Do Pub Tenants need a Special Regulator to Adjudicate Contracts with Pub Owners?

(by Morten Hviid) On January 8th Business Secretary Vince Cable announced plans for an Independent Adjudicator to address unfair practices in the British Pub industry.  It will apply to rents and beer ties (exclusive purchasing agreements) between pub owners and their tenant publicans, but only if the former own at least 500 pubs (known as pubcos).  The Adjudicator will be based on the untried model being introduced for supermarkets.  This proposal arises from prolonged lobbying by part of the industry, and in particular from the Campaign for Real Ale [CAMRA] and extensive public scrutiny by Select Committees and competition authorities, though the latter did not recommend this intervention.  After many attempts to generate self-regulation, the government now wants to impose a “solution”.   But what is the problem that the government seeks to redress?

In 2009, CAMRA submitted a super-complaint to the Office of Fair Trading [OFT].  Having looked at this twice [CAMRA appealed the first rejection], the OFT made clear that there were no grounds for further OFT action. In their 14th October 2010 press release accompanying their report, the OFT state: “The OFT has concluded that the pub sector in the UK is competitive overall and it has not found evidence of competition problems that are having a significant adverse impact on consumers.”[1]  The market may not work well for some publicans but it was working well for consumers.

Without harm to consumers, one might wonder why the Government is proposing to intervene so explicitly on one particular industry.

In the BIS press release, Dr Cable is quoted as saying “There is some real hardship in the pubs sector, with many pubs going to the wall as publicans struggling to survive on tiny margins. Some of this is due to pubcos exploiting and squeezing their publicans by unfair practices and a focus on short-term profits.”   Are the pubcos exploiting their tenants?  The first thing to point out is that both tied houses and free-houses ‘go to the wall’ (i.e. close). The Government’s response[2] to the most recent Select Committee report makes this clear in paragraph 24 that “in the two and a half years between December 2008 and June 2011, there were more net closures of free-of-tie pubs closed than tied pubs, both in absolute figures (1916 free-of-tie; 1778 tied) and as a percentage of the total number of pubs in that category (9.2% of free-of-tie pubs; 5.7% of tied pubs).”  Both have been adversely affected by recession, the smoking ban, supermarket prices and social trends, but why would it be in the interest of pubcos to force their own outlets out of the business?  Equally it seems odd that a company based on owning long terms assets such as pubs, would be unusually focused on short-term profits.  The pubcos, and especially the ones who are large enough to be covered by the Government proposal [those with in excess of 500 pubs] are well established rather than fly-by-night operations and hence hurt by a reputation for unfair dealings.  Who would be willing to sign a tenancy agreement? The Select Committee report[3] suggests [paragraph 41-42] that some tenants have not sought adequate advice before entering an agreement.  While this is naturally a concern, it does seem odd to allow such tenants to abrogate responsibility for their own behaviour.  With the freedom to enter an agreement surely comes a responsibility to scrutinise this agreement adequately.  Why should the industry incur the cost of ensuring that tenants are properly advised, an additional cost which may well be passed on to consumers in the form of higher prices?

Where the owner of a pub does not also run it, there is an obvious principal-agent problem related to differences in incentives.  The owner of the pub wants the publican to use his or her knowledge and skills and to work hard to make the pub successful so than it generates as high a return for the owner’s investment as possible.  The publican may have different incentives depending on the way in which the surplus generated is shared.  Such incentive schemes are not necessarily simple, nor are they necessarily obvious to those outside the industry. For example, one might expect that a large pubco which has used its buyer power to get a low price for beer would want to pass this lower wholesale price on to its tenants to make them more competitive against other pubs, in particular free-houses, and recover some of this in a higher rent.  A report by IPPR[4] suggests that with respect to beer prices, reality may be different with some tied lessees complaining that they could get the beer a lot cheaper elsewhere.

With the great variety in ownership relations between pub owner and licensee and the principal-agent relationship in mind, the statements in BIS’s press release that the proposed code “would enshrine the fundamental principle that ‘a tied licensee should be no worse off than a free-of-tie-licensee’ which will ensure a level playing field is maintained in the pub sector”, is hard to understand.  The first problem is that it is unclear exactly what is meant by “no worse off”.  For example, there may be offsetting services provided by the pubco to tenants, or a rent subsidy.  The second is that on-licence beer retailing is not the only industry in which such issues arise and where we observe a multitude of different relationship between different levels in the same vertical chain.  Fast-food restaurants, petrol retailing and franchising come to mind as having similar mixes of ownership structures.  Why intervene in the market for beer but not in these other markets?


[2] Government Response to the House of Commons Business, Innovation and Skills Committee’s Tenth Report of Session 2010–2012: Pub Companies, Cm 8222. Available at: http://www.official-documents.gov.uk/document/cm82/8222/8222.pdf.

[3] House of Commons Business, Innovation and Skills Committee: Pub Companites, Tenth Report of Session 2010–2012. HC 1369-1.

[4] Tied Down: The Beer Tie and Its Impact on Britain’s Pubs (2011), Glen Gottfried and Rick Muir, IPPR

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