Thursday, 20 November 2014

A Pyrrhic victory?

In 1989, after strenuous lobbying by CAMRA, the government of the day brought in the Beer Orders, which were widely expected to usher in a new era of competition and diversity in the pub trade. In one sense that has happened, with more breweries producing more beers in more styles than at any time in living memory. But, on the other hand, they precipitated a drastic restructuring of the industry and led to the rise of the giant, debt-fuelled pub companies, which are widely felt to exert a negative influence on the market. So the eventual outcome was very much a mixed blessing, and probably one that nobody foresaw at the time.

This week there was a vote in Parliament as part of the discussion of the government’s planned code for regulating pub companies to allow tenants and lessees of major brewers and pubcos to have a mandatory free-of-tie option at an independently assessed market rent. This was celebrated by CAMRA and others as a major step forward to free up the market and give tenants a fair deal. But will it really make all that much difference, and is there a danger there will end up being more downsides than upsides? Christopher Snowdon and Allister Heath certainly think there might be.

The pubco business model is based on charging tenants more than the market price for beer and other drinks bought from the pubco – the “wet rent”, in return for a lower than market “dry rent” for the property, and general support and advice about how to run the business. It gives people a relatively easy and low-cost route into self-employment and spreads the risks and rewards between landlord and tenant. For many people, this works well enough, but others have felt that they have been badly treated by the pubcos, subject to unreasonable rent increases, and that the support they’re given isn’t remotely worth the implicit price they pay.

So for some the market rent option may well seem attractive. However, it is inevitably going to be considerably higher than a tied rent, so it won’t necessarily suit everyone, especially those with low beer volumes or little confidence about buying on the open market. It also transfers all the risk of running the business from pubco to tenant, so all the pubco is interested in is whether the rent is paid. This means that the pubco has effectively moved from the pubs business to the property business, and it wouldn’t really matter to them if the pub was converted to a supermarket or a block of flats, as they no longer have a financial stake in it remaining as a pub.

Given that they campaigned against it, it is fair to assume that the large pubcos believe that the market rent option will damage their business, so it is inevitable that they will seek to take steps to mitigate the impact. An obvious one is to transfer more of the high-performing pubs – which would be most attractive to run under an MRO – to direct management. They could investigate other kinds of business arrangement such as franchise agreements, and sub-letting groups of pubs to multiple operators. Or they could break themselves up into smaller units that would no longer come within the scope of the code.

The plans also involve giving the responsibility for setting market rents to independent assessors, which is almost guaranteed to end up being a source of argument and ill-feeling. It’s also generally the case that if rents are set by tribunals rather than the market it tends to reduce the supply of available property. Property owners may not wish to run the risk of getting involved in time-consuming disputes. Another aspect of the proposals is that pub companies that are also brewers, such as Greene King and Marston’s, will still be able to insist that tenants stock their products, but they will be able to buy them on the open market. You can’t really see that ending well.

Now I can’t say I’ve read every single detail of the proposals, and they’re still a long way from reaching the statute book, so I may not have got everything right. But I think it’s fair to say that they won’t bring about the dramatic liberalisation of the market that some seem to believe, and the takeup of the market rent option may be fairly slow. It might give an attractive opportunity to confident and enterprising lessees, but it’s hard to see the ownership of chains of unbranded free-of-tie rented pubs making much sense as a long-term business model, and there must be a major risk that the various issues I’ve outlined above will overall make owning and running pubs a less attractive business to be in.

It’s also notable how most of the anti-pubco campaigners are strangely reluctant to put forward any alternative vision for the structure of the pub trade. They seem to have a kind of naive, nostalgic vision of pubs being run by stand-alone freetraders, which is about as realistic as harking back to the days of the independent corner shop. Some of the lunatic fringe even talk of pubs being taken over by the State and run as community facilities.

And it would be interesting to know how many of the self-proclaimed champions of pubs who have been crowing about this were silent when the smoking ban was being debated.

17 comments:

  1. This going to be a difficult one to judge over years it comes into effect because pubs will continue to decline in number regardless. Who is to say it would be different under different regulation? You cannot regulate a prosperous pub market into existence if underlying demand is falling.

    Still, it's made some beardy people happy and some suits unhappy so it gets a thumbs up on that count alone. I like beardy people more that suited people.

    Is fixed rent better than variable? Dunno but the risk is different. What is a fair rent? Dunno, to the seller it is the higher number, to the buyer the lower. Will pubs fill up on old scrote IPA? Will a pint of fosters be cheaper? We will have to wait and see.

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  2. That's the point - it's not going to make much difference either way to the long-term trend. All those claiming it's going to lead to a renaissance of the pub trade are drinking in the Cloud Cuckoo Arms.

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  3. As few foresaw a consequence of the beer orders being the formation of pubcos and brewers exiting the market, I gonna make a prediction. Whitbread are doing better running coffee shops and hotels than they ever did making and selling grog. Pubcos do better business with informal dining than selling beer.

    You will still be able to run a restaurant franchise operation, combining managed and franchisees. In pubs you can no longer control the supply chain as people can opt out. Many pubs are basically restaurants anyway. Your John Barras, your toby carveries, your 2 for £10, your Green King burger meal deals all become either fully managed or claim to be franchised restaurants and not pubs.

