Heineken’s pub business is under investigation by the U.K. government following complaints that the company is unfairly treating its licensees who apply to go “free of tie.”
The “beer tie” is a historic clause found in most tenanted pub contracts that forces the tenant to buy beer from their landlord at huge mark-ups, supposedly in exchange for support in marketing, expertise and logistics. Under a law introduced in 2016, some pub tenants can apply to break the tie at their five-year rent reviews, but Heineken stands accused of blocking this right by exploiting loopholes. It’s now being reviewed by the government's Pubs Code Adjudicator (PCA), a department created to advise and act as an arbitrator in disputes between landlords and tenants.
At question is whether Heineken is forcing unreasonable stock demands on pubs, with some being told to stock over 75% Heineken-brewed or -owned products, even after breaking the tie. With its craft companies Beavertown and Brixton in tow, Heineken UK seems to offer publicans and drinkers variety, but in reality the multinational is maintaining a clear stronghold on taps that could give small breweries a competitive path to market.
The regulation at the center of the investigation is the 2016 Pubs Code, which is designed to ensure “tied tenants should be no worse off than they would be if they were not subject to any product or service tie.” Within the code is a provision that means any pub company with over 500 sites had to offer tenants the chance to switch to a “market-rent only” (MRO) option at their next lease renewal, which would allow them to buy beer from other suppliers. However, as one of the three breweries that owns more than 500 sites, Heineken’s Star Pubs & Bars business benefits from a further clause that only allows tenants free range if they retain a “reasonable” amount of Heineken products—whether bought from Heineken or elsewhere.
It’s this part of the code for which Heineken is being investigated. Of the 111 MRO applications Star Pubs & Bars has accepted since the code came into effect, around 40 have been referred to the PCA citing Heineken’s stock demands and attempts to impact prices from external suppliers.
The PCA is calling for all Star Pubs & Bars tenants to supply details of any MRO offers. If Heineken is found to be in breach of the code, it is within the PCA’s powers to set the stock limits for Star Pubs & Bars going forward, and even fine the business up to 1% of its U.K. revenue.
A Star Pubs & Bars spokesperson told the Guardian: “While the principle of the brewers stocking requirement is clear, this part of the new legislation is complex and not clearly defined in the pubs code. We therefore hope that this investigation will provide the certainty and clarity that we have sought repeatedly over the past three years. We will of course cooperate fully with the PCA whilst robustly defending our position.”
WHY IT MATTERS
The alleged wrongdoing at the center of this investigation suggests further attempts by the multinational brewer to disrupt the growing independent on-trade and craft brewing scene—and its success in doing so.
When it was created, the Pubs Code was heralded as the savior for struggling pubs—more than 20 still shut every week—and a boon to the small, independent brewing sector. It was hoped it would help pubs respond to the changing on-trade market by promoting wider choice, while giving small breweries access to potentially 12,000 more on-trade customers from the six biggest landlords—Star Pubs & Bars, Punch Taverns, Ei, Greene King, Admiral Taverns, and Marston’s.
Since becoming law in July 2016, however, just 72 MRO applications of 936 have resulted in a lease change, according to the British Beer & Pub Association. As a result, the clause has been criticized by parties on all sides. Rachel Reeves, a Member of Parliament and chair of the government’s Business, Energy and Industrial Strategy Committee, laid the blame squarely on the code and the landlords, who she said are “gaming the system.” The landlords disagree, with Punch Taverns (bought by Heineken in 2017) even claiming the code was a “breach of the European Convention on Human Rights.”
Chris Wight, an industry consultant and expert on the Pub Code, says that such claims could be seen as an attempt to frustrate progress, much like the tactics Star Pubs & Bars have allegedly engaged in by demanding free-of-tie pubs stock a majority of its products. Its defense is built around the vagueness of what a “reasonable” amount of Heineken products means. In the case of the Garden Pub Limited, Heineken argued that it should amount to 75% of the products on tap, as revealed in an arbitration published on the PCA website.
