Notice pursuant to Article 19 (3) of Regulation No 17 concerning notification No IV/36.081/F3 - Bass
Date: 1998-02-03
Institutions: European Commission
Subjects: alcoholic beverage, beer, business lease, competition, exclusive distribution agreement, trade licence

3.2.98

EN

Official  Journal  of  the  European  Communities

C  36/5

Notice  pursuant  to  Article  19  (3)  of  Regulation  No  17  concerning  notification
No  IV/36.081/F3  -  Bass

(98/C  36/04)

(Text  with  EEA  relevance)

I.(cid:217)The  application  and  notification

1.(cid:217)On  12  June  1996  Bass  Holdings  Limited  and  The
Bass  Lease  Company  Limited,  both  wholly(cid:220)owned
subsidiaries  of  Bass  plc  (Bass),  notified  pursuant  to
Article  4  of  Council  Regulation  No  17(cid:216)(˛)  a  standard
form  of  lease  (the  standard  lease),  the  subject  of
which 
is  a  fully  fitted  out  on(cid:220)licensed(cid:216)(ˇ)  public
house  in  England  and  Wales  with  a  tie  for  beer  as
described  below.  The  parties  have  also  notified
certain  related  agreements.  On  8  September  1997,
the  parties  notified  their  standard  lease  agreements
for  Scotland.  The  parties 
requested  negative
clearance  or  confirmation  that  the  agreements  could
benefit  from  the  application  of  Regulation  (EEC)
No  1984/83(cid:216)(—)  or  individual  exemption  pursuant  to
Article  85  (3)  of  the  EC  Treaty  to  take  effect  as
from  the  date  on  which  the  agreements  were  entered
into.

II.(cid:217)The  parties

agreements  or  unoccupied.  In 
the  year  ending
30  September  1996,  Bass  supplied  approximately
422(cid:216)000  barrels  of  beer  to  its  leased  estate,  which
represents  1,6(cid:216)%  of 
the  1996  on(cid:220)trade  beer
consumption  (volume)  in  the  UK.

5.(cid:217)On  16  December  1997,  Bass  agreed  to  sell  the
majority  of  its  leased  estate  (1(cid:216)190  leased  pubs)  and  a
number  of 
its  managed  pubs  to  a  management
buy(cid:220)in  team  led  by  Hugh  Osmond  and  backed  by
BT  Capital  Partners  Europe,  the  private  equity  arm
of  Bankers  Trust.  Approximately  50  leased  pubs  are
being  retained  by  Bass  while  a  further  approximately
170  leased  pubs  will  be  sold  seperately.  Completion
is  due  to  take  place  by  11  April  1998.

6.(cid:217)Bass’  worldwide 

in 

turnover 

the  year  ending
30  September  1996  was  (cid:158)5(cid:216)109  million  of  which
(cid:158)1(cid:216)278  million  arose  from  its  pub  operations  (both
leased  and  managed  outlets).  In  that  year  Bass
accounted  for  23(cid:216)%  of  the  UK  beer  market 
in
volume  production  terms.

2.(cid:217)Bass  is  a  public  company  listed  on  the  London  Stock
Exchange.  The  Bass  Group  is  an  international  drinks
and 
leisure
hospitality,  brewery  and  drinks  sectors  in  Europe,
the  USA  and  elsewhere  in  the  world.

leisure  group  operating 

in  the  hotel, 

III.(cid:217)The  market

3.(cid:217)In  June  1996  Bass  owned  approximately  4(cid:216)182  pubs
the  United  Kingdom,  of  which  2(cid:216)736  were
in 
managed  (ie.  the  operator  is  an  employee  of  the
company)  and  1(cid:216)446  were  leased  to  tenants.

4.(cid:217)As  of  March  1997,  the  Bass  leased  estate  totalled
1(cid:216)430  pubs,  of  which  106  are  located  in  Scotland.  Of
this  total  number  1(cid:216)430  pubs,  1(cid:216)186  were  let  on
standard  leases,  178  were  subject  to  penancies  at
tenancy
will,  42  were  subject 
agreement  known  as  the  Foundation  Agreement,  and
to  other
the  remaining  24  were  either  subject 

to  a  short(cid:220)term 

(˛)(cid:217)OJ  13,  21.2.1962,  p.  204/62.
(ˇ)(cid:217)On(cid:220)licensed  premises  are  those  which  are  licensed  to  sell
alcoholic  beverages  for  consumption  on  and  off  the  premises
as  opposed  to  off(cid:220)licensed  premises,  such  as  supermarkets,
which  are  licensed  for  off  premises  consumption  only.

