Friday, 8 September 2017

The undercutting fallacy

In their new book 20th Century Pub, Boak and Bailey, in surveying the various reasons put forward for the decline of the pub trade in recent years, refer to “Left leaning campaigners” who “decry the rapacious behaviour of the supermarkets, which sell alcohol very much cheaper than any pub could hope to achieve”. This is frequently advanced as one of the key factors behind pub closures, and has become an article of faith with many CAMRA members. But, in reality, it is at best only a very limited and partial explanation for the trend.

As I explained here, there are a whole list of reasons for the shift from on-trade to off-trade consumption, amongst which relative price is only one amongst many, and not the most important at that. In general, they can be summed up as a combination of homes becoming more attractive and stimulating places to spend time, and a growing attitude in society that alcohol consumption is something that has to be ringfenced from any form of responsible activity. On top of this there is obviously the externally-imposed factor of the smoking ban. It should be remembered that, at the time when most of our pubs were built, there was no radio, no television and no recorded music, and most homes did not even take a newspaper. If you wanted any kind of mental stimulation, there was little alternative but to go to the pub.

It is undoubtedly true that the gap between the two has widened over the years and, particularly at the margins, that must be one element behind the shift. But this is as much to do with pub prices rising above inflation as with off-trade ones failing to keep place with it. The off-trade has benefited from the economies of scale and tighter margins that come with higher volumes. On the other hand, it has to be remembered that the cost of a pint in the pub contains a much greater labour element than that of a can in the supermarket – you are in effect purchasing a service, not a product. As real incomes rise over time, it is inevitable that the price of services will rise relative to that of goods.

Going to the pub for a drink requires both a reason and an opportunity – it isn’t simply a case of choosing an option for the consumption of alcohol. In the past, it was, for many people, often a matter of ritual and routine, which has been eroded over time. As I wrote here, for most responsible people, it isn’t primarily cost that is deterring them from drinking more in pubs, it is more that the opportunities do not arise so often, and they have a general concern both for their own health and maintaining standards of behaviour. Who would honestly say that they would drink significantly more in pubs if beer was 50p a pint cheaper?

In fact, Britain, due to high duty levels, has some of the most expensive off-trade alcohol in the EU. Go to a supermarket in any of our near continental neighbours, and the beer prices will be markedly lower. The attractions of the “booze cruise” may have lessened in recent years due to exchange rate movements and domestic sellers competing by cutting margins, but the gap is still there. And the UK and Ireland still have the highest proportion of on-trade beer consumption in Northern Europe, markedly higher than France, Germany and the Low Countries which have the most comparable drinking cultures. In fact, according to the Brewers of Europe Beer Statistics publication, the proportion of beer sold in the off-trade in in 2014 Germany was 81%, as opposed to 50% in the UK. Those city-centre beer halls may thrive, but in most of the country there’s precious little bar drinking going on. It is higher in Mediterranean countries such as Spain and Greece, but that is because their climate is much more conducive to sitting outside drinking in the evenings.

Supermarkets are sometimes accused of manipulating the market for their own benefit, but in reality they can only sell what people buy, and their interest is solely in maximising sales and profits. Any “agendas” are those imposed on them by government and public health lobbies. Yes, the interaction of supply and demand is a complex process, and it isn’t just a case of sitting back and waiting for people to ask for things. They try various new products and formats, most of which fail, but some succeed and end up becoming regular items on the shelves. That is decided by the customers, and at the end of the day people can’t be forced to buy anything they don’t want.

Two of the necessary preconditions for a mass off-trade beer market are home refrigeration and widespread car ownership. Without a car, it’s hard work lugging a slab of Carling home, and serving it up at room temperature isn’t going to be too appetising. I’d say that most working families ticked both boxes by the mid-Seventies, but it was only with the spread of big out-of or edge-of-town supermarkets in the 1980s that the floodgates really opened. In the 1970s it was often a case of going into the town centre and struggling to find a parking space to do your weekly shop. In the past, Davenports Brewery of Birmingham were known for their “beer at home” service but this, while it ticked over, never became a roaring nationwide success. I don’t know how their prices compared with those of pubs at the time, but possibly the refrigeration issue was one factor holding it back. Nowadays, of course, with the spread of online ordering and delivery, the car ownership aspect is becoming less important.

