Tied hand and foot: the sad and sorry saga of the rise of Britain's giant 'pubcos'

Private Eye, 2009: “Pubcos are essentially greedy property companies with a cuddly name – and they own nearly half the country’s pub freeholds”.

A report in 2009 by the House of Commons Trade & Industry Select Committee, chaired by Peter Luff MP, called for the pub company model to be referred to the Competition Commission. Its report said that “the committee was astonished to learn that 67 per cent of lessees [pubco tenants] surveyed earned less than £15,000 p.a. and over 50 per cent of the lessees who had turnover of more than £50,000 p.a. earned less than £15,000 – a 3 per cent rate of return.”

The committee found that lessees had contracts that obliged them to buy alcoholic drinks from nominated suppliers at twice the open market prices.

The committee said it was not impressed by pubco senior executives, rebuking them for having given “partial” and even “false” evidence to the committee.

The Guardian reported that MPs found an imbalance of power that can amount to “downright bullying between the big pubcos, such as Enterprise Inns and Punch Taverns, and their tenants”.

What on earth has happened to the good old British pub? The folk-lore image of a cheery welcome from Mine Host along with foaming ale and hearty food has been replaced by a grim new one. In the 21^st century, hapless publicans earn a pittance, are forced to buy drink at grossly inflated prices and are bullied by their landlords – giant pub companies whose bosses even lie to Members of Parliament.

The answer lies in seismic changes to the structure of the pub trade in the 1990s. The changes were meant to usher in greater competition among brewers and improved choice for drinkers but they have had the opposite effect. Several attempts by parliament to tackle the iniquities of the “tied house system” – pubs which are owned by brewer/landlords and forced to take their beer from those landlords – have singularly failed. Today, the tie remains. But it’s no longer operated by gentlemen brewers with a Victorian veneer of paternalism when dealing with their tenants. They have been replaced by ruthless companies prepared to throw landlords and their families on to the streets if they fail to meet the terms of their draconian contracts.

Successive British governments have been aware that their tied system needed urgent reform. Between 1966 and 1986 the brewing industry was the subject of no fewer than 15 official reports and in 1969 the Monopolies Commission concluded that the tie was anti-competitive. The report led to two further investigations, the Erroll Committee in England and Wales and the Clayson Report in Scotland. But their recommendations were shelved and it took a further investigation in 1989 by the revamped Monopolies and Mergers Commission to recommend changes that eventually led to the fall of the big national brewers and the rise of the pubcos.

The report was crudely dubbed “a CAMRA charter” but the commission had canvassed widely in order to gather evidence. Organisations that made submissions to the commission included the powerful Brewers’ Society – now the British Beer and Pub Association – individual brewers, beer wholesalers, publicans through the National Licensed Victuallers’ Association, the Society of Small Independent Brewers [SIBA], trade unions and the Campaign for Real Ale [CAMRA]. The commission’s finding undoubtedly bore out what CAMRA had been arguing since the early 1970s: that the six national brewers operated a “complex monopoly” that fixed prices, charged grossly inflated rates for lager and restricted smaller brewers from entering the national pub market through the “Big Six” ownership of pubs. The Big Six were Allied Breweries [Ansells, Ind Coope and Tetley], Bass, Courage, Grand Metropolitan [Watney Mann & Truman], Scottish & Newcastle and Whitbread. The commission found that the Big Six accounted for 75 per cent of UK beer production, 74 per cent of the brewer-owned retail estate, and 86 of loan ties. The loan tie is as an arrangement whereby “free houses” that are not directly owned by brewers take the bulk of their supplies from brewers in return for loans and discounts.

The two key recommendations from the commission were:

*No brewer be allowed to own more than 2,000 pubs; and

*Every tenanted tied pub to have the right to stock a “guest beer” from an outside brewery.

