FORCED SELL-OFF OF 14,000 PUBS

RAISED THE PRICE OF A PINT

In 1989, the Monopolies and Mergers Commission (MMC) recommended the forced divestiture of 14,000 UK pubs ‘tied’ to national brewers, claiming that this would lead to lower retail beer prices and greater consumer choice. But according to Professor Margaret Slade, writing in the May 1998 issue of the Economic Journal, the so-called ‘Beer Orders’ have had the opposite effect: the price of a pint in these pubs has risen, the limited range of beers on sale remain the same, the number of national brewers has fallen and their shares of the UK beer market have increased.

The ‘Beer Orders’ legislation, based on the MMC recommendations, forced national brewers to divest themselves of one half of their ‘tied houses’ in excess of 2,000. (So if a brewer owned 6,000 pubs, it was forced to sell 2,000 of them.) In addition, tenants of the tied houses were given the right to sell at least one cask-conditioned ale from a supplier other than the owner - the 'guest beer'. None of the regional or local brewers was affected since none owned more than 2,000 pubs.

Analysing data on retail prices and sales of draught beer by product type (ale, lager, stout, etc.) and ownership arrangement (tied or free houses) from 1988 to 1994, Professor Slade establishes that, even after accounting for the changes in demand and costs that normally determine prices, the prices of beers sold in tied houses rose after divestiture. At the same time, there was no increase in the prices of beers sold in free houses. Since the free houses were not affected by the Beer Orders, the evidence points to the forced sell-off as the cause of the price increases.

One of the major changes in ownership patterns to emerge after the Beer Orders was the formation of pub chains. Many non-brewers, often in the hotel, food, or entertainment businesses, took advantage of the massive sales and bought large blocks of pubs. These chains tended to establish long-term purchasing agreements with the national brewers. So in spite of the fact that brewers no longer own the pubs, many of the divested houses continue to sell only their former owner's products.

Professor Slade uses financial data on publicly traded UK brewing companies to assess the effect of the Beer Orders on brewer performance. With higher retail prices, it might be expected that brewer profits rose but in fact, this did not happen. Indeed, since many of the new chains were able to use their bargaining power to negotiate volume discounts, the wholesale price that the brewers received actually fell. But these discounts were not passed on to the tenants of the chain pubs since the principal source of chains’ profits is the difference between the prices at which they buy and sell beer.

The MMC report is unclear about the economic reasoning that led to the decision to force divestiture and there is little evidence that large interest groups were in favour of their recommendations. Indeed, consumer organisations were principally concerned with local retail market shares and not with brewer ownership per se. Nevertheless, the MMC alleged that brewer ownership of public houses protected the upstream market power of the companies.

After the Beer Orders, the brewing industry became more concentrated in the sense that fewer firms controlled a larger share of the market. These increases in brewing market concentration were partly due to mergers (for example, Elders/Grand Metropolitan) partly because some firms stopped brewing (for example, Allied Lyons) and partly because some firms stopped retailing (for example, Courage).

Note: ‘Beer and the Tie: Did Divestiture of Brewer-owned Public Houses Lead to Higher Beer Prices?’ by Margaret Slade is published in the May 1998 issue of the Economic Journal. Slade is Professor of Economics at the University of British Columbia, Canada and Visiting Professor at GREQAM, Marseille, France.

For Further Information: contact Margaret Slade in France on 00-33-490-09-85-21 (email: slade@ehess.cnrs-mrs.fr ); or RES/ESRC Media Consultant Romesh Vaitilingam on 0117-983-9770 or mobile 0468-661095.