In some quarters, the actions of supermarkets are seen almost as a malign conspiracy to deliberately undermine the pub trade. However, all they are doing is engaging in the normal behaviour inherent in a competitive market – the free exchange of goods and services between willing seller and willing buyer to the mutual benefit of both. If they for whatever reason decided to hold back, then someone else would step into the breach. If you don’t like the prices Tesco are charging for drinks, have you seen how cheap Aldi’s own-label products are? Patterns of customer demand change with the passage of time and it’s simply a fact of life that there will be winners and losers.

You also don’t hear restaurants complaining about the unfair competition from ready meals, even though the supermarkets enjoy a further cost advantage here as they don’t pay any VAT on them. If the “cheap supermarket alcohol” argument for decline really held true for pubs, then surely it would also apply to restaurants.

Another charge often levelled at supermarkets is that they routinely engage in loss-leading on alcoholic drinks as a means of enticing customers through their doors. However, as I argued here, while I’m not saying it never happens, it would make no sense whatsoever to sell at a loss something like a slab of lager that may make up a substantial chunk of someone’s shopping bill. Yes, of course they achieve keen prices by driving a hard bargain and cutting margins, but it would make for very poor business to actually sell at a loss. The most likely situation when you might encounter it is selling off surplus stock.

It should also not be forgotten that the growth of large supermarkets has brought major benefits to consumers. They have helped people’s budgets by using their buying power and economies of scale to cut prices, something that is also encouraged by keen competition between them. They have provided shoppers with an unprecedented variety and quality of food, especially fresh produce. And they offer extended trading hours which recognise the reality of modern life where two-earner households are the norm and working hours are less and less standardised. The old model of shopping seemed to be based on the assumption that households contained a non-working housewife who had the time to traipse around a variety of local shops on a regular basis to buy something for tea. And, if both partners worked full time, they were left with no alternative but to engage in a frantic scrum on Saturdays to get all their shopping done.

Even if you accept that the argument has some validity, it’s hard to see what in practice could be done about it. The horse has bolted now and the position of supermarkets in the alcohol market is well established. Possibly, if you went back forty years, you could have implemented a much stricter licensing regime for off-trade alcohol, with severely limited hours and requiring alcohol to be sold at separate counters, if not in entirely separate shops. But, given all the various wider factors leading to a growth in demand for take-home alcohol, it would only have slightly held back the trend rather than stopping it from happening. Sweden restricts alcohol sales to state-owned shops with limited hours, but I’d expect that it has still experienced much the same switch in recent decades, and the statistics I linked to above show that the off-trade has a 79% share of beer consumption. In any case, availability tends to follow demand, not create it. In recent years, we have seen a distinct fall in overall alcohol consumption despite a more liberal licensing regime for both on and off-trades, and in the 1970s pubs did a lot better than they do now despite being closed for three hours every afternoon and five hours on Sundays.

Alternatively, you could try to narrow the gap by artificially inflating the price of off-trade drinks. An obvious means of doing this would be Minimum Unit Pricing, which has been widely discussed in recent years although not so far implemented. However, as far as I’m aware, the key justification put forward for this is to attempt to address problem drinking by raising the price of the cheapest drinks. It isn’t claimed to be a method for shifting the balance of consumption to the on-trade. And, if you think about it, the argument makes no sense, as Christopher Snowdon points out here. It wouldn’t reduce the price of beer in pubs, and would give people no extra money to spend in them. Indeed it might lead to them spending less as household budgets were squeezed. And is it really credible that, if you increased the price of the cheapest can of Carling from 50p to 88p, people would then rush to the pub to buy it at £3.50 a pint? It’s just something latched on to by people who foolishly believe that anything that damages other sections of the drinks trade must benefit them. Plus, the further you increase the price of off-trade alcohol, the more problems you have with black market selling and illegal distilling.

