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The Tie and the Small Brewers

Just suppose all this government PubCo malarkey ever reaches some kind of conclusion, and just suppose that a mandatory FOT (free of tie) option ushers in a new world of pubs. What's this new world going to mean for yer small brewer in this country?

I'm happy to consider myself a small brewer. Of course, if I had my right legs I'd be well over six foot. But hey, short legs run in my family (along with noses).

As things stand, whatever else they are, pubcos are big beer buyers (also wine, spirits, soft drinks, and everything else).  This means that they can demand big discounts from brewers (and everyone else).  The big brewers have fantasy price lists, of course, and are adapted to this.  The big brewers can also deliver the volumes that these big buyers require.  The pubcos operate closely with, or part own, wholesaler / distributors that facilitate this part of the operation. Then they whack a markup onto that discounted price to cover (a) their costs of running this operation and (b) the wet-rent element of their take from the pub.

We're all aware of the SIBA DDS scheme where small brewers can, if they wish, try to get their beers listed by the pubcos, so that select outlets can order their beer through their normal pubco channels and get it delivered direct by the brewer.  Of course, the costs of (a) administering this system and (b) the wet-rent are added onto the price that the brewer gets. So this beer is typically no cheaper (for the pub) than the regular stuff.  Dealing with the big wholesalers isn't really an option for the small brewer. We can't make beer for the price, or in the volumes, that they require.

If many pubs decide to opt out of their tied partnerships, they'll likely be charged higher rents to offset the pubcos lost wet-rent.  But they'll be free to buy on the open market.

And this is the question we started with.  What would this expanded free market for beer look like? What's the place of the small brewer in it?

There will be some new opportunities local to the small brewer - local pubs that have opted out.  There may be less call for beer through the DDS.  There will be opportunities for wholesalers to expand their free-trade business. The big wholesalers still won't be interested in small brewers.  There may be growth among smaller wholesalers.   There is the possibility that some small brewers will take advantage of the opportunities (particularly in the transitional phase) to grow their businesses quite substantially. Perhaps no longer being quite so very small.  I suspect the overall effect for many small brewers will be a small positive one.  Nothing to get really excited about.

Interesting times. Maybe.  Maybe not.

All the above, strictly a personal thing.

I'm not an Economist, but...

Professor Morten Hviid is. He wrote (in his reponse to the BIS consultation on proposed intervention between tenants and pub companies:

"If the market really is competitive as claimed, then increasing the fixed costs of the industry will lead to exit until the price has increased to cover these additional costs.  "

But that's not right is it? That would only be the case (at the retailing end) if variable costs remained the same.  But the whole point is to give the option of buying beer out of tie (at lower cost), increasing the gross profit available to those tenants who chose that option. And doesn't this then increase the incentive for the tenant to sell beer (they would get to keep more of the profit), while offering pubcos some insulation from the actual wet beer market (they'd have a portfolio of market rents to wave at their shareholders / lenders)?

Wouldn't a FOT option allow tenants to obtain a higher share of the profit while accepting a higher risk? Or, alternatively, allow them to choose the tie for  lower risk & lower profit. And contrariwise for the pubco? There being only so much risk (and profit) to go around.

Don't like it? Simply take it back.

So, imagine:  You're in, I dunno, a nice burger spot, you see other diners order at the counter.  Up you trot, queue briefly and examine the choices.

"What's the 'Chilli Superior Burger' like?", you ask the counter operative.
Comes back the reply, "It's a Habanero infused patty with fresh Jalapeño topping and it's really rather spicy."  
"OK", you say, "I'll have one of those, cheers."

Off to your little table with your purchase.  It certainly does smell spicy, but you quite like some spicy food.
You take a bite, but - oh my, this is terribly spicy (although you notice the chap who was ahead of you in the queue eating his with every sign of enjoyment).  You leap to your feet and march back to the counter, indignant:

"I bought this burger and I don't like it. Can a have a regular cheeseburger, please?"
The operative looks at you strangely, "But you've had a bite out of it!"
"Yes, please throw it away and give me something different, please. I'm somehow entitled."

The operative says:
[choose one]
(a) "Certainly."
(b) "You're having a laugh, aren't you?"
(c) "Security!"