Tuesday, 8 July 2014

An offer you can’t refuse

Pete Brown writes here about how the Black Lion on Bayswater Road in central London has been sold for an astonishing £27 million. He uses this story as a peg on which to hang an argument about how things other than simply return on investment need to be taken into account when considering the future of pubs, and points out that the pub was turning an annual gross profit of £700,000. But, however much profit you’re making, there will come a point when an offer is just so tempting that you can’t turn it down. Every business owner ultimately has his price.

It is a fundamental principle of economics that overall utility is maximised if all the factors of production – capital, land, buildings, equipment and people – are used in the most effective manner. It doesn’t matter if something is already profitable – if it can be used to generate a greater profit by being used for something else, then it should be.

Obviously we realise as a society that there are some things that you can’t really put a price on, which is why we have planning restrictions, listed buildings and green belts. But in a sense these can be regarded as luxuries that prosperity enables us to afford. Stray too far from the principle of maximising returns and you end up with economic sclerosis and businesses struggling along on life support when their sites and their employees could clearly be more profitably employed doing something else.

Look at any shopping street from fifty years ago and the mix of businesses will have pretty much entirely changed. It may be a matter of regret that all those little family butchers and wool shops have been replaced by takeaways and nail parlours, but the usage of the buildings simply follows demand, and exactly the same is true of pubs. If the building would be more profitable as something else, then, subject to planning considerations, that’s what it should become. You can’t preserve businesses in aspic because people feel sentimental about them.

It also is not the case that such conversions leave whole areas denuded of pubs. It may not make economic sense to maintain a large, free-standing building as a pub in a city centre with sky-high property prices, but such areas by definition will have large numbers of residents, workers and visitors and are likely to be able to support plenty of shops, bars and cafés to meet their needs, albeit generally in units as part of a larger building. And, if a large and underused estate pub has been converted to a Tesco Express, there’s nothing to stop entrepreneurial locals turning a vacant unit in a nearby shopping parade into a box bar or micropub if they think there’s the demand, as many have already done. A small pub may succeed where a big one has failed.

Pete also comes up with the familiar canard that the Black Lion could surely have been more profitable if run in a more enterprising manner. For each individual pub taken in isolation, this may be true, but in general it would only have succeeded by taking trade from others. As I argued here, it isn’t credible to suggest that the marked long-term secular decline of demand for pubs could have been prevented or even significantly curbed by pubs as a whole being better managed. To do that would involve rewinding thirty years of social and legislative change.

It also seems to me that this is overwhelmingly a London problem, and indeed a problem of London inside the North and South Circular Roads. It’s very hard to think of any example of a pub local to me that has been sold for alternative use despite having been doing healthy business. In fact, the opposite is generally true – there are plenty of pubs that have been standing closed and boarded for years without being either brought back to life as pubs or converted to something else. £27 million could easily buy you a whole estate of pubs in the North-West!

21 comments:

  1. umm, also to suggest we would have no schools, parks, hospitals is dubious. That is to assume the only demand is one where people are forced to purchase the economic good and would not freely do so. There would be no free at the point of use schools, parks, hospitals but they would still exist. People would want them as much as a Tesco Express.

    They are publicly provided for, not because they wouldn't otherwise exist but because society has deemed access to them should not be related to the ability to afford them.

    These lefties know nowt. That's why they're lefties.

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  2. Thank you Ayn Rand.

    It is not a "fundamental principle of economics" that something that is profitable should be discarded for something that is more profitable. That is a fundamental principle of laissez faire capitalism. Other forms of economics are available on request.

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  3. Alan's right. Out of you and Pete, Mudge, he's the one who's a utilitarian - Bentham was very clear that 'utility' referred to all forms of satisfaction or pleasure, from boozing and gambling to art appreciation and altruism. There's nothing in utilitarianism to say that the maximisation of economic activity equals the maximisation of utility - let alone that a larger profit (for whom?) means greater utility for all.

    The version of utilitarianism you're using is essentially the religion of the free market - it takes it as read that the free market maximises overall utility, then (in the face of the evidence that it plainly doesn't) redefines utility as what the free market does maximise, i.e. profits in the hands of a few and inequality of power. Bentham would be turning in his grave if he were in one.

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  4. As utility is a representation of preferences over some set of goods and services, and money is the common transactional tool of society, what else would you measure utility by?

    I could estimate my utility for bread and water based on how much of each I had, how much I needed and thus work out some sort of relative utility of one compared to the other.

    But why not measure them in money?

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  5. "Other forms of economics are available on request."

    Other forms of politics are available, often involving mass starvation and death camps.

    The principle that economic utility is maximised by the most efficient use of the factors of production still applies even if you are running a Communist state.

    And market economics and capitalism are not remotely the same thing.

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  6. Here's a relevant article that I've just spotted:

    Using happiness scales to inform policy: Strong words of caution.

    As someone once said, "Poor but happy is not a phrase invented by a poor person."