The conclusion must be that “undercutting by supermarkets” is something that only plays a very limited role in the long-term decline of pubs, and certainly doesn’t give any guide to future policy. It is something that conjures up a sepia-toned vision of an age when you went for a knees-up in the street-corner local, got in a couple of bottles of Emva Cream and Vat 69 for Christmas from the outdoor, and where the missus trotted round the butcher’s, baker’s and greengrocer’s several times a week to feed the family.

Of course in a sense it is sad to see the pub trade so much diminished, but it is social and legislative change that have brought that about, not competition from Tesco. Supermarkets have responded to that change, not created it. Pubs have no hope of ever being able to remotely match the off-trade on price, especially given the ever-increasing cost of labour, so, rather than moaning that life is unfair, they need to concentrate on giving customers something distinctive for which they are willing to pay a premium. The business of pubs is hospitality, not just selling alcohol.

55 comments:

  1. Pubs could give beer away for all I care. What's the point if you have to stand outside in the pissing rain?

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  2. Third time lucky?

    Excellently argued piece. We often seem to forget that in these halcyon days social opportunities as well as commercial and technical ones were much more limited. Supermarkets are not to blame as such - their business is do do business - and of course, as you rightly point out, a service led industry such as pubs will always cost more.

    What is for sure is that what is lacking all too often is the service - as for "hospitality" - that's as rare as hen's teeth. Disinterested staff, no welcome, uncleared tables, poor toilets, routinely poor beer in many cases and much more more mean that the experience won't compete with a glass or two at home watching Dr Foster. Pubs arten't on every corner anymore, so why pay a lot more for much less?

    Pubs need to up their game. As I repeat ad nauseam. "It's the offer Stupid."

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    1. And providing an appealing customer environment often consists as much of *not* doing things that are recognised to irritate people.

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    2. The music's OK if it's quiet and inoffensive but when it's noisy and you can't hear anything but the music and the background noise it's impossible trying to have any conversation for people who are hearing impaired or have an auditory processing disorder.

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  3. A well reasoned article but I would take issue with your comparison with ready meals. Eating in a restaurant rather than cooking a ready meal provides a much higher level of service than drinking at home versus going to the pub. washing up one beer glass and putting out the bottles is far from onerous: clearing up after cooking a tree course meal is very onerous.

    And, as Tandleman eventually manage to say, the service in many, perhaps, most, pubs is dire. So many landlords live in a time warp where the prevailing ethos is "This is my gaff and if you don't like it you can get out". Not surprisingly many drinkers are getting out and going to drink at home.

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    1. There's not *that* much washing-up after a microwaved lasagne. And I believe over 50% of households have dishwashers nowadays anyway.

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    2. Hopefully, though, a restaurant offers something a bit above a supermarket microwave lasagne. Ok, maybe not if it's a family feedbag :-)

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    3. Most of the Italian themed chain restaurants are supplying you with microwaved Lasagne, I'm afraid. The only thing they 'cook' is the pizzas and even then they use dough that is ready prepared elsewhere and delivered to the individual restaurants. And still people go?

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    4. Indeed. That's why I don't go to them :-)

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    5. And the same is true of most of the food served in "family dining pubs". The fact that it costs more is, as with pubs, down to the cost of labour and overheads, not ingredients.

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    6. I recently went to a Brunning and Price pub for a starter. The starter was over £6 (usually it's more like £4 or £5, even in posh places) and it was very clearly mass-produced cheap supermarket rubbish. You'd think at the prices they charge and the setting that the food would be homemade but it wasn't and it showed.

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  4. And many of those pubs are closing or doing badly. Whilst many bemoan the loss of the traditional 'boozer' in fact they're the ones in
    many cases, who, has has been said are the 'problem'. What doesn't appear to be accepted yet, is that the new breed of micro's are supplying all those things which are missing from the failing pubs. Add to that sourcing new and innovative beers and you have IMO, a partial glimpse of the future.

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    1. I tend to agree though I have doubts about the financial viability of such small operations. Staff costs in a micro are a larger percentage of turnover than they are in a larger pub. And most large pubs seem to be short staffed in order to make ends meet.