(—)(cid:217)Commission  Regulation  (EEC)  No  1984/83  of  22  June  1983
on  the  application  of  Article  85  (3)  of  the  EC  Treaty  to
categories  of  exclusive  purchasing  agreements  (OJ  L  173,
30.6.1983,  p.  5;  corrigendum  OJ  L  281,  13.10.1983,  p.  24).
The  Regulation  contains  in  its  Title  II  special  provisions  for
beer(cid:220)supply  agreements.

lease 

following 

7.(cid:217)Since  1991,  the  date  of  introduction  of  the  Bass
standard 
in  England  and  Wales,  significant
changes  have  occurred  in  the  structure  and  conduct
of  the  UK  brewing  and  pub  retailing  markets.  These
are  for  the  most  part  the  result  of  the  Beer  Orders
made 
the  Monopolies  and  Mergers
Commission’s  (MMC)  report  on  the  supply  of  beer,
together  with  a  fall  in  both  overall  demand  and
particularly  on(cid:220)trade  beer  sales,  shifts  in  consumer
demand  towards  pubs  offering  a  wider  choice  of
drinks  and 
several
companies  from  brewing  and  the  redefinition  of
relationships  between  brewers  and  pub  retail  chains
on  the  one  hand  and  tenants  on  the  other.

the  withdrawal  of 

food, 

The  1989  MMC  report  and  the  subsequent  Beer  Orders

8.(cid:217)The  MMC’s  report  of  1989  into  the  supply  of  beer
led  to  a  number  of  recommendations  being  made
traditional
which  were  aimed  at 
tie 
and
purchasing 
(exclusive 
non(cid:220)competition  obligation)  between  brewers  and
pubs.  Most  of  the  MMC’s  recommendations  were

the 
obligation 

relaxing 

C  36/6

EN

Official  Journal  of  the  European  Communities

3.2.98

implemented,  mainly  by  the  Supply  of  Beer  (tied
estate)  Order  1989  and  the  Supply  of  Beer  (loan  ties,
licensed  premises  and  wholesale  prices)  Order  1989.
The  Tied  Estate  Order 
following
changes  on  the  national  brewers  (brewers  with  an
estate  of  more  than  2(cid:216)000  on(cid:220)licensed  premises):

imposed 

the 

11.(cid:217)Consumption  of  draught  beer  accounted  in  1996  for
63(cid:216)%  of  total  consumption.  This  is  also,  with  the
exception  of  Ireland,  the  highest  figure  in  the  EC.  In
contrast,  the  figure  for  Belgium,  which  has  the  third
largest  draught  consumption  in  the  EC,  was  39(cid:216)%.
UK  pubs  also  offer  a  bigger  choice  of  draught  beers
than  elsewhere  in  the  EC,  with  an  average  of  6,5
brands  per  pub.

-(cid:217)their  tenants  would  be  free  of  tie  for  non(cid:220)beer
drinks  and  non(cid:220)alcohol  and  low(cid:220)alcohol  beers,

-(cid:217)their  tenants  would  have  the  right  to  buy  one
cask(cid:220)conditioned  ale  (a  beer  which  undergoes
fermentation  in  the  cask(cid:216)((cid:209))  from  a  source  other
than  the  brewer/landlord  (the  so(cid:220)called  guest
beer),  and

Supply  factors

B r e w i n g

-(cid:217)they  were  only  allowed  to  tie  a  certain  number  of
pubs.  This  forced  them  to  sell  or  free  of  tie  about
11(cid:216)000  of  the  then  estimated  60(cid:216)000  UK  pubs.

Demand  factors

through 

restaurants,  or 

9.(cid:217)Beer  can  be  sold  through  the  on(cid:220)trade,  for  example
pubs,  hotels  and 
the
off(cid:220)trade,  for  example  supermarkets  and  off(cid:220)licences.
In  addition,  private  duty(cid:220)paid  imports,  mainly  from
Calais,  are  estimated  to  account  for  4(cid:216)%  of  total
beer  consumption  in  the  UK.  Volume  sales  of  all
beer  in  the  UK  fell  by  9,5(cid:216)%  between  1989  and  1995
and  volume  sales  of  beer  in  the  on(cid:220)trade  fell  by
17,3(cid:216)%  in  the  same  period.  The  proportion  of  sales
volume  accounted  for  by  the  on(cid:220)trade  has  thus  fallen
(from  79,3(cid:216)%  in  1989  to  around  69(cid:216)%  in  1996)  but,
with  the  exception  of  Ireland,  remains  the  highest
proportion  in  the  EC.

10.(cid:217)Falling  beer  sales  volume  in  the  on(cid:220)trade  has  been

offset  by:

(a)(cid:217)a  rise,  in  real  terms,  in  on(cid:220)trade  beer  prices  of
21(cid:216)%  between  1989  and  1996,  only  a  negligible
proportion  of  which  was  accounted  for  by  tax
increases,  and

(b) a  rise  in  the  proportion  of  non(cid:220)beer  sales  in  pubs
to  37(cid:216)%  of  total  revenues  in  1996,  largely  as  a
result  of  the  increase  in  catering  sales.

