The anomaly of the wholesale price pub rise

Time again to ask an old question. If an industry is seeing a decline in demand of roughly 10% per annum in its product, is suffering from an excess supply of its product and has many suppliers of this product, what would happen to the general price level of this product?

The answer is pretty straightforward — the price goes down. Is there any industry where this general fact does not apply? Well, only one — it's the wholesale price of beer in the UK.

Why? The clear and obvious answer is the beer tie. It seems odd to me that this basic anomaly is not raised by those with interests related to reviewing the beer tie in the UK.

Some argue that a perverse "arrangement" has existed between the beer producers and the pubcos.

Desperate to maintain volumes the producers have been keen to see wholesale prices increase, even though they have known that the price rise would not be incurred by the pubco — but passed on to the tenant.

Of course, the pubco and most large purchasers of beer never actually buy beer on a gross basis, but a net price one. The effect has been to guarantee a continuous rise in margin to the pubcos at the expense of the brewer and tenant.

As is often the case, the market will eventually intervene — as it now seems to be doing — irrespective of any attempts at rewriting rules or laws.

It now seems that some of the regional brewers are already not looking to pass on wholesale price increases to their tenants; what's more some regional brewers are already no longer prepared to give huge discounted net prices to the pubcos as any discount does not go to the tenant or even the customer, but goes straight to the bond or debt holder.

Perhaps the market is intervening in at least two obvious ways. Firstly, if you push up prices on a distorted basis into a declining market, you will only increase the decline in the market — and at some stage the market will adjust.

Secondly, the agents of the distortion will also be driven out. It might not happen all at once, but once the tipping point has passed, the end of the distortion tends to come more quickly than would have seemed possible. How long till the annual ritual of wholesale price increases becomes a thing of the past?

This is my last My Shout and it has been a privilege to have been given the opportunity to unload some thoughts. I wish you all a very happy, healthy and prosperous 2010.