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    2. That's partly true, and it's certainly the reason that many operate reduced hours. However, other overheads are far lower than bigger pubs. The micropub model works for publicans who are not bothered about making huge profit but see it as more of a lifestyle choice and as such I think they are viable, at least under current trading conditions (for example small business rates as it is now).

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    3. Micropubs successfully occupy a niche in the market but I don't think they can really be regarded as a successor to the traditional boozer.

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    4. This. (As the kids say.) I like many or most of the Kentish micropubs I've been to, but still wish they were proper pubs.

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    5. Have quite liked most micro-pubs have popped into, as a one off or occasional visitor, from point of view of beer and physical ambience. Couldn't ever see myself becoming a regular in one though: the preserve of vanity project landlords and a small clique of identikit hangers on. Not that some full-blown pubs aren't also like that, but more still have a reasonable social diversity... whatever Mudgie might believe about people never going into establishments outside their obvious comfort zone (Never the twain) ;-).

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  5. "You also don’t hear restaurants complaining about the unfair competition from ready meals"

    Although you do hear the VAT argument from Tim Martin along with his "tax equality day" gimmick.

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    1. That is true, but it always comes across to me as specious special pleading, and it isn't a call echoed across the rest of the eating-out sector.

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    2. Tim Martin looks ridiculous about that since supermarkets also pay VAT when they sell hot food. Tim could avoid VAT by serving his food cold and uncooked :-)

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  6. Interesting and very good article. In reality there's a D.phil thesis required here to get to the bottom of things, which would require much research. In fact, thinking about it, it's probably beyond the scope of single handed post graduate research and would require a collaborative approach. In the meantime we can only postulate. I'm going to maintain my stance and say that good pubs will survive - the ones that give the customer exactly what they want. And where bad pubs close there is opportunity for new venture, many are thriving. As you point out over time peoples outlook and taste changes, so the trade has to adapt to accommodate it. If the building game can adapt then so can the pub trade, despite the fact that there are many out there still trading in the pubby equivalent of wattle and daub huts.

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    1. It's certainly true that, by and large, the pubs that survive will be good pubs. However, the opposite doesn't necessarily follow, that good pubs will survive. I know of plenty of pubs that, in many respects, were good pubs, but were still left high and dry by changing patterns of drinking behaviour.

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  7. £3.50 a pint of Carling? That's during happy hour I take it? ;)

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    1. This is oop 'ere in t'grim North, tha knows!

      And Sam Smith's considerably superior Carling equivalent Double Four is only £2.08 in their pubs. So only twice the price of supermarket cans.

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    2. Where do you get that if I may ask? I've never seen that in any Sam Smith's pub. You can get the very weak Alpine Lager, the equally weak Mild, the three Stouts they do plus the OBB but I've never seen Double Four. I tell a lie, I did see a font for it once but I asked for a pint of it and they said they didn't have any.

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    3. Sams' choice of which of their keg beers to put into their pubs can seem rather arbitrary, as I wrote here. But the Double Four is certainly on in the Boar's Head in Stockport (which has about the widest range of Sams' kegs I know of) and the Bird in Hand in Mobberley. I'd be surprised if it wasn't also on in Sinclair's in Manchester City Centre.

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  8. It's also rather naive of the pub industry to support minimum alcohol pricing when the plan is to one day impose a minimum unit price for the on-trade too. They should beware who they get in bed with.

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    1. Plenty of publicans would probably support that in the hope it would damage Wetherspoons.

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    2. It's interesting that this is the first mention of Wetherspoons within the post or the comments. Supermarkets don't seem to have done them any harm, probably because their business model is closer to them than any traditional pub.

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    3. How much would that affect the pub trade in practice? Would most pubs be affected?

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    4. It would depend where it was set. The Sheffield University study which is used to support calls for minimum pricing certainly proposed a considerably higher level for the on-trade than for the off. At £1 a unit it would certainly catch a pint of 4% beer sold for £2, which is far from uncommon. Not to mention all those strong guest real ales in Spoons after deducting the 50p CAMRA voucher ;-)

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  9. No one has mentioned all the coffee shops that there are now despite it being easy and cheaper to make a coffee at home or work.