((cid:209))(cid:217)The  UK  Government  recently  extended  the  scope  by  also
allowing  for  one  bottle(cid:220)conditioned  beer  from  1  April  1998.

caused 

12.(cid:217)The  main  change  since  1989  is  that  the  brewing
concentrated.  The
market  has  become  more 
by
been 
concentration  has 
increased 
companies  leaving  the  brewing  market  and/or  selling
their  brewing  operations  to  existing  competitors.  In
1996,  the  remaining  four  national  brewers,  Scottish
&  Newcastle,  Bass,  Carlsberg  Tetley  Brewing  (CTB)
and  Whitbread,  commanded  78(cid:216)%  of  the  UK  beer
market 
larger  regional
brewers  also  left  the  market  between  1989  and  1991,
reducing  the  number  of  large  regional  brewers  from
11  to  7.

in  terms  of  supply.  Four 

W h o l e s a l i n g

for 

independent  wholesalers.  However 

13.(cid:217)One  result  of  the  Orders  was  the  sale  of  some  of  the
national  brewers’  tied  estates.  This  was  expected  to
lead  to  an  increase  in  the  free  trade  and  to  a  greater
in
role 
1995/1996 
only
independent  wholesalers 
accounted  for  some  6(cid:216)%  of  distribution,  compared
to  5(cid:216)%  in  1985.  The  national  brewers  still  dominate
the  wholesale  sector,  with  a  share  of  distribution
similar  to  their  share  of  production.

still 

14.(cid:217)The  pubs  that  were  sold  by  the  national  brewers
were  purchased  mainly  by  retail  pub  chains  or  by
regional  brewers.  In  general,  pub  chains  either  have
their  own  wholesaling  operations  or  are  supplied
directly  by  the  brewers.  Similarly,  regional  brewers
do  not  require  the  services  of  independent  whole(cid:220)
salers  for  distribution  to  their  own  retail  estates.
This,  combined  with  the  general  decline  in  sales  of
beer  and  the  increased  efficiency  of  national  brewer(cid:220)
wholesalers,  has  resulted  in  marginal  growth  in  the
independent  wholesale  sector.

3.2.98

EN

Official  Journal  of  the  European  Communities

C  36/7

R e t a i l i n g

15.(cid:217)In  the  UK,  the  retail  sale  of  beer  and  other  alcoholic
drinks  for  consumption  on  the  premises  requires  a
justices’  (local  courts  of  law)  licence.  Three  distinct
classes  of  licence  are  currently  in  operation(cid:216)((cid:210)):

-(cid:217)full  on(cid:220)licences:  where  a  person  can  buy  an
alcoholic  drink,  without  being  a  resident  or
having  a  meal.  There  are  approximately  83(cid:216)100
full  on(cid:220)licences  in  issue,  of  which  around  57(cid:216)000
are  pubs.  The  remainder  include  hotels  and  wine
bars,

-(cid:217)restricted  on(cid:220)licences:  where  it  is  a  condition  of
buying  a  drink  that  the  customer  is  either  a
resident  or  having  a  meal.  Covers  some  32(cid:216)300
private  hotels  and  restaurants,

in 

of 

purchases 

loans  are 

non(cid:220)alcohol 

time  by  the  borrower  on  three  months’  notice.  The
Orders  also 
introduced  the  guest(cid:220)beer  right  for
publicans  with  trade  loans  from  the  national  brewers
and  also  required  that  such  customers  should  not  be
and
restricted 
low(cid:220)alcohol  beers  and  non(cid:220)beer  drinks.  From
information  supplied  by  the  BLRA,  it  appears  that
approximately  20(cid:216)%  of 
terminated  or
advanced  each  year.  An  unestimated  proportion  of
these  terminations  and  new  issues  must  be  accounted
for  by  publicans  paying  back  an  existing  loan  with
money 
them  by  another  brewer  (in
exchange  for  a  new  loan  tie).  It  appears  that  the
larger  outlets  such  as  clubs  not  only  receive  much
larger  loans,  but  they  are  usually  non(cid:220)exclusive  as
these  operators  want  to  have  dual  or  multiple
sourcing.  However,  the  purchasing  obligations  are
usually  for  a  specific  quantity  of  beer.  No  estimate
was  made  by  the  BLRA  as  to  the  number  of  such
non(cid:220)exclusive 
total  on(cid:220)trade  volume(cid:220)
percentage  accounted  for  by  such  non(cid:220)exclusive
loans,  or  the  percentage  of  total  throughput  of  the
relevant  premises  accounted  for  by  the  quantity  of
beer  stipulated  in  such  loan  ties.

loaned 

loans, 

the 

to 

-(cid:217)clubs:  a  person  has  to  be  a  member  before  buying
a  drink.  Covers  some  31(cid:216)500  outlets,  mainly
jointly  owned  by  their  members.

