London, April 20 - It took an almighty battle to end the "tie" between the major brewers and British pubs, but nearly 20 years after the rules on tied pubs changed, could the downturn herald its return?
British public houses are seeing sales shrivel as people go for the cheaper option of drinking at home and smokers find other places to socialise following the smoking ban. Meanwhile, banks have become much warier about extending debt to business owners. This has delivered a Vulcan pinch to the business model the pub industry has evolved since the brewers were forced to break up their pub estates in 1989. Vast chains were sold off to financial operators who used the steady cash flows pubs generate to support vast debt piles, thus delivering high returns on equity. They supplied their pubs with long-term supply contracts from brewers like Heineken. Now the credit crunch has struck, many of these businesses are in financial difficulty. Take Globe Pub Company, owned by entrepreneur Robert Tchenguiz, which has defaulted on its bonds and could face administration.
Heineken has responded by snapping up 30 percent of the senior bonds in Globe (buying them up at 30-40 pence in the pound according to bond traders). This ensures it a seat at the negotiating table as the bondholders take control of the pub operator. With Heineken's Scottish and Newcastle pubs arm managing and supplying Globe's 424 leased pubs, the Dutch brewer -- which paid top whack for S&N's British assets last year -- cannot afford to risk this revenue stream, which might be the result were Globe's estate to fall into the hands of a property company which could break the estate up and sell off individual pubs or worse, be bought wholesale by a competitor. Stumping up 25 million pounds ($37 million) or so to avoid this is clearly a price worth paying for Heineken.
Heineken and other brewers need the pubs to survive, not least to give them alternative sales outlets to the supermarkets, which continue to squeeze their margins. If there are fewer pubs around, the ubiquitous supermarkets -- which have the brewers over a barrel when it comes to pricing -- will increase their stranglehold on beer distribution.
It's unlikely however that this will see a wholesale resurrection of the tied estate. Competition authorities are likely to revisit pub ownership limits (capped at 2,000 for brewers by the 1989 Beer Order) for the estimated 60,000 pubs in the UK if brewers start buying them up again. Consolidation in the brewing industry has created mega-brewers, many of which are highly-leveraged. Heineken, for instance, has its own debt pile to cut and along with other brewers won't be rushing to buy up large estates. But if they can acquire assets by buying distressed bonds and they repackaging the pubs themselves, they can ensure continuity of contracts and revenues. They could even help pub landlords to buy properties, while locking in beer contracts. Pub owners and and brewers may find some ties are worth preserving after all.