With at least 40 similar complaints, hardline plays like this seem to be at the heart of the PCA’s investigation. Whether Heineken wanted that many products on the bar or not was irrelevant. If they drew out the long, costly process of contract negotiation, the tenant was more likely to agree to their lesser terms or give up entirely, which might explain why fewer than 8% of negotiations result in MRO terms being agreed, and why the average length of such negotiations in the last year is over 200 days.
According to Wight, who consulted on the code and now runs the Pub Advisory Service to help pubs caught in litigation with landlords, the situation is entirely of the PCA’s making.
“The Pubs Code was rushed out,” Wight says. “They missed a deadline and couldn’t put it in front of a scrutiny committee in time, so they got sent to the back of the queue. While it was there, Anna Soubry [Minister for Department for Business, Innovation and Skills] decided it needed redrafting. So we [the team of consultants] saw a draft, she made something like 700 changes, and then they published it on the July 20 and it went live the next day. There was no sandbox or test phase.”
Wight argues the lack of definition around the word “reasonable” could even be linked with the merger of Star Pubs & Bars and Punch Taverns, which was going through the Competition and Markets Authority during the first year of the Code’s implementation. The PCA has the power to edit the Code under Section 47 with 90 days’ notice, but has not done so. Wight believes the Code may have been left as it was to avoid thwarting the deal.
“If [“reasonable”] had been defined that would have affected the deal, simple as that,” he says. “It’s fundamental to Heineken’s model that they get more routes to market, so when buying Punch they wanted to make sure they could force Punch tenants who tried to go free of tie to still buy their products.”
Whatever the reason, this small piece of code is wide open to exploitation. When Tom Helliwell, the landlord of The Woodman in Highgate, North London, attempted to go free of tie, Star Pubs & Bars’ original offer meant he would have to stock 100% Heineken brewed (or owned) keg beer and 60% Heineken bottled beer. He won in arbitration in 2018, but it cost him around £130,000 in legal fees, a sum very few publicans can afford. Nick Pritchard, who runs the Hampshire Hog in Hammersmith, was unable to comment directly on his case, as it was going through arbitration. He’s been in litigation since 2016 and agrees that the hardline that Heineken has taken is designed to make people back down.
“The original offer from Star was so outrageous—the rent was unbelievably high but it was the stock requirement that made you think, ‘What’s the point of going free of tie?’” Pritchard says. “They wanted to make it as toxic as possible. It’s damaged my health, it’s damaged my wife’s health and it’s gone on and on and on.”
Pritchard believes his arbitrator on the case sided with Star Pubs & Bars from the start, and wasn't working in his best interest. He feels that because the head of the PCA, Paul Newby, has done pro bono advisory work and arbitration for pub companies in the past, there was a conflict of interest. This was also picked up on by Members of Parliament after his appointment.
Slowing down proceedings and starting negotiations well beyond “reasonable” terms aren’t the only ways that large pub companies are trying to restrict the number of publicans going free of tie. In Heineken’s case, the acquisitions of Beavertown Brewery and Brixton Brewery were in part to offer beer with “craft” credentials to their 2,000-strong Star Pubs & Bars’ estate, intending to remove one motive for publicans to look elsewhere. This in turn has shut out other large breweries and distributors who had hoped to sign large contracts with Star and Punch pubs.
Coupled with the fact that just 936 of the 7,000 pubs that could have applied for the MRO option so far have done so, it seems the big-six pub companies that fall under the MRO part of the code have successfully convinced many businesses not to try. Which means they still control every tap and every fridge in about one-quarter of the U.K.’s pubs.
“This sector will not improve until we have a market-wide investigation by the Competition and Markets Authority,” says Wight. “The last time we had an investigation into the wholesale beer market was 1989. They [the big six] have a slick operation of lobbying and access to the right people, and they want to maintain the status quo at all costs.”