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  7. Warning!
    There are thousands of liesure venues ,some still viable,waiting for disposal when values reach a point (soon) justifying a sale.
    There are many groups(breweries) maintaining their survival by asset disposal, when higher prices are possible ,there will be a torrent of closures
    There are ways of reversing the demise in the pub sector but sadly the muted protesters are hindered by appeasers and fellow travellers .Very few are prepared to face the truth and reality,they hide in corners bloated with indifference,petrified of tackling the obvious

    Once more,dear friends

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  8. The Slender Man8 July 2014 at 13:32

    Nothing will keep the pubs open. They will all close. Darkness will fall.

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  9. Ah, the economics of the jungle. we lost the Ashcroft Arms recently in Luton after the pubco decided to sell it to Morrisons. It was profitable, and the reason for that was the 3 years of grind the tenants put in to turn it round. The pubco made assurances to them about their future if they took it on, let them spend their savings on refurbisment and then used smallprint to yake it off them.

    In your view this is all ok, people are just so much fodder to be thrown in the mill and then spat out.

    It is a cold, inhuman philosophy.

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  10. Ah, anonymous 13:42, the old "you approve of that, thereefore you must approve of this too, what a bastard you are" fallacy. Pubcos screwing over tenants is nothing to do with someone selling a pub in London for a price far higher than decades of ereturns from using it as a pub. And the Luton pub may well have been profitable, but if it wasn't making as good a return, doiscounted over time, as selling it to Morrisons, the pubco is not doing right by its shareholder (possibly my pension fund, perhaps yours too) by keeping it going as a pub.

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  11. Quite so - in the long run, keeping pubs (or any other type of business) open for sentimental reasons that could be more profitably used for something else does nobody any favours.

    And, as Martyn has pointed out in the past, it's never been easier to open new licensed premises. I'm sure there are plenty of shopping parades in Luton with vacant units that anyone with a bit of entrepreneurial nous could turn into micropubs.

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  12. I'd go further than Martyn, capitalism requires the enforcement of fair contracts as part of its functioning.

    Enforcing fair & mutually understandable contracts between tenant & owner isn't mitigating against the worst excesses of capitalism, it's making capitalism work.

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  13. The thing is, pubs have huge positive externalities that are never reflected in the profits. Just because it would be more profitable for a supermarket to exist than a pub does not mean it would be preferable.

    Laissez faire economics fails to recognise this, hence the reason it was last taken seriously about 100 years ago.

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  14. positive externalities?

    would this be the pigeons that feed off the blood and vomit on the pavement outside Mudgies local after he's downed 6 pints of proper clear boring brown northern fighting bitter?

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  15. As utility is a representation of preferences over some set of goods and services, and money is the common transactional tool of society, what else would you measure utility by?

    Measuring utility by the expenditure of money leads to the conclusion that many of the things people actually do in search of pleasure and satisfaction aren't the acts of people maximising utility. But this is a contradiction in terms - Bentham's utility was precisely a term for the pleasure & satisfaction people actually seek. If I get satisfaction from gazing into space, or stroking my cat, or watching Live At the Apollo, or window-shopping, or reading a library book, or reading the Daily Mail online, or voting for UKIP, or having pointless arguments with beer bloggers, every one of those provides utility for me - and if I had to pay a transaction fee to do any of those things there'd be less utility, not more.

    Money doesn't track utility even in the more obvious cases. The £8 pint costs twice as much as the £4, but it's highly unlikely to deliver twice as much satisfaction. The curve may even slope the wrong way - I'll pay £4 for a pint, but reluctantly, and I'm likely to value the £3 pint of cask more highly because it's cheaper.

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  16. 'Midge

    That paper by Lang and Bond that you reference is a load of ballcocks and reinforces the well-known fact that economists don't really understand mathematics They apply sophisticated statistics to what are, essentially, non-numeric data.

    Not content with that they demonstrate that with a different analysis the result can be reversed but fail to draw the obvious conclusion that that merely demonstrates that the data is inadequate to draw any conclusion from.

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  17. Obviously there are plenty of things from which people derive utility that you can't really put a value on, and I'm not suggesting otherwise.

    But, if as a society we make the decision that we will forgo £x of narrow monetary utility because we think something has non-monetary positive externalities, then in effect we are putting a value on it.

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  18. aye, but are we putting the right value on it?

    Experience says no.

    There are numerous examples of how market failure can occur, I'm sure you either know about them or are smart enough to read up on them. IMO, the provision of social space in the form of pubs is one such example.

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  19. "Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire"

    from this
    http://en.wikipedia.org/wiki/Utility#Quantifying_utility

    so if you don't want to use money, what else we using? magic beans?

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  20. If a pub has been open for over one hundred years and survived wars,recessions and depressions
    we need to ask the simple question
    why the sudden need to sell it.
    Most honest educated observers will know the answer but are drowned out by compliant ,cap doffing weasels and Westminster
    butt kissing gargoyles,not forgetting the froth blowing Trots

    Your England ,not mine.

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  21. The elephant is in the room but nobody wants to see it. Why? Because the elephant is what it is all about.

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