Competition  between  brewers

16.(cid:217)By  forcing  changes  in  the  ownership  of  pubs,  the
Orders  have  also  had  an  effect  on  the  proportion  of
beer  sold  through  the  different  retail  channels:  (a)
the  tied  estate  of  the  brewers,  (b)  the  managed  estate
of  the  brewers,  (c)  the  tied  estate  of  independent  pub
companies,  (d)  the  managed  estate  of  independent
pub  companies,  (e)  loan  tied  premises  and  (f)  untied
or  free  premises.  This  can  be  seen  from  the  following
overview  on  beer  sales  (volume).  The  1985  data
comes  from  the  MMC  report  and  can  be  considered
as  representative  for  the  years  1985  to  1989;  the
1995  data  are  from  the  Brewers  and  Licensed
including  estimates
Retailers  Association  (BLRA), 
for  non(cid:220)members.

Table  1:  UK  on(cid:220)trade  beer  consumption

(a)

(b)

(c)

(d)

(e)

(f)

1985

30,8(cid:216)% 24,2(cid:216)% 0,0(cid:216)% 0,0(cid:216)% 22,0(cid:216)% 23,0(cid:216)%

1995

12,4(cid:216)% 20,2(cid:216)% 9,1(cid:216)% 3,5(cid:216)% 21,1(cid:216)% 33,6(cid:216)%

17.(cid:217)The  Orders  also  reduced  the  restrictive  scope  of  loan
ties,  by  allowing  their  termination  at  any  moment  in

((cid:210))(cid:217)The  licensing  system  is  slightly  different  in  Scotland.

18.(cid:217)At  the  wholesale  level,  the  major  brewers  have  some
guaranteed  sales  through  their  tied  and  managed
estates.  The  brewers  have  to  compete  to  supply  the
individual
remainder  of 
agreements  with  free  houses  and  supply  agreements
with  pub  chains  and  other  brewers.  This  competition
takes  place  mainly  on  price  and  brand  strength,
although  the  brewers  also  try  to  gain  sales  by
offering  other  benefits  such  as  promotional  support.

the  market, 

through 

Market  entry  at  brewing  level

19.(cid:217)The  main  barriers  to  entry  at  this  level  are  the  need
to  secure  outlets  for  supplies  and  to  have  access  to  a
distribution  system.  A  new  entrant  has  to  secure
supplies  to  free  houses,  pub  chains,  or  to  the
brewer’s  estates  as  part  of  their  portfolio  of  beers  or
(in  the  case  of  a  national  brewer)  as  a  guest  beer.
Possession  by  competitors  of  well  known  brands  is  a
further  barrier  to  entry,  or  to  expansion  by  existing
lagers,
brewers.  This  may  be  more 
which  are  normally  marketed  nationally,  and  where
economies  of  scale  in  advertizing  may  make  small
scale  entry  less  viable.

important 

in 

C  36/8

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Official  Journal  of  the  European  Communities

3.2.98

20.(cid:217)The  entry  barrier  of  securing  outlets  has  been
reduced  since  the 
implementation  of  the  Orders,
owing  to  the  reduction  of  the  proportion  of  the
market  subject  to  ties  and  to  the  emergence  of  pub
chains.  It  is  easier  for  a  new  entrant  to  enter  supply
agreements  with  a  chain  rather  than  with  individual
pubs.  The  need  for  a  distribution  system  remains  a
barrier  to  entry.  However,  brewing  overcapacity  has
ceased  to  be  a  significant  barrier  to  entry  since
brewing  capacity  utilization  stood  at  90(cid:216)%  in  1996,
up  from  79(cid:216)%  in  1991.

21.(cid:217)Most  foreign  producers  of  beer  (mostly  lager)  have
chosen  to  enter  the  UK  market  by  entering  into
exclusive  licensing  agreements  with  existing  national
brewers  whereby  the  beer  is  brewed  in  the  UK  and
sold  as  part  of  the  national  brewer’s  portfolio  of
brands.  These 
lagers  have  often  been
marketed  as  premium  brands.  Bass  has  formed  a
joint  venture  in  the  UK  with  the  Dutch  brewer
Grolsch  for  the  brewing  and  distribution  of  Grolsch
products.

foreign 

Market  entry  at  retail  level

beer  supplied  by  the  landlord  plus  other  drink  and
food.  Following  the  MMC  report,  pub  tenants  in
England  and  Wales  were  provided  with  security  of
tenure  by  being  brought  within  the  Landlord  and
Tenant  Act  1954.  However,  before  the  MMC’s
recommendation,  the  first  long  full  repair  and  main(cid:220)
leases,  which  provided  some  security  of
tenance 
tenure  and  the  ability  to  assign  the 
lease,  were
offered.

IV.(cid:217)The  agreements

25.(cid:217)The  tenancy  agreements  are  contracts  between  Bass
and  the 
lessee,  whereby  Bass  makes  available  a
licensed  public  house  together  with  fixtures  and
fittings  to  a  lessee  for  the  purpose  of  carrying  on  the
business  of  the  public  house  and  under  which  the
lessee  pays  a  rent  to  Bass  and  agrees  to  purchase  the
beers  detailed  in  the  agreement  from  Bass  or  its
nominee.

