Demand down, price up — please explain

The successor to the Trade & Industry Select Committee (Tisc) will shortly revisit its report of four years ago into pubcos.

At the time of the last Tisc report, the pubcos were asked to establish codes of practice to make sure that they disclosed how they would treat their customers. This has largely been complied with.

The outcome of the last Tisc report saw the beginning of the bull run in pubcos' share prices — and some might say allowed the process of them squeezing the final juice out of the lemon.

In the ensuing four years — perhaps coincidentally — the brewers have seen their business model hurt badly, with on-trade volumes now stuck in a 10% year-on-year decline, while tenants (the pubco's customers) have seen their incomes literally decimated — if not eliminated.

That tenants and tenants' trade associations have been saying this for years has largely gone unrecognised.

But now the great beast — the market — is doing what Tisc nor tenants achieved.

The reason is simple. The model that permitted the pubcos to grow their profits and capital values was based on their ability to fund their acquisitions and balance sheets at very low levels of debt, while they used their market power to increase their share of a beer market they effectively controlled. And that model is no longer working.

Only in the UK have we seen the economic phenomenon of a market in which demand for a product (beer) is falling while the wholesale price of the product has kept on rising.

At the time of the establishment of the modern leased model, the average discount to the wholesale beer price was about £120 per brewer's barrel. This was shared roughly equally by pubco and tenant — £50 each — with £20 lost in distribution and promotional costs.

Now discounts are in the region of £230 of a wholesale price, almost 50% higher, but with a split of £50 tenant, £160 pubco, £20 other costs.

The Business & Enterprise Select Committee, which replaced Tisc, should now ask the pubcos to explain the impact of this wholesale pricing model and what the "significant countervailing benefits" are to offset this pricing distortion. Or perhaps that does not really matter anymore as the stock markets seem to have decided the answer.

One thing is for sure — the profitability and viability of tenanted pubs will continue to head south. And perhaps now the pubcos will have a real interest in fighting for their customers' interests.

Peter Linacre is chief executive of Glasshouse