The shock waves crashed through the brewing industry. The Big Six reeled from the news that they would have sell off vast numbers of pubs:

Allied Breweries owned 6,600 pubs and would have to lose 4,600

Bass owned 7,300 pubs and would have to lose 5,300

Courage owned 5,100 pubs and would have to lose 3,100

Grand Met owned 6,100 pubs and would have to lose 4,100

S&N owned 2,300 pubs and would have to lose 300 and

Whitbread owned 6,500 pubs and would have to lose 4,500

The Big Six in total owned 33,900 pubs and the commission’s finding meant that 21,900 would have to be divested.

With the benefit of hindsight, it’s worth considering the dissenting voice in the MMC report. Leif Mills was the general secretary of the National Union of Bank Employees and later rose to become President of the TUC.  In his dissenting note he asked “whether companies or individuals that buy the 22,000 public houses to be divested would in practice have different strategies to those currently practised. Some companies could well seek in the future to sell off the profitable property. Other companies which might be interested in buying parts of the tied estate would probably sell the highly-profitable and highly-advertised types of beer. This would mean buying and selling nationally-advertised lagers and bitters; individuals could also adopt the same strategy, and again I cannot see that consumer choice would therefore be increased.”

The MMC’s recommendations had to be steered through parliament by the Secretary of State for Trade and Industry, Lord Young of Graffham, in Margaret Thatcher’s government. He met ferocious opposition from many Tory backbench MPs whose constituencies received financially support from the brewers. Since the Liberal politician David Lloyd George had threatened to tax the brewers out of existence in World War One or even nationalise the industry, the brewers had huddled under the comfort blanket of the Conservative Party.  But by the 1980s and 90s the party had changed. Thatcher, the self-made grocer’s daughter from Grantham, had no time for “old money” and the toffs who ran the Big Six.

But her backbenchers came from more traditional stock and spoke up for the brewers. As a result, Lord Young’s Beer Orders in 1989 were a compromise that paid lip-service to the MMC without adopting its more radical demands. From 1 May 1990, the Big Six were given two years to remove the tie completely from half their pubs over the first 2,000 each owned – a total of around 11,000 pubs, while the rest, amounting to 20,000 pubs, had to be allowed to take a “guest beer”. CAMRA had been actively lobbying Lord Young’s department, arguing that unless the guest beer was restricted to cask-conditioned real ale Leif Mills’ dire prediction would be borne out and pubs would be flooded with nationally-promoted lagers and keg beers. The DTI agreed and cask beer was given a tremendous boost by the shake-up that followed.

For a while it seemed that the power of the big brewers had been severely dented if not broken. Their pubs were awash with guest real ales, though on close inspection many of the “guests” came from lists generously supplied by the brewers themselves and were often from subsidiaries of the Big Six. For example, it was good to find Boddingtons Bitter in thousands of Whitbread pubs but how many customers knew the famous “cream of Manchester” was now a Whitbread brand? 

Nevertheless, the Beer Orders did, for a brief halcyon period, encourage the growth of new small breweries dedicated to cask ale. In 1996, for example, 67 new breweries opened and the total number of micros operating in Britain passed the 300 figure. But the beer revolution was nipped in the bud. Lord Young’s successor as Secretary of State for Trade and Industry, Nicholas Ridley, pointed out to the national brewers that there was a simple way round the Beer Orders: if they sold a large number of their pubs to a non-brewing operator they could have a supply agreement that would mean the pubs continued to take the beers from those breweries.

A nod is as good as a wink and the relieved brewers hurried through the loophole offered by Ridley. The ball was set rolling in 1991 by an audacious “pubs for breweries” swap between Grand Metropolitan and Courage. GrandMet, which was to leave brewing and beer retailing when it merged with Guinness in 1997 to form the global drinks group Diageo, sold its Watney Mann & Truman brewing division to Courage, owned since 1986 by Elders IXL of Australia, brewers of Foster’s lager. In return, Courage and GrandMet created a pub group called Inntrepreneur with 4,300 outlets.