22.(cid:217)Pubs  compete  only  with  others 

locality.
Broadly  speaking,  each  area  has  a  local  price  for  a
certain  type  of  package,  which  comprises  the  total
pub  "offer’  (facilities,  ambience)  and  not  just  the
price  of  beer.

in  their 

23.(cid:217)Entry  barriers  in  the  retail  market  are  relatively  low.
The  only  one  of  any  significance  is  the  presence  of
licensing  laws,  which  can  prevent  new  pubs  from
being  opened  unless  there  is  a  need  for  them.  This
law  is  not  applied  strictly  throughout  the  UK,  but
where  it  is,  it  can  result  in  entry  within  that  locality
in  some  areas  of  the  UK,
being  difficult.  Also, 
licences  are  now  being  refused  mainly  on  public
order  grounds.  However,  a  particular  pub  company
has 
in  opening  over  100  pubs  on
greenfield  sites  in  recent  years.

succeeded 

Changes  in  arrangements  between  pub  tenants  and
their  landlords

24.(cid:217)Historically,  pubs  were  let  by  means  of  "traditional’
short(cid:220)term  pub  tenancies.  Brewers  retained  responsi(cid:220)
bility  for  the  fabric  of  the  building  and  its  fixtures
and  fittings,  and  tenants  were  responsible  for  selling

26.(cid:217)The  basic  standard 

lease  agreement  has  been 

in
existence  in  England  and  Wales  since  1991,  with
slight  modifications  in  the  form  used.  The  lease  is
generally  of  10  years  duration  (some  are  of  15  or  20
years),  with  a  fixed  rent  which  is  subject  to  review
every  five  years  and  in  certain  other  limited  circum(cid:220)
stances.  The  lessee  may  assign  his  obligations  under
the  lease  after  two  years,  with  Bass’  prior  consent
provided  Bass  is  given  first  option  to  purchase  the
lessee’s  interest.  Under  the  terms  of  the  Standard
Lease  the  lessee  has  full  responsibility  for  repairs  and
cannot 
install  any  amusement  machines  without
Bass’  written  consent,  but  may  keep  all  the  revenue
from  such  machines.  In  1992  a  standard  lease  was
introduced  in  Scotland.  The  main  differences  with
the  standard 
in  England  and
Wales  are  the  following:  first,  the  deed  of  leasing
conditions,  which  contains 
trading
conditions  for  the  Scottish  leases,  entitles  Bass  to
in
review 
accordance  with  the  retail  price  index.  However,
Bass  has  never  exercised  this  right.  Second,  Bass  has
the  right  to  terminate  the  agreement  five  years  after
commencement.  Third,  Bass  asks  that  ingoing  lessees
pay  a  certain  sum  of  money  into  a  "retention  fund’.
The  maximum  amount  so  required  is  (cid:158)(cid:216)10(cid:216)000.  This
sum  is  retained  by  Bass  as  security  for  losses  or
damages  sustained  to  the  premises  or  to  Bass,  or  any
other  amounts  owed  to  Bass  by  the  lessee.  Bass
normally  pays  interest  on  the  Fund  at  a  rate  of  2(cid:216)%
per  annum  over  the  deposit  rate  of  Barclays  Bank  plc
on  termination  of  the  lease.  Until  recently,  the  deed

rent  annually  and 

in  operation 

the  relevant 

increase 

lease 

the 

it 

3.2.98

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C  36/9

of  leasing  conditions  contained  a  covenant,  which
Bass  has  never  enforced,  restricting  the  lessee  from
competing  within  a  radius  of  half  a  mile  from  the
leased  premises  for  one  year  post(cid:220)termination  of  the
lease.  In  March  1997  there  were  1(cid:216)186  standard  lease
agreements  in  operation.

foundation  agreement  and 

27.(cid:217)In  addition  to  the  standard  lease  agreements,  the
parties  have  also  notified  certain  related  agreements.
There  are  two  further  forms  of  tenancy  agreement,
the 
tenancy  at  will
(TAW)  which  is  a  temporary  agreement.  The  foun(cid:220)
dation  agreement  is  a  three(cid:220)year  agreement  used  in
circumstances  where  a  10(cid:220)year  lease  may  be  inappro(cid:220)
priate,  such  as  unstable  economic  conditions  or
uncertain  expense 
trade.  The
agreement  gives  the  occupier  the  opportunity  to
convert  to  a  standard  lease  during  the  first  two
years.  The  tenant  is  not  permitted  to  assign  his
interest, 
is  not  fully  responsible  for  repairs  and
shares  amusement  machine  income  with  Bass.  The
exclusive  purchasing  obligations  in  both  the  foun(cid:220)
dation  agreement  and  the  TAW  are  not  materially
different  from  those  contained  in  the  standard  lease
agreement.  In  March  1997  there  were  42  pubs  let
under  foundation  agreements  and  178 
let  under
TAWs.  These  agreements  are  not  used  in  Scotland.