    Many traditional pubs are old and large buildings that are expensive to maintain, too costly for the level of trade: a shop converted into a micro-pub is more viable.

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    1. Well, coffee shops aren't supermarkets, but they're an example of pubs being outflanked by something that is *more* expensive.

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    2. I was not really thinking about the competition to pubs from coffee shops as such but there must be some if only to a limited extant. It was merely that they do not seem to suffer from there being a much cheaper alternative.
      I have no idea what percentage of drinkers drink at home as well as in pubs but the point of Christopher Snowdon’s article was that if supermarket prices are forced up they will sell more not less and pubs less not more as supermarkets will still be the cheaper option. (I know you have read the article but others may not have linked.) But still those in or supporting pubs have argued for it.

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  10. The pubs of my youth were mainly populated by (presumably single) middle-aged men with severe alcohol dependency issues who never seemed to leave, and the occasional large group of students. The former group appear to have died, the latter are all at home playing twitter, which is probably worse.

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    1. What a bizarre comment. I'd say twenty years ago pubs had a much broader mix of customers than they have now.

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    2. They had more customers full stop!

      I'd like to see a report on the changing demographic usage of pubs. I'd bet there has always been a U shape in age demographic with a relative absence of 30-45 year olds that has remained pretty consistent, I'd bet there is a strong bias towards men across all age brackets, which has reduced but not disappeared, and I'd bet the greatest fall-off has been in the 18-25 age bracket.

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    3. The greatest fall-off has been in the 15-18 bracket.

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  11. The two major factors that have led to the demise of the traditional pub are all day opening and Pub Co's.
    Pubs open all day has resulted in drinkers taking them for granted, especially on a Sunday. How good was the old 12-2pm lunchtime session on a Sunday? Pubs packed and the atmosphere great as people had a good drink before going home for a roast. Now pubs are open all day on Sunday and people think we'll go to the pub today, but they go shopping to the supermarket and then the garden centre because they know the pub is open all day. But by the time they have got home they can't be bothered. When we had lunchtime sessions you knew you had to go within those hours or you didn't go at all.
    Then there are the Pubco's; they don't give a toss about beer! When the breweries owned the pubs they would visit them and make sure the ale was being served correctly. Now the only thing the Pubco's care about is whether their Sky subscription up to date and how long will the lasagna last in the bars heated serving section.

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    1. Have to agree that ending lunchtime closing eroded the traditional way pubs used to work.

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  12. I think you've nailed it ... spot on and great article

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  13. Can you think of any other product where those reliant on selling it have decided to try and convince people it is to dangerous to drink unsupervised and that the "hospitality" they provide is in fact a safety requirement of consumption?

    The pub industry have been playing into the hands of those that wish to destroy for years and those people aren't Tesco.

    No wonder the kids are laying off the sauce. That's the real danger. The gradual steady reduction in drinkers. Wait till you're all in the minority like smokers were.

    We will then see how much special pleading for middle class craft alcohol works.

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    1. @Cooking Lager

      That's probably the most accurate assessment of the situation so far. The first nail in the coffin was the drink drive laws, which meant that a lot of people who weren't in easy walking distance of their local were frightened into staying home rather than drive to a pub they liked. And that also marked the beginnings of a slow but remorseless drip drip of anti-alcohol propaganda. Then came the smoking ban, which caused a large proportion of 'regulars' to decide that if they were going to be made to stand on the naughty step when they went to the pub, they'd rather get a few cans from the supermarket and sit in front of the telly, in a comfy chair, ciggy in one hand and beer in the other.

      And since the ever increasing manipulative power of the anti-tobacco lobby has become apparent, the anti-alcohol lobby has been busy boning up on their propaganda techniques for deployment in the war on alcohol. And they have had no small measure of success. Using the tactics learned from Tobacco Control, they are gradually turning alcohol drinking into an antisocial habit, and that decreasing number of people who enjoy a drink are going to be doing it at home in private rather than in the pub, where all and sundry can see how many 'units' you are drinking (oh, the shame...). Of which there is now no safe level, of course.

