamentary review on Tuesday.

MPs will also hear from other key players in the beer trade such as the British Beer and Pub Association, the Association of Licensed Multiple Retailers and the British Institute of Innkeeping.

Andy Langford is absolutely right. Pubcos do not run pubs, they are property companies. The people who actually do run tied pubs –publican lessees – no longer make a profit from them because their freeholders – pubcos – have, over twenty years, manipulated the entire financial set up of the pub industry so that all the profit in a tied pub is taken by the pubco through charging over valued rent and grossly inflated beer supply prices. And unless Geoff Mumford has an undeclared direct interest in profiting from the beer tie, he has a very narrow understanding of the role of pub companies’ involvement in the operation of pubs in Britain.

Property companies are set up to make a profit from owning property that has a capital value and renting it at a level that provides a satisfactory return on the capital invested. Property companies do not make an extra profit from something they have no involvement in whatsoever: the supply of goods to their tenants. Pucbos profit enormously, to the tune of hundreds of millions a year, from the contractually enforced sale of beer to their tenants – in addition to the profit already made from their rental income. This is why pubcos have been so incredibly profitable since they were set up in the late ‘80’s after the introduction of the Beer Orders.

The Beer Orders were supposedly designed to break, and prevent, monopoly in the beer supply industry. Everyone seems to have forgotten that pubcos intially only got block exemption from European law in removing the supply tie because it was argued that pubs would close without the ill defined support freeholders gave them along with the supply of beer. A benefit of doubt on this point allowed a settling in period while the brewers’ vast property estates were broken up to give the industry time to reorganise and end the tie without overly adverse consequences for publicans and consumers’. Because of these reasons the beer tie was set to end in 1998.

By 1998 brewers no longer owned vast estates of pubs and legislation to remove the tie was scrapped because it seemed not to be needed. No one outside the industry foresaw how property companies who had written supply obligations into their leases would take advantage of the tie remaining in place to profit handsomely from taking commission on every pint of beer sold to their ever growing estates. In effect the last twenty years have been a legally sanctioned free lunch for pubcos profiting from a playground of unregulated gratuitous excess.

Think if all normal successful property companies were allowed to oblige tenants to sell products which were chosen by and whose price was fixed priced by the freeholder. What clothes and food would M&S be selling? What would you see on the shelves at Boots? What would Gap be selling?

Name one property company which, in addition to the profit it earns in letting out buildings to tenants, receives the privilege of an extra income, often equal to the rent in terms of profit, from a clause in the lease which says: ‘as this company’s tenant you are obliged to buy the goods you sell from us’.

Pubcos sell beer to tenants for two or three times more than the tenant could buy them outside the terms of the lease. Tell me please, Geoff Mumford, one good reason that pubcos should be able to profiteer from their position this way? The tie is out-moded iniquitous and has been thoroughly abused by the pubcos who implement it solely to the benefit of the shareholders and the board and to the direct financial detriment of all lessees.

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