levels  relative 

to 

28.(cid:217)Bass  have  also  notified  supplemental  agreements
relating  to  the  division  of  the  financing  of  alterations
and  improvements  between  Bass  and  its  lessees,  into
which  approximately  109  lessees  had  entered  by  June
1996.

introduced 

lease  agreement 

in  September  1994, 

29.(cid:217)In  addition,  Bass  have  notified  an  incentive  package
scheme  available  free  of  charge  up  to  October  1996
to  certain  standard 
lessees,  the
Premier  Alliance  Scheme.  Under  this  scheme,  which
was  first 
lessees
without  any  current  debt  are  eligible  for  additional
volume(cid:220)based  discounts  and 
enhanced  business
support  in  terms  of  business  planning,  development
and  marketing.  The  only  requirement  is  that  the
lessee 
development
meetings.  A  marketing  fund  is  also  available,  which
may  be  used,  inter  alia  towards  promotions  offered
by  Bass  or  promotions  run  at  the  initiative  of  the
lessee.  By  June  1996  approximately  654  Bass  lessees
had  taken  up  the  Premier  Alliance  Scheme.

business 

attends 

regular 

The  beer  tie

30.(cid:217)The  lessee  agrees  to  buy  all  specified  beers  from  Bass
or  its  nominee  with  the  exception  of  one  brand  of
cask(cid:220)conditioned  draught  beer  and,  by  the  end  of
March  1998,  one  brand  of  bottle(cid:220)conditioned  beer
(guest(cid:220)beer  clause).  Specified  beers  are  the  beers  of

the  types  set  out  in  a  schedule  of  the  lease.  These
types  are  light,  pale  or  bitter  ale  (known  in  Scotland
as  70  shilling  ale,  heavy  ale  or  Scotch  ale),  export  or
premium  ale  (also  known  in  Scotland  as  80  shilling
ale),  mild  ale  (known  in  Scotland  as  60  shilling  or
light  ale),  brown  ale,  strong  ale  (including  barley
wine),  bitter  stout  or  porter,  sweet  stout, 
lager,
export  or  premium  lager  (also  known  as  "malt  lager’
or  "malt  liquor’),  strong  lager,  "diet  pils’  (or  premium
low(cid:220)carbohydrate  beer),  low  carbohydrate  (or  "lite’)
beer.  These  types  are  represented  by  the  brands  or
denominations  of  beer  listed  in  Bass’  current  price
list.

31.(cid:217)The  lessee  may  sell  any  type  of  beer  other  than  the
specified  types  if  it  is  packaged  in  bottles,  cans  or
other  small  containers  or  if  it  is  in  draught  form  and
the  sale  of  that  beer  in  draught  form  is  customary  or
is  necessary  to  satisfy  a  sufficient  demand  from  the
lessee’s  customers.

Rent

32.(cid:217)Under  the  standard  lease  agreements,  rent  is  paid
monthly  in  advance  and  the  lessee  will  repay  the
premiums  paid  by  the 
insuring  the
premises  against  loss  or  damage  by  fire,  explosion
and  aircraft  (including  three  year’s  open(cid:220)market  rent
of  the  premises  and  expert’s  fees)  and  against  other
risks,  and  the  cost  of  holding  the  justices’  licence.

landlord  for 

33.(cid:217)The  fixed  rent  is  reviewed  every  five  years.  The
reviewed  rent  is  the  higher  of  the  existing  rent  or  the
market  rental  value  of  the  premises  at  the  relevant
increase  date.  The  market  rental  value  is  defined  as
an  open(cid:220)market  rent  but  taking  into  account  the
terms,  and 
in  particular  the  exclusive  purchasing
obligations,  contained  in  the  lease.  In  the  absence  of
an  agreement  as  to  the  market  rental  level,  any  rent
review  is  subject  to  determination  by  an  independent
surveyor  or  valuer.

Discounts  and  countervailing  benefits

34.(cid:217)As 

individuals  who  are  not  tied  for  their  beer
purchases  to  another  company  (individual  free(cid:220)house
operators)  can  obtain 
the  United  Kingdom
in 
discounts  for  their  beer  purchases  which  are  not
available  to  the  tied  operators,  the  Commission  has
assessed  (i) 
for  beer
purchases  from  Bass  between  the  price  paid  by  indi(cid:220)
vidual  free(cid:220)house  operators  and  Bass’  tied  lessees
and  (ii)  the  value  of  benefits  which  are  granted  by
Bass  to  its  lessees  and  which  are  not  readily  available

the  net  price  differential 

C  36/10

EN

Official  Journal  of  the  European  Communities

3.2.98

to  the  individual  free(cid:220)house  operators.  The  starting
point  for  this  assessment  was  the  report  of  the  Office
of  Fair  Trading  on  their  enquiry 
into  brewers’
wholesale  pricing  policy  of  May  1995  (the  OFT
report),  which  was  supplemented  by  further  investi(cid:220)
gations  by  the  Commission.

