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.