Pubcos get stronger
The British local pub,--that fine institution. Surely there's no better representative of small business at work than the honest publican and his wife, serving beer at some tavern that has hung its sign since the era of Samuel Pepys or even Shakespeare. Or, so it was. Like so many other industries we have seen, the pub has become the playground of large national oligopolies, and the local publican is just another tenant.
On November 5, Punch Taverns PLC bought out privately held Pubmaster for over two billion dollars. Punch already owned 4,515 pubs in the UK. Pubmaster owned 3,110 pubs. Punch was obliged to sell off a measly 200 pubs to keep the competition authorities happy, so the new chain will make a chain with about 7,400 pubs.
Yet even this will not make Punch Taverns the number one pub owner in Britain. That spot is held by Enterprise Inns PLC, which by next spring is expected to exercise an option to buy Unique Pub Co. That would put 9,000 pubs under Enterprise's control. Both companies plan to grow over 10,000 pubs.
There has been concentration in the pub industries before this. In the 1980's, many pubs were controlled by breweries, such as Whitbread, Scottish & Newcastle, Bass, Grand Metropolitan (owners of Guinness, and others, the so-called "Big Six.") These were vertically integrated oligopolies, with the same company brewing and serving the beer. A few of the chains approached 10,000 pubs.
In 1989, the Monopolies Commission passed the Beer Orders, which limited the number of pubs that breweries could own. The thought was that small and microbrewery-owned pubs would proliferate. But while the act prohibited breweries from owning large chains of pubs, it did nothing to prevent other companies from holding numerous pubs.
In the 1990s, not only were the brewery pubs gradually swallowed up by large new oligopolies, the so-called pubcos, but also many small, independent pubs decided to cash out and sell off to the rich new pub chains. The results are outlines in an article in Hop Press, a publication of the Hampshire (England) CAMRA group. CAMRA stands for the Campaign for Real Ale, a consumer beer advocacy group. The article, entitled "New Enemy at the Gate," gives a classic cost-based oligopoly at work.
The pubcos quickly took their lessons from the way supermarkets control their suppliers and they set up systems to screw the last drop of profit out of brewers. Huge discounts are demanded, intensely bureaucratic supply arrangements insisted upon, 'listing fees' have been introduced and, of course, none of these so-called economies of scale are passed on to the publicans or the customers.
The discounts involved are truly enormous and very, very secret. A barrel (36 gallons) of an ordinary session beer, which would be priced by most regional brewers at about £250, will have a discount of at least £100 asked for (i.e. demanded) before it is graciously accepted by a pubco. From the biggest breweries 'national agreements' frequently mean beers are supplied at only 50% of list price.
If the publican, and then the drinker, saw any of these discounts then the extortion could, perhaps, be justified as being in the public good - but they don't.
The effect has been to hurt the small, specialty brewer, even more than the old brewery pubs did. As we have seen in other industries, the difficulty of supporting the demands of powerful, centralized distribution and the demanded discounts, mean that only big brewers can compete. Even worse, the dwindling number independent pubs that might be glad to serve the beers from small breweries, are being snapped up by the pubcos, who are flush with cash from their big profits. A related issue important to the CAMRA people is the disappearance of traditional English ales, which are being replaced by lagers.
Slotting fees, called in this case listing fees, are another issue.
Listing fees are perhaps the most extraordinary and outrageous of the pubcos' moneymaking wheezes. This scam was directly copied from our loveable, cuddly supermarketeers. For a micro brewery to have its beers listed by the pubco's head office as available to its tenanted pubs the brewery must pay an up front fee for each beer to be listed. Punch Taverns charge £1,700 to 'list' a beer for six months - a brewer with four ales would have to stake a nonreturnable £13,600 for a years listing, without any guarantee of an order.
As we have seen so often before, the pubcos have the ideal oligonomy position. They are an oligopoly to the pub tenants, actually a monopoly from whom they have to buy beer at a steep markup. To the brewers they are an oligopsony, able to make or break breweries with their buying decisions. Their money translates into political power, and there is no move to stop further mergers, let alone break up the chains. By comparison, the old brewery pubs were far less clever at milking the system. After all, they had no beer suppliers to squeeze as an oligopsony. The new pubcos, which are basically distribution and money-collecting companies have low overhead, lots of cashflow, and lots of maneuverability, or, more properly, manoeuverability.
Update (11/28): Thanks to a reader, who pointed to this site, we learn there were around 60,000 pubs in the Uk in 1998. That probably hasn't changed much. The two leading pubcos are on track to own a third of them.