      And CL is right also in that kids are indoctrinated with all this PC shite in school from an early age, and as a result less and less of them are inclined to drink alcohol. They've been scared off it. As another commenter pointed out above (slightly, but not completely tongue-in-cheek), one of the customer base losses is the 15 - 18 year olds! Well, how old were you when you first started going to pubs? I bet it was well before you were 18.

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    2. Yes, good point that the rise in anti-drink propaganda means that people, even if they do drink, are increasingly going to do it out of public view. Drinking (as opposed to dining) in pubs is a lot less socially acceptable than it was thirty years ago.

      And the aggressive ID'ing that 18-25 year-olds experience is likely to put them off for life.

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  14. I think you are broadly right.

    The one thing missing from this analysis is consumer discernment, or, more specifically, the abject lack of it.

    As you point out, a major selling point of the big supermarkets vs the shopping experience of the past is the prevalence of fresh produce. But most consumers don't give a Chipping Norton about this when they can buy tinned or frozen. Where is the 'fresh produce' beer? (It's in the pub and, with a very few exceptions, *only* in the pub). For the masses, cheap tinned, mass produced beer will do.

    Pubs will survive because of 'beer snobs' like me, just as organic farm produce shops will survive. But numbers of both may well dwindle further because, by and large, the lumpenproletariat really don't give a flying sex about the quality of the shit they buy.

    And that's why your anti-beer-snob prejudices are unfounded!

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    1. Ha Ha. I read that & then clicked through to your blog where you have a picture of yourself. I've being laughing at your inflated view of yourself all morning. Thank you.

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    2. I don’t agree with him (Ben) but you are really playing the man and not the ball and you should have called him out.

      Is there much difference between a can of Carling and that poured in a pub? Because that is where most pubs earn their income: 70% of sales. So pubs will not survive because of 'beer snobs' like him: only a small number of craft bars.

      I don’t even think he knows what the term lumpenproletariat actually means but for many the choice is simple: 5 pints in the pub or a case of Carling plus some nappies for the baby.

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    3. Beer snobs don't spring fully-formed from the womb, though - they tend to have graduated from normal pubs. Without normal pubs, there probably wouldn't be any beer snobs' pubs either.

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    4. There's no point in calling the lad out. Such views of themselves & wider society are based on emotion more than fact. You can only enjoy & chuckle.

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    5. Ben could give himself the tagline "Ben Nunn: The Voice of the Beer Bubble" ;-)

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    6. Worth pointing out that you can get 14 pints worth of Carling (say 20 440ml cans) and have change for those nappies instead of just those five pints in the pub.

      I mean, I hate the stuff, but if you just want the beer and aren't interested in socialising with people, then it makes sense.

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    7. Cheers Mudgie,, that's the new strapline sorted. I'll tell those brand management consultants in Shoreditch I have no further need for their services...

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  15. Good piece. Well said. Worth saying.

    'Left Leaning' where do Boak and Bailey get that from?

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  16. I agree, good piece, and I agree that social changes contribute to the decline of pubs. On the one hand I get fed up with people saying pubs only have themselves to blame or need to 'try harder' when the deck is so stacked against them. They're like Monty Python's 'Black Knight', with bits of his body being gradually chopped off. Whack! High taxes. Whack! Smoking ban. Whack! Licensing laws still over-restrictive in many places. Whack! Draconian drink/drive laws. Whack! Compulsory IDs and youngsters alienated instead of watchfully tolerated and 'socialised' into pub culture. Whack! Red tape and permits for every little thing. Etc etc, and yet people keep saying 'stand up and fight' when the Knight has no legs!

    Of course the sketch is funny because he stays defiant no matter what happens, but in real life it's pretty hard to stay that defiant. No excuse for bad service, but we get a lot of things like, even pubs that are doing OK, hiring cheaper staff who don't give a damn, so the pub feels unwelcoming. I just think politicians, councils, health and safety nannies, etc deserve a lot more of the blame.

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