Tap contracts have resurfaced as a major issue in the brewing industry following the finalisation of Asahi’s $16bn deal for CUB last month.
While the ACCC quashed any hopes for regulation around tap contracts in 2017 after a three-year investigation, a law change following the Harper Review in 2017 means that a case brought to the watchdog now could prove much more effective than its antecedent.
But tap contracts are a way of life for many hotels and pubs, according to industry professionals.
Paul Fraser, national director of the CBRE Hotels Investment and Brokerage team, explained that tap contracts are negotiated and agreed under confidentiality, protecting both hoteliers and the breweries which can make them very opaque to outsiders. They are dependent on the deal the hotelier or publican can arrange with the major brewery, and almost no two are alike.
“Ultimately different publicans support different suppliers in different ways, and suppliers are no different in how they approach this scenario with larger investments potentially being made to operators who best drive volume, brand recognition or activations,” Fraser explained.
“Whilst smaller craft brewers will complain about supply agreements the fact of the matter is that the bigger brewers have high-volume products that they command significant market share.
“These breweries reinvest a percentage of their profits back into the industry through CAPEX spends such as cold rooms or glycol systems, rebates and advertising spends.
“This is seen as valuable to publicans and installs the partnership ethos between them. That’s a hard cycle for smaller breweries to contend with if their volume is significantly less and in some cases it’s too big a hill to climb.”
This lack of access and opacity has been part of what makes tap contracts such a point of contention. Mark Hinkley, director of Tadcaster Holdings which owns 14 venues across Australia, Singapore and the Philippines, said that especially for larger groups with a proven track record, tap contracts just made sense.
“Every deal is different. At The Emerson Rooftop [in Melbourne], 80 per cent of taps are Lion. We go into tap contracts when we’re building a greenfield site, and not everyone that buys a pub or a cafe will get their beer system installed for them. It helps if they have multiple venues and a proven track record.
“We’ve had 20-odd venues in the past so we’ve got a good rapport with them. It builds up some goodwill between yourself and the supplier and then you know they’re just as invested in your survival as you are.”
Evolving tap contracts
Despite the gloomy outlook, tap contracts and consumer tastes are evolving, said the industry professionals, even if it is at a glacial pace.
“What you’ll find these days is because venues are more leaning towards craft products, and certainly patrons are, gone are the days of people coming in and just drinking VB or Carlton Draught,” explained Hinkley.
“The clientele have become a lot more attuned to all the different products coming online with all the different craft projects.
“That’s why Lion and CUB/Asahi are more willing to give more taps up and give more space up, they know they have to move with the times,” said Hinkley.
CBRE’s Paul Fraser explained that while the big breweries talk about being strategic partners, they do not command the market share they did 20 years ago, with tap dominance anecdotally declining from around 90 per cent to closer to 70 per cent ownership.
“When I was in pubs, tap contracts were pretty prevalent, you really only had two options at the time – CUB or Lion Nathan – but now as you get more craft beer entering the market and that variety becomes more prevalent, publicans are seemingly more reluctant to put all of their eggs in one particular basket,” explained Fraser.
“The craft beer market is changing all the time and rapidly, the more astute publicans don’t necessarily want to tie themselves down with one of the big players for a long period of time.”
He also said that the evolving beer market at both a global and an Asia-Pacific level means that publicans are right to feel concerned that a tap agreement they sign now, especially those that include brands produced under licence, may mean a brewer’s portfolio could look very different after a few years.
“Over the last two decades publicans are now much more astute to this ever-changing landscape and as such few of them will lock in with a supplier for longer than 2-3 years,” Fraser said.
At the same time, the big brewers realise that there is appetite for a greater diversity of brands, as evidenced by the acquisitions of smaller independent brewers from Mountain Goat to Balter in recent years, and Tadcaster’s Mark Hinkley explained that this was working in the big brewers’ favour.
“It helps them to see what taps are working, and what they can adapt, they use it as a mechanism to trial their products as well – Little Creatures is probably the best example of that.
“That was the craft beer guru’s go-to beer for 40 months and the big boys turned it into a long-term mainstream beer.
“So they don’t actually lose a lot of market share, they just stop other people coming in. People will think it’s a new craft option but it’s CUB or Lion-owned – people don’t read the back on a can, and they can’t usually see it on a tap,” Hinkley said.
This consideration of provenance however is changing, driven by a focus on local and Australian-owned brands which has been accelerated by the COVID-19 pandemic.
“The market is now much more open to trying different beers and the craft market has been expanding significantly over the last 10 to15 years,” said Fraser.
“I don’t see this trend stopping, so there are opportunities for unique smaller craft brands to evolve in this market and become a significant player in the industry- you just need to see how well Stone & Wood have done over the last decade.”
Tap contracts and independent beer
The issue is that signing a tap contract is not compulsory. It is however beneficial to publicans in a way that independent brewers may have a hard time matching.
“A lot of people say that if there weren’t beer agreements [it would be a fairer market] but I wouldn’t subscribe to that at all. These are commercial decisions that publicans make,” said Fraser.
“The unfortunate state of it is that an independent brewery cannot put the dollars in the back pocket of the publican that the big boys can do. But by the same token the bigger brewers do a lot more reinvestment into the specific assets and industry on a whole as well.
“When I was a publican, if I get these craft beer guys in saying they want a tap but their kegs are $100 more than what a mainstream beer will cost. The publican will think, well I will have to charge a dollar or two more to get the same gross profit.
“One of the many considerations that publicans will make on beer selection is what beer that they are making the best gross profit on, they don’t necessarily want to substitute [mainstream beer] for one that’s got a higher cost if it is not driving additional turnover, as all that is doing is eating margin.
“There’s not incentive enough to take on craft beer. If I drop it down to $8 like mainstream beer I’m losing my gross profit. It will affect the bottom line.”
Hinkley of the Tadcaster Group said the growth of craft beer and optionality had caused a “death by choice” situation for publicans and hotel groups.
“It’s a double edged sword. The problem we have as operators is that we only have a finite amount of fridge space to stock these.
“It might be something running hot, like Sample or Doss Blockos which comes in a paper bag. It’s cool and funky and crafty, made by some boys out of South Yarra, but how can you find the fridge space for that? How do you stock the beers for every little pocket in Melbourne?
“This choice is great for a bottle shop but not on-premise. We need a lot of stock, and God forbid you pick the wrong one, and have 10 cases of something you can’t sell.
“It’s a great choice for the consumer but a minefield for resellers – you’ve got to be really careful about who you go with.
“It’s especially the case for big venues like we do, or chains. The Tadcaster business model has always been to let the area pick the venue – we don’t have any chains and don’t believe in reinventing any of our brands to fit into a new site, but the bigger you get the less one-on-one interaction there is [to explain more innovative stock choices].”
However the changing nature of tap contracts and the pressures of consumer demands indicate that it’s not all depressing for independent beer’s chances in pubs and hotels.
“Why do people go to farmers markets instead of Woolworths? It’s a different choice,” explained Fraser.
“Single publicans are able to move very quickly in this market, so when a new product comes out they don’t have to go through a whole national procurement process, they can try different things in their venue almost immediately and evaluate its success before the bigger guys can.
“It’s harder if you have bigger beasts like ALH or Coles-owned pubs, it is tougher to move quickly.
“The bigger boys struggle with pace and that’s where the independents have the wood on the bigger players. They can think outside the box and move quickly.
“And if you’re an independent publican and it makes commercial sense, why not have a point of difference through the product range you serve?”
Radio Brews News recently spoke with new IBA general manager Kylie Lethbridge about independence and tap contracts, including her own experiences owning a country pub.