Australia’s largest brewers are feeling pressure from the growth of one smaller, independent brewer and are moving to specifically target it in tap contracts.

While brewery supply contracts have long included provisions excluding major competitors from access to beer taps, Lion Australia is now targeting comparative minnow Stone & Wood in its supply contracts.

In a current trading agreement seen by Brews News, Kirin-owned Lion – Beer, Spirits and Wine Pty has entered into a supply arrangement with a Melbourne metropolitan venue that seeks to specifically exclude the Byron Bay-based brewery from uncontracted taps.

Amongst its terms, the multi-year tap contract commits the venue to 75 per cent of taps to Lion products, while excluding CUB/Asahi, Coopers, CCA and Stone & Wood from remaining uncontracted taps.

“For the avoidance of doubt, you may pour any other competitor brand(s) on the remaining tap(s) subject to our exclusivities and tap share percentages above,” the agreement states.

Brews News understands that this is an increasingly common condition for Lion’s supply agreements and Lion is not alone in the practice.

Approached for comment on the tap contract and its decision to target a smaller brewery, Lion acknowledged the conditions in the agreement but appeared to deny Stone & Wood could be characterised as a small brewery, saying it did not seek to exclude ‘small’ breweries under its agreements.

“While we cannot comment on the specific details of our contracts with venues, Lion does not seek to exclude particular small craft brewers in our agreements with venues,” a statement advised.

“Lion’s tap beer contracts are driven by the desires of our customers. It is evident from the marketplace that a number of high-quality small brewers are achieving both distribution and strong growth.

“Lion does not prevent small craft brewers from gaining access to uncontracted taps in our contracts with venues.

“All of our activity is fair and reasonable. Lion is immensely proud of our track record in growing the craft beer sector, from starting breweries, training brewers, sharing techniques and fostering our industry throughout Australia.”

In its last full-year results Lion – which reports through Japanese parent company Kirin – showed revenues of $4.4 billion, with an operating profit of $607 million. The Fermentum Group, which owns Stone & Wood, reported revenue of $62.3 million, with after-tax profit of $5.1 million.

Approached for comment, Stone & Wood general manager Nick Boots said he was aware that the brewery had been targeted.

“We have been seeing that for a little while now,” he said. “It’s disappointing and flattering at the same time.”

He said the the brewery understands its because of the competition they offer for contracted product.

“The common line we get [in trade] is ‘your beer it too popular and sells too damn well.. it takes large volume from contracted taps in my venue and makes it harder for me to achieve my contract volume’.”

Competition law and tap contracts

In 2017, the Australian Competition and Consumer Commission announced the results of its three-year investigation into tap contracts, finding that their impact is “unlikely to substantially lessen competition in any of the markets we investigated.”

“Although some venues had exclusivity arrangements, most pubs and clubs said they did not feel constrained from allocating taps to smaller brewers and could make taps available for craft beer if necessary,” ACCC deputy chair Dr Michael Schaper said at the time.

“While some craft brewers may have been refused access to taps by certain venues, our investigation found that the venues were responding to consumer demand for certain beer brands, rather than restrictions imposed by the big brewers.”

Asked whether Lion’s move to target a brewer with less than one per cent market share would see a change in their approach from the 2017 findings, the ACCC this week told Brews News it “continues to take an active interest in conduct which raises any competition concerns in beer distribution arrangements, as it does across a wide range of industries across the Australian economy.”

“Our assessment when concluding our investigation in 2017 was that some small brewers were unable to access taps in particular venues, and this may have had a detrimental impact on those specific brewers. However, the impact was unlikely to meet the legal threshold of ‘substantially lessening competition’ in any of the markets we investigated,” a spokesperson said in a statement to Brews News this week.

“In general, restrictive terms in supply contracts are against the law only when they have the purpose or effect of substantially lessening competition.

“The focus is assessing the overall impact on the competitive process, not only on the impact of a particular business. The courts have treated competition as a process that protects the interests of consumers rather than competitors.

“The ACCC is aware some smaller brewers have had trouble getting onto taps in certain venues. However, on balance, our assessment was that venues can respond to consumer demand when deciding what beer to put on their taps.”

The ACCC reiterated that venues indicated that consumer demand is the biggest driver of which beers the venues choose to pour, not the terms of their supply contracts.

“Not all draught beer is supplied under contract from major breweries, and not all such contracts contained terms limiting sales of competing draught beer that we initially had concerns about,” the statement said.

“Some venues reported being able to stock beer from smaller brewers even when under contractual restrictions from the major brewers.

“As these assessments are focused on competition within markets – potentially involving a number of geographic locations and venues – the presence of one term in one supply contract is unlikely to alter the ACCC’s previous assessment.

“However, the ACCC continues to take an active interest in conduct which raises any competition concerns in beer distribution arrangements, as it does across a wide range of industries across the Australian economy.

“Small brewers are welcome to report any competition concerns to the ACCC.”

New approach to competition?

While the ACCC has reiterated its 2017 findings, competition law expert Associate Professor Rob Nicholls from the University of New South Wales’ School of Taxation and Business Law said that since then the competition law landscape had changed considerably.

“It changed from a requirement for the courts to find that a business had the purpose of reducing competition in the market, to having the purpose effect, or likely effect, and this effect or likely effect changes how you would analyse any competition law problem associated with abuse of market power,” Nicholls told Brews News.

“I think what the ACCC’s looking to do at the moment is to take a case that actually tries out that new law, and that case they’ll select quite carefully but it’s showing something where the issue has changed since the new law came into effect is quite important.”

Nicholls noted that the ACCC has this week commenced an action in the Federal Court against Australasian Food Group Pty Ltd, trading as Peters Ice Cream (Peters), alleging it engaged in conduct that hindered competition for the supply of single-wrapped ice creams to petrol and convenience retailers.

The ACCC case alleges that Peters engaged in exclusive dealing by entering into an agreement with a refrigerated delivery provider to distribute its ice cream to petrol and convenience retailers nationally. The agreement contained a condition that PFD could not distribute any competing ice cream products in certain locations around Australia.

“If there is a lessening of competition that comes from either specifically excluding particular beers from the taps that are not being used under that contract, or specifically limiting access to fridge space, this is the Peters case,” he said.

“When you’re looking at the market, you have to show that there’s been a substantial lessening of competition,” Nicholls explained.

“But markets mean something very specific to the ACCC.”

Associate Professor Nicholls said ‘market’ is defined by three things, including geography.

“You might be able to say that, on a national basis, Stone & Wood Brewing is really, really small, but it might have, for example, 15-20% market share in a geographically limited market.

“If you start to say, well Stone & Wood products are sold primarily in inner-cities, so there are eight geographic markets but they are actually defined fairly closely into the centre of town.

“It’s an area where, for example, craft beers are more highly regarded than tap beers from the big two and that might also give you an opportunity [to argue it’s a substantial lessening of competition].

“You will be in a strong position if the ACCC prevails over Peters,” he said. “Watch Peters, and watch for Peters defence because that will be a really interesting thing.”

Editorial, If that’s competition, it doesn’t pass the pub test.

Brews News has commercial arrangements with both Lion Australia and Stone & Wood.