Publication
Towards Competition at the Tap
The draught beer market is not working properly: choice at the tap is limited for pub-goers, for instance. Usually there is only one variety of draught beer available, as breweries impose exclusivity requirements in their contracts with hospitality venues. This results in higher prices and less incentive to innovate, which is detrimental to consumers.
75% of beer is sold by licensed hospitality venues tied to breweries. These vertical ties between hospitality venues and breweries take the form of loan agreements for equipment, financing agreements, guarantee agreements or rental contract. The ties are combined with exclusive purchase obligations which only permit the hospitality venue to serve draught beer from the respective brewery. This means that there is no competition at the tap. The vertical agreements therefore restrict competition: consumers have no choice.
The ties also have detrimental effects on the hospitality venues, resulting in higher purchase prices for beer, lower returns and relatively large numbers of bankruptcies, among other things. The overcapacity in the hospitality industry deliberately created by the breweries reduces the willingness of banks to finance this industry. Given the risk of bankruptcy, the low returns and the fact that fixed assets are often owned by the breweries, banks are reluctant to provide finance to hospitality venues. This in turn makes hospitality venues even more dependent on the breweries, thus increasing the ties. This is aggravated by the low rate of switching to other breweries, which means that ties remain the same or are increased in the majority of cases. Thus the agreements with breweries and the finance provided under them have a bitter aftertaste.
The draught beer market within the hospitality industry can only work effectively if there is competition at the tap, which would mean abolishing the exclusivity requirements in the vertical agreements between breweries and hospitality venues.
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Erik Brouwer
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