The GrandMet-Courage deal was swiftly followed by Allied Breweries, now part of food giant Allied Lyons (later Allied Domecq). Allied announced it was placing all its breweries into a joint venture with the Danish brewer Carlsberg that would be called Carlsberg-Tetley, while its pubs would form a new company called Allied Retail.

New pub companies or pubcos were also being created, such as Enterprise Inns and Century Inns, both formed with pubs bought from Bass. In some cases, executives and senior managers of some national breweries were given “golden handcuffs” to open companies with pubs donated by their former employers. In return, they took their beer supplies from the self-same brewers. By 1994, a quarter of all the country’s pubs were owned by new pubcos. A number of old regional and family brewers had bailed out: Eldridge Pope in Dorset sold its brewery in a management buy-out – the brewery quickly closed – and became a stand-alone pub company. Gibbs Mew in Salisbury closed its brewery and sold its 300 pubs to Enterprise Inns. In 1998 Morrell’s of Oxford also closed its brewery and sold its pubs.

Major changes continued at the top of the industry. Scottish & Newcastle bought Courage from Foster’s, and became the country’s biggest brewer. Bass was stopped from buying the Allied share of Carlsberg-Tetley and Carlsberg became the sole owner. “Tetley” was eventually dropped from the title and the Leeds brewery closed, spelling the death of Yorkshire’s pre-eminent brewery.

Allied sold 1,800 pubs in 1999 to Punch Taverns, which had been formed two years earlier when it bought 1,450 leased pubs from Bass. The hard-nosed attitude of the new pubcos was summed up by Punch founder Hugh Osmond (above), who was best known for creating the Pizza Express chain of restaurants. In an interview with me when he launched Punch he described his business model as “buying beer cheap and selling it dear. The difference is my profit.” He later denied saying this, but it was in my notebook.

The 21^st century arrived with decisions by Bass and Whitbread, two of Britain’s historic brewers at the heart of the pale ale and porter revolutions of the 19^th and 18^th centuries, to leave brewing and concentrate on hotels. Bass sold its brewing assets to Interbrew, which had also bought Whitbread’s brewing interests. The competition authorities moved in and the bulk of the former Bass brewing operation was transferred from Interbrew to Coors, the American group that now controlled the UK’s biggest brand, Carling. Bass, now Intercontinental Hotels, owns Holiday Inns, InterContinental and Crowne Plaza while its former pubs were renamed Mitchells & Butlers after a Birmingham brewery that Bass had owned and closed. Whitbread has kept a small group of pub-restaurants but its main business is now the Costa coffee shop chain along with Premier Inn hotels and health clubs.

Of the old Big Six, only S&N was still brewing but it was bought by Heineken in 2008. The group still owns Caledonian Brewery in Edinburgh – famous for award-winning Deuchars IPA – but the S&N breweries in Scotland and Newcastle have closed, with production concentrated at John Smith’s in Yorkshire and the Royal Brewery in Manchester. Heineken UK owns a small estate of former S&N pubs but is busily paring the estate down.

The fall-out from the Beer Orders falls into two categories: the disappearance of five of the former Big Six brewers and the inexorable rise of the giant pub companies.

Enterprise Inns, formed by Ted Tuppen in 1991 with a modest 368 former Bass pubs, now has an estate of 5,493. Along the way it has bought Discovery Inns, Mayfair Inns and Century Inns. In 2000 it bought 2000 Swallow Inns from Whitbread. The Swallow estate came up for sale following the asset-stripping of the large Vaux Brewery in Sunderland and its subsidiary, Ward’s of Sheffield. The big coup came in 2004 when Enterprise bought the 4,054 Unique Pub Co estate. Unique was the new name for Inntrepreneur, the former Courage/GrandMet pubs that had been bought by the Japanese bank Nomura.

