Anyone reading this blog will quickly realise that I am not the greatest fan of the smoking ban. But, on the other hand, if you are running a pub or a brewery, you would be foolish to base your business plans on an assumption it may be repealed or relaxed in the next few years.
Equally, I am strongly, indeed viscerally, opposed to the current alcohol duty regime, in particular the “duty escalator”. It penalises responsible drinkers, closes pubs and encourages smuggling while doing nothing to curb problem drinking and indeed not even being effective in maximising government revenue. But, given the current level of anti-drink hysteria in the political sphere, realistically the prospect of removing the escalator, let alone any actual cut, is extremely remote.
Before the Budget, various parts of the drinks industry mounted a concerted and heartfelt campaign to get the government to think again, most notably SIBA’s Proud of British Beer video, but it all fell on deaf ears.
So, in your business plans, it makes sense to assume that the alcohol duty escalator will stay in place at least until 2014. The first realistic opportunity for it to be abandoned is in the pre-election Budget of March 2015.
Hardknott Dave makes a very good argument that, in the current climate, it makes sense for craft brewers to concentrate on quality rather than volume. A high tax regime increases the leverage exercised by quality. As often said in relation to wine, every bottle carries the same level of duty, so the differential between the £6 bottle and the £4 bottle is entirely (apart from the additional VAT) accounted for by higher quality.
The other night, I picked up a beermat in the pub asking the question “Why is illegal tobacco so easy to get hold of?” I would have thought that qualified as an entry-level question for a CSE in the Bleeding Obvious, but on the reverse it says “More and more criminals see it as an easy way to make some cash. But what else are they selling?” Cheap imported booze, hopefully.
It’s now reckoned that between 33 and 40% of all tobacco products sold in the UK are either smuggled or legal personal imports. Raising tobacco duty by 50p for a pack of 20 is only likely to increase that percentage, and potentially lead to less government revenue. Extortionate duty encourages smuggling as surely as night follows day. How many people now would feel any sense of moral outrage about tobacco smuggling? As Kipling wrote:
Five and twenty ponies trotting through the dark -
Brandy for the Parson, 'Baccy for the Clerk.
Them that asks no questions isn't told a lie -
Watch the wall my darling while the Gentlemen go by !
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 offMany promotional techniques that are commonplace in other retail businesses seem to be largely absent from pubs.
- 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
Drinks journalist Andrew Pring has controversially claimed that, despite the closures of recent years, Britain still has far too many pubs and about a quarter of those that remain are fundamentally unviable.
He said: “We will still lose many thousands of pubs, regardless of what the government does. We are an over-pubbed nation. The pub’s USP has long since disappeared. All the technological developments have worked to the detriment of the pub. There is a whole generation who have grown up who don’t see the pub as a place to socialise.”
And, sad to say, he’s probably right, although of course it could equally be presented as a lack of pubgoers, not a surfeit of pubs. If supply exceeds demand, the imbalance can only be resolved in one of two ways.
The crisis of the pub trade is often presented, not least by Mike Benner in the linked article, as essentially a crisis of supply, caused by evil grasping pub companies, high-handed council planners and restrictive covenants. As one commenter says, “A free of tie option with open market rent for almost 2/3’s of all the pubs in the country will allow the feathers of the sector to regrow and stand a chance of flying again.”
However, surely in reality the problem is that at present there simply isn’t sufficient demand to sustain the existing pub stock, and nobody explains how supply-side improvements would magically increase demand by 25%. I would say that a good quarter – maybe even a third – of the currently trading pubs in areas I’m familiar with are not viable in the long term.
There will be plenty of wailing and gnashing of teeth from the pub and beer community over the lack of any concessions in today’s Budget but, to be honest, did anyone really expect anything different? Not only is beer duty to rise by 2% above the rate of inflation, but, as widely trailed, an additional 25% duty is to be introduced on beers above 7.5% ABV. This will mean that a 500ml can of 9% beer will incur additional duty (plus VAT) of 25p. It remains to be seen to what extent brewers of beers in this category will seek to reformulate their products to bring them down under the threshold – but I would expect an extra £1 on a four-pack to make this very likely.
