Friday, 25 March 2011

Gross profiteering

The duty increases announced in this week’s Budget would result in an increase in the price of a typical pint of beer in the pub of about 4p, once VAT was added on to the additional duty. However, it’s been widely claimed that this is likely to lead to an increase of more like 10p in the price of a pint passing across the bar. Hang on, you might say, doesn’t that mean that licensees and pub companies are profiteering?

Well, maybe they are, and maybe they aren’t. The reason for this is that pubs typically look at “percentage gross profit” when assessing their financial viability. The pub will seek to maintain a fixed percentage, usually at least 50%, between what they pay for their beer and other drinks, and what they sell it for. This has to cover overheads and staff wages as well as the licensee’s own share. Obviously, over time, overheads and staff wages tend to go up roughly in line with the overall rate of inflation, so you have to increase the amount added on to the cost of beer to cover that. And, if you don’t maintain the %GP, over time inflation will steadily erode the licensee’s income in real terms.

Clearly, on Day 1 after the price increase, if the licensee maintains the same %GP, he will be raking in more money than he was before, assuming that sales do not fall. But, over time, all that it doing is compensating for the rise in other costs the pub pays, and maintaining the real value of the licensee’s income. So far, so good. It all makes sense, and nobody is profiteering or cheating the customer.

However, as any economist will tell you, in a competitive market, pricing isn’t simply a question of adding a fixed percentage to cost, it also needs to take into account what customers are able and willing to pay. Over the years, in maintaining their %GP, pubs have slowly seen the prices they charge increase over and above the general level of inflation, and above the prices charged by the off-trade and other competitors for the leisure pound. What seems a sensible idea in the short-term is, in the longer run, seriously detrimental to trade.

Then Wetherspoons have come along and smashed the old cosy model by adopting a “pile it high and sell it cheap” approach that deliberately sacrifices some margin for higher volumes. Nowadays, if you run a traditional leased or tenanted pub within a competitive radius of a Spoons, you haven’t a hope in hell of competing on price.

Now, I’m not suggesting that licensees’ incomes are generally too high, or that crude price-cutting is a good strategy for pubs. But, in recent years, the pub trade hasn’t been helped by adopting a lazy and complacent pricing model that ignores market realities. If they are to succeed in future, pubs will have to look at a more sophisticated, flexible and market-sensitive approach to pricing rather than just simplistically banging on a fixed percentage of the cost of beer.

I also often think there is more pubs could do through pricing to stimulate customer interest, such as, say:

- each week, selling one of its regular draught beers (including kegs) for 50p off
- having a discounted “wine of the week” or “malt whisky of the week”
- having a permanent house beer of cooking strength from a local brewery at a significantly lower price than other beers
Many promotional techniques that are commonplace in other retail businesses seem to be largely absent from pubs.

6 comments:

  1. The major gross profiteers are Government who consistently raise their financial demands despite putting no effort into the development, production, delivery or sale of this product or any other 'sinful' pleasures and fuel etc..

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  2. You should probably point out that the gross profit margin is equal to sale price minus purchase price divided by sale price. So the duty stays in the calculation but VAT comes out before doing the sums if VAT registered.

    Gross profit in £s is important because it's the profit you make before paying out expenses (wages mainly) and overheads (like rent and rates). The percentage margin is the easy way to figure this out, but really, like Spoons, you should work backwards from the bottom line you want to figure out the gross profit required. Small pubs, like small (non supermarket) petrol stations are at a disadvantage in this respect.

    I've never run a pub but I have run petrol stations. Drivers were usually upset when we put up the price at 6.00 pm on budget day because many knew we hadn't paid the higher price - duty is levied at source rather than the petrol station. It's probably the same for pubs. But the cost of stock is substantial and you must increase prices asap because your next load of petrol or barrel of beer will be higher in price. Where do you get that extra cash? Usually you would have to borrow the money. So the price goes up asap.

    On pubs more generally, all I know comes from my son who is a pub chef. The trade knows it was the smoking ban; his pub doesn't have drinkers since the ban - they drink at home. But he reckons the control of the pubcos and breweries is so strong that the trade chickened out of protesting and running an anti-ban campaign. It would have made a few directors and chairmen look bad. It was easy for the banners and politicians to get these few individuals to tow the line. In other EU countries the trade is very fragmented and the ban has been harder to implement and while the banners have made progress, the bar owners will hit back.

    As it stands, my son is looking for a job in an hotel or restaurant because after ten years in pubs he thinks the business is doomed. "Another 20 years and there won't be any pubs!" All I know is that our village pub, where he works, is up for sale by the puco with planning for houses. It's a sorry day.

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  3. My 'local' village pub decided about a year ago to raise the price of a pint by 50p.
    Its no longer my local, and I wouldn't have a clue now if they raised or lowered the prices.
    Basically they treat punters like shite. Pay £4 for a pint and either get deafened by screaming kids inside or stand in the rain outside because they can't be arsed to give you shelter.

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  4. Of course one drawback with concentrating on %GP is that, if putting up the price causes your sales to drop, your %GP remains the same but your absolute income reduces.

    I would have thought any business putting together a budget should start with sales volumes and values and work through to costs, not the other way round.

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  5. I know licensees and bar staff get sick of customers whingeing about prices - one I know simply says, "You know where Wetherspoons is." If there is any gross profiteering going on here, it's at PubCo level.

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  6. Part of the problem seems to be that publicans don't seem to be aware of the existence of any coin smaller than the 10p. There's never an increase of 4p or 6p - it always gets rounded up.

    And that's not even taking into account the penalising of responsible drinkers by setting the price of a half some way above 50% of the price of a pint.

    Even if there are valid reasons for all of this, such as maintaining %GP, it still presents the image of profiteering - and the customer, feeling ripped off, drinks at home the next time.

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