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  4. I can't imagine they will allow the franchised operations to supply their own booze. A franchise is the whole package, food, drink, menus etc. I was under the impression that these were mostly managed anyway?

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  5. One of the comments I've seen floating around is that people warning of unintended consequences are doom mongerers, and if you worried like that nothing would ever get done.

    The thing is 'unintended consequences' isn't really the right phrase. It is more like 'reasonably foreseeable consequences'.

    I'm broadly in favour of MRO, but I do think there will be negatives. We're not going to have pubs with a nice range of beer, all kept perfectly well, at a good price. Pubs will still go out of business. The pubcos will still seek to dispose of marginal pubs.

    I get frustrated by rhetoric used by the anti-pubco lot. At least now they will only have themselves to blame if they can't make the business work. (Who am I kidding, of course they will still blame the pubcos or anyone else).

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  6. Hopefully in the blogpost I'm trying to look at some of the likely consequences rather than crying doom and gloom. It's not going to kill the pub trade, but nor is it going to breathe a lot of new life into it.

    In general, by making owning a leased pub estate a bit less attractive, it will tend to accelerate the disposal of bottom-end pubs by pubcos. Some will be bought by independent freetraders, but the amount of capital - and customers - available is limited.

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  7. What tosh. CAMRA is 100% bang on right. It was right about the beer orders, right about the smoking ban, right about the beer tie and right about planning regulation. Who cares how many pubs there are? All we want are CAMRA pubs!

    We can have a 100% freehouse, 100% microbrewed IPA cottage industry and put supermarkets, plastic chain pubs, microwaved food and fizzy chemical lager in the dustbin of history!

    Another stepping stone to victory!

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  8. Ed Miliband's hamster20 November 2014 at 15:17

    Wow, I never knew that the fragrant and politically astute Myleene was a CAMRA supporter!

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  9. BBPA,CAMRA and Ms Klass all dipping their snouts in the trough
    of blinkers and ear muffs,all skating around the real issues of
    the English Pubs demise.
    Reality check,many more pubs WILL
    close,many more staff will be made redundant.
    With more than 24,000 VENUES (uk) closed and 10,000 + bound for closure,the time is ripe to point the finger of blame at the REAL CULPRITS,the real Quislings,the real Judases,the real back stabbers,not difficult,have a glance round your local.

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  10. Rob. Describing a "wet rent" pub as a franchise, as both of 'mudgies references do, is quite misleading.

    On a proper franchise the franchiser does not market his products except through his franchisees.

    How successful would Subway or Pizza Hut be if you could buy subs and pizzas in Tesco or Wetherspoon's at two thirds the price. Yet that is what Marston's "franchisees" have to compete with (more fools them)

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  11. David, I was thinking of the likes of Hungry Horse, Toby Carvery etc. I completely agree a wet led pub, or one where the tenant has developed their own food offering could and should not be deemed a franchise (though I wonder if the pubcos will try that on).

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  12. It is very hard to see ANY downside to this measure. It's supported by independent representatives of the trade and consumer organisations alike. It wasn't even instigated by dreamers in the beardy club: CAMRA, in fact, came quite late to the party but did provide a lot of support.

    The obvious fairness of the proposal is what convinced so many from different faiths to vote for it. The only opposition I've heard is from pubcos and, erm, libertarians Which says it all really.

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  13. Nobody knows exactly how it will pan out, but I'd say there is a clear risk that if you make owning a leased pub estate less attractive - as the pubcos obviously believe - you will end up with fewer pubs.

    Even Pete Brown admits that it is likely to accelerate the rate of pub closures.

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  14. Does Pete Brown really say that? He does comment on the BBPA statements which, as he points out, are somewhat exaggerated. I see that Stonch's Beer Blog has some further thoughts - and details the various things that could trigger this new provision. Clearly there's not going to be a stampede and nor, I suspect, will there be an avalanche of closures.

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  15. Pete Brown says:

    "It's undeniable that MRO will accelerate the rate of disposal of under-performing pubs from the pubco estates."

    and goes on to say:

    "If we take into account London Economics figures for reopenings under alternative management, the report is saying that, net, between 462 and 924 pubs will close, not 1400, with between 2442 and 4620 job losses, not 7000."

    So he's saying that, while the BBPA figures are somewhat exaggerated, there will still be a significant net loss of pubs.

    At the end of the day I suspect it won't make a huge amount of difference either way, but those claiming that it represents some kind of new dawn for the pub trade are seriously over-egging the pudding.

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  16. Yes, you may be right about the end result - not a huge difference either way. It will be good news for some publicans who are able to trigger an option for MRO but not everyone will want to do that as after all there seem to be plenty of pubco pubs doing alright as they are (although we never hear about them). We'll just have to wait and see.







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  17. My mate Pub Landord Larry is a proper salt of the earth decent bloke that serves the cheapest coldest pint of wife beater in town. Whilst cheaper Stella is to be welcomed what most affects his viability is dodging the SKY sports inspectors over his Iranian TV sports feed, dodging the VAT, dodging the council health inspectors and keeping them away from his secret freezer where he puts the sheep I sometimes run over in my white van, keeping CAMRA types out of the place and stopping fights kicking off when city lose. I've been supplying him with duty free spirits for ages, and the pubco just think he flogs buggar all of that. The tie is looser than many people think.

    Will this measure stop him burning down the pub for the insurance? Who knows, as Clarkey says, We will have to wait and see.

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