To a large extent, this is pointless gesture politics, as beers over 7.5% make up only about 1% of the total beer market, and a negligible proportion of beer sold on draught. However, it’s entirely possible it may end up having the reverse of the intended effect. Most of the beer in this category is the super-strength lagers such as Carlsberg Special Brew and Tennents Super. These brews tend to be unpleasantly syrupy in character and aren’t really something anyone would want to drink unless inebriation is the primary objective. But it’s much easier to brew a strong lager at 7.5% that is also reasonably palatable. It’s widely recognised that the 7.2% Carlsberg Elephant Beer is a far better and more drinkable beer than Special Brew. So we could end up with a situation where these beers are reduced in strength and as a result gain a wider appeal, which no doubt isn’t exactly what the advocates of the tax rise intended.
Incidentally, while these beers are often characterised as “tramp juice”, bear in mind that they are on sale not just in seedy street-corner shops but also in major supermarkets, who often even have their own branded versions, and regularly appear in the Top 20 of take-home beer brands, suggesting that in reality they have a much broader and more respectable customer base.
In the past, I’ve sometimes heard the view expressed that, if a market economy functions efficiently, there should be no need for consumer pressure groups like CAMRA. There’s an example here in a comment on one of my Opening Times columns.
Tim Worstall makes an interesting post addressing this point, arguing that, far from being a sign of market failure, the presence of pressure groups is an integral part of the efficient functioning of markets:
And thus, far from CAMRA (or any other such voluntary organisation or banding together) being something which should be unnecessary in a market economy, they are exactly the manner in which a market economy works: voluntary, not directed, cooperation to achieve the desired goal(s). That spontaneous order coming from the application of the innate human abilities to use agency and cooperation to achieve a collective desire.In the late 1960s and early 1970s, business was much more in the grip of a corporatist viewpoint and took the view that standardisation and economies of scale were desirable and, to a large extent, customers should be “sold” what the company was willing to make. In this situation it made sense to band together in a pressure group to demonstrate to suppliers that there was a demand for a particular product*.
Although it was widely signalled in advance, it is still good news for pubs and pubgoers that the government has decided not to reduce the British drink-driving limit from 80mg to 50mg, as recommended last year by Sir Peter North’s review. Their response contains a detailed examination of the potential effect on the licensed trade – something that North signally failed to carry out – and says “It is possible, on some assumptions that limited safety benefits might be at a high economic cost.”
It also points out that the overwhelming majority of drink-related casualties involve drivers who are well over the current limit, and it is difficult to forecast accurately what effect, if any, reducing the limit would have on those in this category. The document says:
Of the total reported road accident fatalities in Great Britain in 2008, where a BAC was recorded, 78% of fatalities were below 80 mg/100ml (the legal alcohol limit). Within the total, 76% of fatalities had a BAC below 51mg/100ml; while 2% were between 51 and 80 mg/100ml. Over a fifth of fatalities (22%) were over the prescribed limit and 21% were over 100mg /100ml.- which suggests that disproportionate accident involvement only really begins at levels above 100mg, and certainly not below 80mg. Let us hope now that the issue will be laid to rest at least for the length of the current Parliament.
Last night, we had a CAMRA pub crawl, and one of the participants was a retired gent who said that his normal mode of pubgoing was on his own with the paper. Snap. Exactly the same applies to me. Being someone who still works during the week, the principal times when I am able to explore pubs are Saturday and Sunday lunchtimes. And, all too often, I find that Andy and Denise have decided to bring little Jake and Ellie along to the pub. Quite frankly I am getting fed up to the back teeth with it.
I have no problem with dining pubs admitting children to eating areas. But if I’m in a wet-led pub hoping to have a quiet drink, the last thing I want is howling, wailing brats running around. I really wonder whether I should just give up and stay at home with a nice bottle or two. Admitting children is often presented as “the future of the pub”, but I reckon it’s killing it.
Any suggestions from the readership for polls that you’d like to see on here in the future?
