Villains of the piece?

Tom Kerridge’s TV series on saving the British pub has turned the spotlight on the activities of the large tied pubcos. To many people, the pubcos are perceived as pantomime villains who are responsible for all the current woes of the industry. But where did they come from in the first place, and what can, or should, be done to rein them in?

Going back fifty years, a large majority of pubs in England and Wales were tied to breweries. Genuinely free houses tended in general to be smaller pubs in rural areas, and in large towns and cities were virtually unknown. This system had developed over the years as brewers sought to gain outlets for their products. The more pubs you owned, the stronger was your position in the market. This dominance was reinforced by post-war planning policies that ensured that any new licences issued were allocated to the major existing pub owners in a given area.

Even in the early days of CAMRA, many members were critical of the tie as restricting access to most of the pub market for the independent brewers’ real ales. However, it must be remembered that the existence of the tie saved cask beer as a mass-market product in this country. Some companies, such as Young’s, had a commitment in principle to maintaining brewing traditions, but others continued as they had before as they simply lacked the funds to upgrade brewing methods and cellar equipment. The same was true of many plants that had been acquired by the industry giants during the takeover spree of the 1960s, but were still well down the queue for investment.

At a time when traditional beer was desperately unfashionable, the likes of Hook Norton and Batemans would have vanished off the face of the earth if they had not been guaranteed an outlet for their products in their own pubs. Free trade licensees would simply have swept them off the bar in favour of flashy keg products supported by hefty advertising budgets. This is exactly what happened in Scotland, where the proportion of tied pubs was much less, and by the early 1970s cask beer had virtually disappeared.

During the 70s and 80s this dominance was slowly eroded. The big brewers were persuaded by the government to engage in some half-hearted pub swaps to reduce local monopolies. They also started to sell off lower-performing pubs, either to regional breweries or to what in retrospect were proto pub companies. Belhaven was a small Scottish brewer who built up a substantial estate of mostly bottom-end pubs in England that didn’t actually sell any of their beers. Small free-trade managed operators such as Wetherspoon’s started to get a foothold in the market. The rise of the off-trade made sales through pubs less critical, and the increasing market share of lager meant that pubs were increasingly selling draught brands that, while they may have been licensed by the brewers, were not so closely identified with them. The link between the name on the sign and the beer on the bar was being weakened.

Then came the notorious Beer Orders of 1989, which were intended to address what was identified as a “complex monopoly” in the beer market. At the time they were widely welcomed, not least by CAMRA, who were mesmerised by the prospect of every Big Six tenant getting the right to a guest cask ale. I wasn’t writing a magazine column at the time, let alone blogging, so nobody can go back and throw my words back in my face. However, I do wonder whether anyone seriously thought about what the likely consequence would be. They certainly turned out to be a classic case of “be careful what you wish for!”

One of the key outcomes of the Beer Orders was the restriction on the number of pubs that the Big Six brewers could continue to tie, which led most of them to conclude that they might as well get out of the pub business entirely. The response to this was the creation of pub companies, often led by former big brewery executives, who would take the unwanted pubs off their hands and maintain the tied house business model. But a major difference was that, while many of the old brewery tied houses were owned outright, the pub companies took on a huge amount of debt to acquire them. In a market in long-term decline, a debt burden can all too easily become a millstone around your neck, which was exacerbated by the pubcos spectacularly underestimating the negative impact of the 2007 smoking ban. More recently, we have seen a wave of takeovers, mergers and restructurings, but pubcos remain a major force in the market today.

There are plenty of things that they can be criticised for – attracting prospective tenants with unrealistic projections, providing them with minimal support, penalising success through extortionate rent increases and being all too eager to dispose of pubs for redevelopment. But many of their critics seem to ignore the fact that they are operating commercial businesses, not charities, and are doing so in a very challenging climate. Are their actions really any different in kind from those of the old Big Six national brewers? And it should not be forgotten that some of the family brewers, who are sometimes held up as examples of a more sympatheitc approach, have been pretty ruthless in disposing of surplus pubs from their estates.

