The Business Secretary explains why the government is consulting on the tied model for pubs.
I’m pleased to have this chance to explain the Coalition’s position on pubs – to recount the circumstances which prompted the current consultation on the beer tie and to describe what we’re looking to achieve in this area.
In particular, I want to assure you that while we remain concerned about tenants being disadvantaged by contracts with some of the larger pub companies – and concluded that self regulation was not adequately improving the situation – we are open minded about how to proceed from here; hence the consultation.
As all of you will all know, complaints about the relationship between some pub companies and their tenants predate the current government. Over the course of a decade, four select committees have now investigated whether the tied model can cause an imbalance of bargaining power. I was hopeful that the latest plan for effective self regulation, agreed between the large pub firms and tenant groups back in November 2011, would change things for the better. Regrettably, and despite some progress on independent arbitration, the feedback we sought 12 months on reflected ongoing problems. That was why I announced to Parliament back in January my decision to investigate some kind of statutory intervention.
I am concerned by reports that substantial numbers of individual publicans are continuing to face serious hardship. CAMRA suggest that 57% of tied tenants earn less than £10,000 a year, compared to 25% of those who are free of tie. Tenants still tell us that the tie arrangements with their pub companies are unfair – particularly that a lack of transparency weakens their negotiating position. Some of those who do know about the self-regulatory approach consider it vulnerable to collusion by the big firms.
At the same time, I must say that there’s no robust evidence that the beer tie per se is causing problems in the pubs market. The OFT found that competition is functioning well. Consumers are benefiting – including from increased choice on types of beer. There is choice for licensees when it comes to picking pub operators – including smaller family brewers. Also, it would appear that tied pubs are no more likely to close than pubs which are free of tie.
But with views on both sides of the argument firmly entrenched, with fragmented progress on reforming self-regulatory mechanisms, and recognising that arbitration cannot fix every issue, I concluded it was necessary to for the government to step in.
Our [Pub companies and tenants] consultation opened on 22 April and closed last Friday. It contained proposals for a statutory code of practice for pub companies, and an independent adjudicator to enforce them, modelled on the Groceries Code Adjudicator (which has been well received).
The consultation proposed that the code would be mandatory for companies owning 500 pubs or more, thereby targeting those with the greatest market power. Smaller companies – who would find it more burdensome to comply with the code – would be exempt. Naturally, there is debate over whether this is the right threshold – and we will look at the consultation responses before making any decisions.
Our consultation also proposed that companies with fewer pubs should continue to operate under a self-regulatory regime. The creation of company codes, certified by appropriate bodies like the British Institute of Innkeeping, has generally been beneficial thus far.
Behind the proposals in the consultation were two core principles: to ensure that pub companies treat their tenants fairly and that tied tenants are no worse off than their free-of-tie counterparts. Specifically, we sought views on whether pub companies should undertake to compensate tenants through lower rents where they are charging higher prices for beer – in line with fair open market principles.
A mandatory free-of-tie option may be one way of doing this – whereby pub companies would be required to offer every tenant the opportunity to go free of tie, able to buy beer and other drinks from any source. Another alternative could have the code allowing companies to establish transparent rules ensuring that higher beer prices connected to the tie are directly counteracted by lower rent and/or other quantifiable benefits.
The consultation also covered issues including the tie on gaming machines, guest ales, flow monitoring equipment and the right to request rent reviews.
Let me say this again: we are open minded about the best way of fulfilling the principle that tied tenants should be no worse off than tenants who are free of tie. We deliberately posed an open question about the mandatory free of tie option, for example, and encouraged respondents to provide evidence to support their view.
So the responses are in – and I thank those of you here today who participated in the consultation process. We received around 1,200 written responses, and 7,000 via the online questionnaire – a good indication of interest in the issues involved here. Our task now is to consider the submissions – including the research we have commissioned separately from London Economics into the potential impact of the proposals on pub closures and employment levels – and report back in the Autumn.
If the evidence supports a code and an adjudicator, we will seek to introduce them via primary legislation. Our current estimate is that the net regulatory burden on business to fund the adjudicator, via an industry levy, would be just under £2 million annually. As with the Groceries Code Adjudicator, we propose that – after the first year of operation – a higher proportion of the levy would fall on those companies which are slower to comply. A pub code, meanwhile, has the potential to transfer £100 million a year from large pub companies to hard-working publicans in the form of lower rents and cheaper beer.
The bigger picture, from my perspective, is that Britain’s beer and pub sector makes a valuable contribution to our economy – which is why the government scrapped the beer duty escalator and reduced the tax on beer at the recent Budget. I recognise that, like other parts of the economy, pubs have been hit hard during the recession – though the rate of pub licensee failure has been no higher than that of other small businesses. Overleveraged pub chains have also faced major challenges.
As we begin to see some signs of consumer confidence recovering, I’m as keen as all of you for British brewing to build on its proud heritage – and for a sustainable industry to enable pubs to remain as mainstays of our communities.
Thank you for listening. I’m happy to take questions.