The licensees letter to Greene King

Dear Editor

We have been instructed by a group of about 100 Greene King tenants and lessees regarding the pricing activities of their landlord, Greene King (GK). Our investigations are ongoing, but we write now to address a number of the points made by the managing director of GK Pub Partners, David Elliott, in his letter dated May 19 2005.

1.The main complaint of the GK tenants and lessees instructed by us is that their businesses are unfairly undercut by the substantially lower prices at which GK's managed houses acquire and sell their beer and other products. They rely on the Competition Act 1998, which prohibits abuse of a dominant position. The tenants and lessees contend that the type of conduct amounting to an abuse by GK includes (a) imposition of unfair selling prices and (b) application of different trading terms to equivalent transactions, thereby placing the tenants and lessees at a competitive disadvantage.

2.A number of factors must be considered in assessing whether GK is in a dominant position in any part of the UK. We accept that the Office of Fair Trading (OFT) may not assess GK as individually dominant unless their share of the relevant market is 40% or above. However, there are clearly parts of the UK where GK's share of the market is considerably in excess of 40%. For example, we understand that 22 of the 28 pubs in Abingdon and its immediate area are owned by GK and, until recently, 8 of the 12 pubs in Wantage were owned by GK. Whilst the pubs operated by members of the Group who have instructed us to date are mainly situated in the Oxford-Abingdon-Wantage area, we have no doubt that there are similar concentrations in other parts of the country.

3.The criteria used by the OFT in their consideration of GK's acquisition of Laurel last year are different to those which would be used in considering whether GK are abusing a dominant position. The OFT assessed the relevant geographical market on the Laurel acquisition by reference to Licensing Divisions (and market share of up to 25% within those Divisions). The OFT's evidence last year to the Trade and Industry Select Committee, which has been confirmed to us subsequently, is that they are not wedded to that definition of the relevant geographical market and may well be prepared to consider a more local area in assessing abuse of dominant position. Pub customers do not generally travel great distances to frequent their pub. A geographical market of a Licensing Division appears to us to be too large.

4.Mr Elliott says that he is disappointed that members of the Group have not previously addressed the issue of GK's pricing activities with him. However, we understand that these issues have in fact been regularly raised with GK's Sales Development Managers and at Tenant Development Group (TDG) meetings, and the situation has not improved. We have been supplied with a copy of the minutes of the TDG meeting on 16th June 2004 (at which Mr Elliott was in attendance) and it is clear that concerns regarding the differential in pricing with GK's managed houses were raised at that meeting.

5.Mr Elliott refers to the fact that the leader of the Group, Meeko Oates, is no longer a GK lessee. The freehold of Mr Oates's pub was sold, without any reference to him, by GK in March 2005. The fact that Mr Oates' pub was sold by GK after Mr Oates had become leader of the Group is perhaps not entirely coincidental.

6.Mr Elliott's statement that "in every case the tie has been found to be fair and reasonable" is incorrect. In May last year, the Court of Appeal found in the Crehan case (in which we are acting) that the tie in the Inntrepreneur lease was unlawful and, as a result, substantial damages were awarded to the claimants.

7. The Trade and Industry Select Committee had concerns about the tie and, in a certain number of cases, the imbalance between pubcos and their tenants. This was the reason that the Select Committee commenced their inquiry in the first place and ultimately made numerous recommendations in their report to address the imbalance where it exists.

8.Mr Elliott says that there is no sale of beer to GK's managed houses because they are "supplying (them)selves". Mr Elliott's comments appear to ignore the fact that much of the beer sold at GK pubs, both managed and tenanted, is not brewed by GK. For example, the beer that sells in the highest volumes for many of the members of the Group instructed by us is Fosters lager, which appears to be sold by GK to managed houses at a cost of about £85 for a 22 gallon keg as against about £200 for GK tenants and lessees. Mr Elliott's contention relies on the fact that, technically, both the GK brewing and managed pub divisions are owned by the same company. However, his comments do not seem to reflect the reality of the structure of GK. As stated in their Annual Report, GK "operate three different, but closely related, divisions" and "each of these individual trading divisions needs to stand on its own feet and provide its individual merit…". Nor do Mr. Elliott's comments address the reality on the ground where the GK tenants and lessees appear to have been placed at a competitive disadvantage by their own landlord to the detriment of their customers.

9.We are continuing to investigate the extent to which the GK tenants and lessees receive compensation, if any, for the higher beer prices they are obliged to pay. We have been instructed to retain an economist to assist us in that regard. The evidence provided to us to date suggests that the GK tenants and lessees are not adequately compensated. In any event, this issue may not be decisive as a matter of law in addressing the question whether GK are abusing a dominant position.

Yours faithfully

Maitland Walker