Saturday, 21 December 2013

Action and reaction

A common error made by campaigners and politicians is to imagine that policy changes can be made in isolation without any wider implications. Sometimes this can be achieved, but in most cases, if you change one thing, it will end up changing something else. It’s like trying to squeeze jelly into a string bag. If you increase the tax on something, people may be persuaded to buy something else; if you regulate a business sector more, companies may be more reluctant to invest in it; if you ban something outright, it’s no guarantee that people will stop doing it or even do it less. It may well be the case that, on balance, it’s still worth doing, but it is foolish to imagine that unintended consequences never occur.

A good example of this is in the field of payday loans, which have been much in the news recently. Many would argue that the likes of Wonga are heartless, grasping scum who cynically exploit the poor who have encountered financial difficulties, and therefore the interest rates they charge should be capped. However, if that was done, they wouldn’t make the more risky and marginal loans, and some of the very neediest people would be driven into the arms of illegal loan sharks. It might benefit more people than it harmed, but to claim that capping legal interest rates would not give any encouragement whatsoever to illegal lenders is fanciful.

A similar situation applies with the pub companies such as Punch and Enterprise. These have been widely criticised for both strategic and operational incompetence, and in particular for having an exploitative relationship with their lessees. In response to this, various proposals have been put forward such as implementing a statutory code of practice, allowing lessees to take a guest beer and offering all lessees a free-of-tie option.

However, seeing a potential threat to their business, the pub companies have come back with dire warnings about how such changes would affect them and what their response would be. For example, Spirit Group have claimed that it might force them to reinstate upward-only rent reviews, Greene King have said they could restructure their business to reduce their leased estate below 500 pubs, and J. W. Lees have suggested that a mandatory guest beer option could be disastrous for themselves and other similar family brewers.

Now, all this may contain a substantial element of exaggeration and scaremongering, but it would be foolish in the extreme to imagine that, if new curbs were introduced, pub companies would just roll over, wave their legs in the air and say “OK, we’ll play nicely now”. It’s hard to believe that, at least to some extent, they wouldn’t cut back on new investment, accelerate the disposal of their more marginal outlets and seek to convert as many pubs as possible to managed or franchised operations that were outside the scope of the controls. However much you detest the pub companies, they are the incumbent owners of the pub estates and you need to assess how, in the real world, they would actually respond. There is no blank sheet of paper.

In particular, given that some degree of product tie is fundamental to the pubco business concept, it’s very difficult to see why any pub company should want to lease out pubs on a completely free-of-tie basis, as it would change their position to being essentially that of any commercial landlord. As Martyn Cornell has pointed out in his provocative blogpost In Praise of Ted Tuppen:

large numbers of the best currently tenanted/leased pubs will be turned into managed houses, and those pubs not suitable for a managed operation that look as if they will not bring in an adequate return to their pubco owner as free-of-tie operations will be sold to the highest bidder – likely to be Tesco, Sainsbury’s or Morrisons...
As I have said before, the critics of pub companies always seem strangely reluctant to put forward any kind of alternative business model for the industry. If you don’t like the way it’s organised at present, it is incumbent on you to outline what you think it should evolve into. I am not suggesting nothing should be done at all, but the implications of any change in regulation need to be considered very carefully. Otherwise the risk is that we end up with another Beer Orders-style disaster which could be extremely damaging to both the pub trade and the British brewing industry.

6 comments:

  1. Under the changes, if someone decided to go 'free of tie' is their dry rent not subject to change? Surely it would be a change of contract so the pubco would be free to up their dry rent to compensate for the loss of wet rent. If they weren't allowed to do that then the losses to the pubcos would be enormoous, and I can't see how they could continue.

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  2. It sometimes pays to go behind the obvious villain. Wonga are a symptom of the problem of increasing poverty caused by a combination of the financial sector's greed and the coalition's vindictive incompetence. People should be tough on Wonga and tough on the causes of Wonga - and we should take a similar approach to pubcos.

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  3. You would expect the rental under the free-of-tie open market option to be higher, but it means the pubco no longer has a direct stake in the success of the pub and effectively just becomes like any other commercial landlord.

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  4. It's a complex argument. I'm glad to see since his original piece that Martyn has produced a rather more comprehensive piece that to me at least, makes more sense.

    One of the problems is that as you say, you aren't starting with a blank sheet of paper,so we are where we are. The tie itself need not be bad, but underneath that tie, in the case of the PubCos is staggering debt. Now some would have you believe that this is a good thing, but it is this debt that makes it hard to see a sensible solution that would not make it worse overall.

    I support the tie, but it was never envisaged in the way it operates now, but its evolution has not been a beneficial one, except to those who bought cheap after the Beer Orders, sold on quickly and sat back and watched it all go wrong.

    It only really worked before because in the main the brewers that owned the pubs had a vested interest in their wet success and operated far more paternal;y.

    As Cookie points out, that ain't so now. Property companies with a big debt to service is what we have now in the main.

    Solutions? Goodness knows.

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  5. It's always seemed to me that the pubcos are essentially a form of financial engineering to get round the provisions of the Beer Orders and - at least as far as their tenanted and leased operations go - don't really bring much to the party in business terms.

    I can see the point of a branded, managed operation and I can see the point of a brewery operating tied houses to specifically sell its own beers, but what kind of business has thousands of outlets but won't put its own name (or some other brand name) above the door?

    So IMV they are not good, or ultimately sustainable businesses, but the problem is that, if you're not careful, undermining their business model could prove disastrous.

    It's also worth making the point that, for many years, taking on a pub tenancy has offered a fairly low-cost and structured way into self-employment that few other fields compare with. Most tenants would not have either the financial means or the business nous to become independent free traders.

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  6. If you look at the leased pub co model from the perspective of selling a business to investors, then you would not accept the practices involved if they were selling pensions or ISA’s. There is scope for ensuring those that buy in know what they are buying into and know the actual trading of those pubs over the last few years. You would expect this to result in fairer rents and contracts but yes, it would be more difficult for an unviable outlet to stagger on for 6 months whilst a new set of people burnt through their life savings.

    As nice as some of the regional grog is, I quite like a pint of Hydes Bitter, they are not strong brands. A free of tie option might not offer 12 obscure micro brews in every pub, they might give you more Pedigree than you really want. Look at the dominance of national brands in the mainstream lager market.

    @Nev Over Xmas I enjoyed much of my life long labour voting Dad’s fine aged malt whisky. He was even a member once. He’s more of a supporter of IDS than I am. You should hear him talk about the work shy scroungers that booze all day in his working mans club. He’d never vote Tory as that would be class betrayal. He rather likes Nigel Farage, though, as Mudgie might be pleased to know. It’s the pint of bitter and fag as a prop thing, I think. Maybe if your labour party represented working tax paying people rather than supporting dependency, I’d have more time for it. As Ronald Reagan said a hand up not a hand out. Nowt vindictive about a hand up.

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