This criticism sometimes turns into a distinctly obsessional insistence on blaming the pubcos for all the current woes of the pub industry, in the manner of the man who, being in possession of a hammer, sees every problem as a nail. But, as I have explained on this blog over the past thirteen years, the decline of pubs has been caused by a perfect storm of changing social attitudes and restrictive legislation that have combined to greatly reduce the range of occasions when people will contemplate a visit to pub, especially one that is not combined with dining. It’s a demand crisis, and the effect of the way the industry is structured is pretty incidental. If this analysis contained much truth, then surely pubs operating under different business models would be thriving as compared to those owned by pubcos, but that patently isn’t the case – the decline is across the board.

It is significant that the harshest critics of the pubcos never seem to be able to come up with any credible alternative structure for the industry. The Beer Orders have now been completely repealed but, apart from the takeover of half of Punch Taverns by Heineken offshoot Star Pubs and Bars, there has been little move to return to the old vertically integrated model. With two-thirds of pub beer sales now international lager brands, and food now often more important than drink, brewing and pub retailing are increasingly divergent businesses. Unless you are BrewDog or Sam Smith’s, it makes little sense to own a large chain of pubs mainly as outlets for your own production.

In many cases, as I wrote here, the dislike of pubcos seems to stem from a generalised animus towards private business per se. This inevitably leads to critics favouring community-based solutions. However, any community-owned pub by definition involves “dead capital” that isn’t expected to show a financial return, and there’s precious little of that around at present. And, while some may hark back to the long-gone days of the Carlisle State Management Scheme, do we really want the likes of Public Health England having any say in the way pubs are run?

The favoured option usually seems to be preventing non-brewing companies imposing any kind of product tie on leased pubs. However, an immediate objection to this is that it cuts away the core business of the pubcos and undermines freedom of contract. It is also fraught with unintended consequences. For a start, in many pubs owned by breweries, the share of sales accounted for by their own products is often very small. Indeed, I can think of one or two, now closed, where it was probably zero. Is 5 or 10% really that different from nothing – and couldn’t Punch set up their own small brewery to produce a cheap house lager to get round it?

And, as Martyn Cornell writes here, the likely outcome is that, far from opening up a brave new world of free houses, such a move would lead the pubcos to, entirely understandably, do whatever they could to retain such pubs within their control.

The call has been made for a mandatory free-of-tie option to be offered to pubco tenants. I can tell you what will happen if that is brought in: 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...

...There’s a good argument for saying that if it wasn’t for the pubco model and the support it provides licensees, even more pubs would have gone under in Britain than have so far.

That highest bidder now is just as likely to be Taylor Wimpey or Persimmon. There has also been a movement in recent years to replace conventional leases with franchise-type agreements such as EI’s Craft Union, where the licensee retains self-employed status, but the pubco exercises much greater control over stocking and the general way the business operates. These would only increase if the traditional type of leases were outlawed. To be successful, any kind of business arrangement has to offer something to both parties. Turning pub companies into mere property renters fails on that score, and that is also why they have been so resistant to the idea of the Market Rent Only option.

As Martyn hints, pubco leases provide a means of entry into the pub market for people wanting to run their own business that would not be available if they had to raise the capital to buy their own pub. Although no doubt they could often do these things better, the pubcso also provide business support, investment and a structured business framework. Running a pub as an independent free trader can be a daunting prospect that many people would struggle with. Over the years, while some of the very best pubs I’ve visited have been genuine free houses, so have some of the absolute worst, where the licensees had basically given up and were just going through the motions. There are many examples in other sectors where self-employed people run businesses under a corporate nameplate which exerts a large degree of influence on their operations.

While there is much to criticise about the actions of the pubcos, those calling for further statutory regulation of their activities need to be very careful what they wish for. In the wise words of Milton Friedman, "The government solution to a problem is usually as bad as the problem." And we should never forget the outcome of the Beer Orders, which were introduced with the best of intentions.