across 

lessees  which 

35.(cid:217)The  price  differential  is  the  difference  between  the
average  discounts  in  (cid:158)/barrel  granted  by  Bass  to  its
individual 
a
free(cid:220)house  operator(cid:220)clients 
typical  product(cid:220)mix  including  an  equivalent  discount
per  barrel  by  virtue  of  any  loan  and  the  discounts
granted  to  the 
include  the  actual
discounts  on  beer  purchases  and  the  value  of  the
lower  Bass 
leased  estate)  as
compared  to  the  standard  Bass  price  lists.  Discounts
to  Bass  lessees  also  include  the  discounts  offered  to
members  of  the  premier  alliance  scheme  via  volume(cid:220)
related  discounts  and 
fund.  All
discounts  offered  have  been  averaged  across  the  Bass
leased  estate,  excluding  tenancies  at  will.

list  prices  (for  the 

the  marketing 

36.(cid:217)The  rent  subsidy  is  calculated  by  subtracting  the
actual  rental  income  from  the  tied  estate  from  15(cid:216)%
of  the  estimated  retail  turnover  of  the  estate  (the
assumed  rent  for  a  free  of  tie(cid:220)outlet  being  15(cid:216)%  of
turnover).  For  this  purpose,  tenancies  at  will  were
is  because
excluded 
tenancies  at  will  are  characterized  by  significantly
lower  rent  levels  than  other  lease  agreements.

the  calculation.  This 

from 

or 

lease 

under 

standard 

-(cid:217)The  estimate  of  the  total  retail  turnover  for  the
estate  (that  is,  the  aggregate  turnover  of  the  pubs
let 
foundation
agreements  in  the  estate)  was  calculated  on  the
basis  of  the  aggregate  rent  paid  being  equal  to
11,36(cid:216)%  of 
turnover.  The  figure  of  11,36(cid:216)%
stems  from  internal  Bass  documents  compiled  for
the  most  part  in  preparation  for  rent  or  rent
review  negotiations,  for  a  random  sample  of  30
pubs  chosen  by  Commission  officials.  These
documents 
estimates  of
turnover  for  the  pubs,  from  which  the  average
rent  to  turnover  ratio  was  calculated,

individual 

included 

Value(cid:220)added  services

38.(cid:217)Since  the  date  of  introduction  of  the  standard  lease
agreements  Bass  has  offered  its  lessees  bulk  buying
and  procurement  services,  the  value  of  which  has
increased  over 
time.  These  value(cid:220)added  services
currently  include  discounts  on  glassware,  gas  supply,
insurance  and  paint.  Bass  has
rating,  banking, 
calculated  the  annual  benefit  of  these  services  by
estimating  the  potential  value  per  outlet  of  the
discounts  and  offers  available  across  the  range  of
goods  and  services,  on  the  assumption  that,  where
lessees  have  not  taken  advantage  of  the  services  on
offer,  they  have  used  the  fact  that  discounts  are
available  to  Bass 
lessees  to  obtain  equivalent  or
better  prices  on  the  open  market.  This  potential
value  per  outlet,  which  has  been  estimated  at
(cid:158)3(cid:216)054,9  for  the  years  1994/1995  and  1995/1996,  is
then  multiplied  by  the  number  of  outlets,  excluding
TAWs,  in  the  estate.

Investment

39.(cid:217)In  1994  Bass 

joint 

investment
introduced  a 
programme  whereby 
company  undertook
the 
investment  in  the  tied  estate  in  cooperation  with
lessees.  The  value  per  barrel  of  this 
investment
programme  to  existing  lessees,  excluding  TAWs,  has
been  calculated  by  taking  the  total  cost,  including
outside  consultancy  and  project  supervision  funded
by  Bass,  and  subtracting  attributable  rent  increases
over  five  years.

Repairs

40.(cid:217)This 

is 

the  value 

lessees,  excluding
to  existing 
TAWs,  of  non(cid:220)rentalized  repairs  funded  by  Bass.
These  repairs  are  either  to  support  investment  or  to
fund  statutory  requirements,  licensing  demands  and
other  such  unavoidable  expenses.

-(cid:217)to  arrive  at  the  rent  subsidy  per  barrel,  the
overall  rent  subsidy  was  divided  by  the  total
number  of  barrels  sold  to  the  estate  (excluding
TAWs)  in  each  year.

37.(cid:217)In  addition  to  the  rent  subsidy,  Bass  has  supplied
details  of  seven  other  quantifiable  benefits  to  the
Commission.