Punch has 3,500 pubs, slimming down in 2011 when it split from its managed house division Spirit. Spirit was bought by Greene King in 2014, boosting the Suffolk brewer’s pub estate from 1,900 outlets to 3,000. Punch bought Inn Business in 1999 and in the same year acquired the former Allied Domecq pubs that had been rebranded as Vanguard. Its major coup came in 2003 when it bought the Pubmaster group, with 2,000 outlets: Pubmaster’s estate was mainly the former Brent Walker pubs stretching from Hartlepool to East Anglia. Brent Walker, run by former East End boxer George Walker, had owned Cameron’s brewery in Hartlepool, which survives, and Tolly Cobbold in Ipswich, long closed.

The third biggest pub company, Mitchells & Butlers, has a different business model with the emphasis on dining pubs and operating under a large portfolio of brand names. They include Ember Inns, Toby Carvery, Harvester, Nicholson’s, O’Neill’s, All Bar One and Vintage Inns. It bought 239 pubs from Whitbread and in 2014 acquired the Orchard Pub group. It now owns 1,600 pubs and restaurants.

By 2002, 75 per cent of the British beer market was in the hands of four companies: Interbrew (which became InBev then AB InBev), Coors (which became Molson Coors), S&N (which became Heineken UK), and Carlsberg-Tetley (which became Carlsberg UK). Martyn Cornell, in Beer:the story of the pint (2003), commented: “Seventeen years earlier, six brewers had owned 77 per cent of the market: if the Beer Orders had been intended to increase competition, they had completely the opposite effect. In addition, the beer market has become increasingly dominated by big brands. In 1989 the top five best-selling beers had just under 21 per cent of the total market, the top 10 31.6 per cent. Over the next 10 years the independent pub companies increasingly bought the beers they perceived to be the most popular, that is, the existing best sellers, and sales of the big brands rose accordingly. In 1999 the top five beer brands in the UK had 34 per cent of all beer sales, the top 10 just under 50 per cent...Eight out of 10 pints now come from brewers who do not own any pubs.”

The tie remains but its implementation has changed. In place of the gentlemanly paternalism of the big brewers, the big two pub companies are ruthless free marketeers. Nothing must stand in the way of their making excessive profits. The big brewers’ system of cheap rents but expensive beer for their tenants has been replaced by sky-high rents and over-priced beer. The tie is rigidly applied: if a publican breaks the tie, even unintentionally or – in extremis -- because the pubco fails to deliver beer, he or she can be fined or even evicted.

Enterprise and Punch went on a wild buying spree in the early years of this century and then caught a terrible cold when the banking crisis caused a major economic crisis. In order to pay off some of their massive debts – and at one stage in 2014 the burden of debt almost sent Punch into administration – the big two have sold off swathes of perfectly viable and successful pubs. The pubs have become mini supermarkets, betting shops, fast food outlets and private housing. In some cases, the loss of a pub has ripped the heart out of a local community.

What is undeniable is that choice for beer drinkers is far better now than it was back in 1990. But that improvement has little or nothing to do with the Beer Orders but with a separate piece of government legislation. In 2002, the Chancellor of the Exchequer, Gordon Brown, in the Labour government, brought in Progressive Beer Duty that meant smaller brewers would pay less excise duty. When the level at which PBD kicks in was raised a few years later, many family and small regional brewers, as well as micros, enjoyed the benefits of lower rates of duty. There has been an explosion in the number of new small breweries, with as many as 80 or 100 opening every year.

The result has been not only greater choice for drinkers but a greatly improved range of beer styles, too. But these beers have to be sought from genuine free houses along with the tied pubs of family brewers and independent pubcos that do believe in choice.

It’s to be hoped that parliament’s decision in November 2014 to bring in a Market Rent option for the tenants of Enterprise, Punch and other pub companies and bigger brewers will widen choice for drinkers. But, given the grisly history of the Beer Orders, it would be best not to hold our breath and in the meantime raise a glass to the prescience of Leif Mills.