Statutory Code: OFT warns Govt on pubco intervention

The competition authority said it had “reservations about more far-reaching proposals” included in the Government’s plan for a statutory code.

In its response to the consultation on the plan, the OFT said a mandatory free-of-tie option - one proposal of the code - would be likely to result in pub companies losing some economies of scale through centralised purchasing, “which could in turn result in higher beer prices for tied lessees, which may be passed on to consumers”.

Market distortion​

It said that its own recent work has found that there’s a “great deal of fragmentation at the brewing level of the supply chain”, and that removing the tie would “set an unhelpful precedent for other industries and give rise to uncertainty for businesses that use this distribution method”.

The OFT expressed concerns about plans to incorporate the principle that tied tenants should be no worse off than their free-of-tie counterparts into the code.

“The ultimate impact of the ‘no worse off’ principle will depend upon the detail set out in the statutory code and the adjudicator’s interpretation of it,” the OFT told the Department for Business, Innovation & Skills.

“We are concerned that, in the even that adjustments are made systematically to tied pub rents to ensure consistency with the rent payable by a hypothetical free-of-tie rent, such an approach has the potential to result in significant rental adjustments. If this is the case, this could result in a market distortion that may lead to consumer detriment.

Higher prices​

“In particular, to the extent that the proposed changes to rent calculations mean that pub companies decide that running a tied outlet is no longer its most profitable option, they may choose to adopt an alternative business model (for example, running a managed pub or a free-of-tie leased pub) or consider selling or closing the pub.

“To the extent that pub companies are incentivised to adopt a business model that is less efficient than they would have otherwise adopted, this has the potential to increase supply costs and result in higher prices to consumers.”

Last month the Government said a final decision over the introduction of a statutory code would be delayed while it assessed all the consultation responses.