Support  franchise

41.(cid:217)Since  1994  Bass  has  provided  certain  business
review  and  development
planning,  performance 
initiative  services  for  lessees  wishing  to  take  up,  free
of  charge  up  to  October  1996,  an  additional  scheme
know  as  the  support  franchise.  By  the  end  of  the
1995/1996  financial  year  the  lessees  of  an  average  of
joined  the  support
669  pubs 
franchise  and  for  those  pubs,  there  was  an  average
increase  of  0,93(cid:216)%  in  barrelage  turnover,  compared
to  a  decline  of  2,33(cid:216)%  for  non(cid:220)participating  pubs.

in  the  estate  had 

3.2.98

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C  36/11

to  a 

typical 

lessee  receiving 

Bass  have  estimated  that  the  average  increase  in  net
the  support
profit 
franchise  was  (cid:158)2(cid:216)585 
total
estimated  increase  in  net  profit  generated  by  the
support  franchise  is  therefore  (cid:158)1,7  million,  which
produces  a  figure  of  (cid:158)4,50  per  barrel  if  divided  by
the  total  barrelage  to  the  leased  estate.

in  1995/1996.  The 

Direct  operational  support

lessee  for  each  of 

42.(cid:217)Bass  has  estimated  the  value  and  benefit  of  direct
operational  support  per 
the
relevant  years  by  taking  75(cid:216)%  of  the  total  remun(cid:220)
eration  costs  (salaries  plus  benefits  and  expenses)  of
the  Bass  Lease  Company  employees  who  are  directly
involved  in  supporting  and  developing  the  business
of 
include  business
directors  and  business  managers,  business  devel(cid:220)
opment  managers,  property  managers  and  surveyors
and  employees  dealing  with  catering,  training  of
lessees,  assisting  with  assignments,  promotions  and
public  relations.

lessee.  These  employees 

the 

Set(cid:220)up  and  development  costs

43.(cid:217)Bass  provides  support  to  new  lessees  in  the  form  of
literature  and  assessment  schedules,  including  devel(cid:220)
opment,  administration  and  printing  costs  associated
with  new  initiatives  as  well  as  training  costs,  and  to
existing  lessees  in  the  form  of  annual  recognition
awards.

Promotions

into  operation  Bass  has  made 

44.(cid:217)Since  the  date  at  which  the  standard  lease  agreement
certain
came 
promotions 
exclusively
available  to  its  lessees  on  a  national,  regional  or  local
basis.  These  promotions  are  intended  to  increase  the
turnover  of  the  individual  lessee.

and  marketing 

offers 

45.(cid:217)The  results  of  this  assessment  of  the  price  differential
and  the  countervailing  benefits  are  shown  in  the
following  table:

Table  2:  Price  differential  and  countervailing  benefits

Year  end
30  September

1991/92
(cid:158)/barrel

1992/93
(cid:158)/barrel

1993/94
(cid:158)/barrel

1994/95
(cid:158)/barrel

1995/96
(cid:158)/barrel

24,55

15,4(cid:217)

2,31

24,41

19,18

3,29

32,38

22,5(cid:217)

3,63

3,67

0,58

1,2(cid:217)

1,76

0,23

0,88

(cid:134)(cid:216)0,3(cid:217)

2,84

0,13

1,53

3,14

3,45

0,38

2,36

1,14

35,56

21,77

9,87

1,46

1,09

4,08

5,06

0,97

3(cid:216)(cid:217)(cid:217)

39,07

22,18

9,98

3,44

1,6(cid:217)

4,5(cid:217)

4,88

0,87

4,48

11,74

12,86

Price  differential

Rent  subsidy

Value(cid:220)added  services

Investment

Repairs

Support  franchise

Direct  operational  support

Set(cid:220)up  costs

Promotions

Conclusion

Other  benefits

46.(cid:217)Bass  offers  additional  support  and  benefits  to  tenants  in  the  form  of  fixtures  and  fittings
funding  for  tenants  in  difficulty,  one(cid:220)off  PR  promotions,  a  charitable  support  fund  and,
until  late  1994,  a  legal  advice  scheme  for  tenants  and  prospective  tenants.  Finally,  Bass
lessees  also  have  reduced  beer(cid:220)derived  profit  volatility  as  a  result  of  a  reduced  profit
margin  on  beer  relative  to  free  house  operators  which,  combined  with  lower  fixed  costs
(rent),  reduces  the  risk  of  an  investment  in  a  Bass  tenancy.

C  36/12

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3.2.98

V.(cid:217)Conclusion

The  Commission  intends  to  take  a  favourable  position  in  respect  of  the  agreements,  a  summary
of  which  is  published  here,  by  granting  a  retroactive  exemption  pursuant  to  Article  85  (3).
Before  doing  so,  the  Commission  invites  all  interested  third  parties  to  submit  their  observations
within  one  month  from  the  date  of  this  notice,  quoting  reference  IV/36.081/F3  to:

European  Commission,
Directorate(cid:220)General  for  Competition,
Directorate  F,
Rue  de  la  Loi/Wetstraat  200,
B(cid:220)1049  Brussels.