Wednesday, 25 February 2015

The future of pubs (if CAMRA keeps winning)

I gave a speech at the Future Pubs conference yesterday. This is what I said...

I’ve been asked today to give you my predictions of what the pub industry might look like in 2020. There are, I think, two realistic possibilities. The mundane view is that the trade will be pretty similar to what it is now, but with even fewer pubs. I would expect to see the rate of closures to slow down, but under any realistic scenario I wouldn’t expect to see the number of pubs grow. In only 3 of the last 35 years has there been an increase in the number of pubs, and only a modest increase at that, and all three of those years were in the twentieth century. The recession has, I’m sure, played a part in the decimation of the pub trade in the last eight years, but that doesn’t mean that recovery will lead to the growth in the sector. For the last couple of generations, pubs have closed during recessions and they have continue to close, albeit in smaller numbers, during booms.

The mundane view may also be the optimistic view. A less optimistic view is that, if the pub preservation movement continues to win victories in parliament, the pub industry will be well on its way to something like nationalisation by 2020.

What I call the pub preservation movement is the alliance of groups like The Campaign for Real Ale (CAMRA), Save the Pub, Fair Deal for Your Local and the All Party Parliamentary Save the Pub Group. The best that can be said about these groups is, perhaps, that they mean well. It pains me to criticise them because, on the face of it, we have a lot in common. They like beer, they like pubs, they want to see the pub industry prosper and grow. So do I. The fundamental difference is that whereas they see the government as the solution to the trade’s problems, I see it as the cause.

The pub preservers’ faith in government has led to what is, in my view, one of the most self-defeating and counter-productive political agitation in living memory. If we one day discover that the Campaign for Real Ale has been secretly controlled by the temperance movement for years, would we really be surprised?

For years, the Great Satan was the big brewers. CAMRA lobbied for—and virtually wrote—the Beer Orders which smashed the tied house system. Quite predictably, PubCos arrived to take their place, and now it is the PubCos who are the Great Satan and the big brewers who have been partially rehabilitated in the public imagination as ‘family brewers’ who supported something called ‘community pubs’. This kind of historical revisionism and rose-tinted nostalgia is an abiding characteristic of the pub preservation movement.

I have no interest in defending the PubCos. In many cases, they have run their businesses badly - as evidenced by the colossal debt that most of them are in and the fact that they have been selling off large parts of their estate. They have been hopeless when it comes to defending the interests of their customers on issues like minimum pricing and the smoking ban. If I were a publican, I think I would prefer to run a freehouse.

However, this does not mean that I think PubCos are evil or are determined to demolish every pub in the country, which appears to be the view of the pub preservers. You need to assume fiendish motives to able to predict how a business will react to ill-thought out regulation and perverse incentives.

This is how I think events will unfold.

Phase one: Market rent only

Parliament has decided - rightly or wrongly - that it is unfair for PubCos to be monopsony sellers who charge tenants more than the market price for alcohol. Essentially, it has decided that the PubCo quasi-franchise model is exploitative. And so it is giving tenants the legal right to buy their alcohol from wherever they like. It is easy to predict that most tenants will take advantage of this and buy their beer on the open market. And it is also easy to predict how the PubCos will respond. They will make up for the loss of wet rent by increasing the dry rent.

Phase two: Rent assessment

But the pub preservers can see this coming and they are one step ahead. They have pushed the government into bringing in a system of arbitration to decide what the 'market rent' is. Of course, we know what the market rent is. It is whatever the tenant and landlord agree upon. CAMRA et al. don’t really mean ‘market rent’. They mean a ‘fair’ rent, as interpreted by themselves.

Incredibly, this rent must not only be ‘fair’ - whatever that means - but it must be set at a rate that leaves the PubCo tenant ‘no worse off’ than the equivalent free-of-tie tenant.

This is legislation that could only be drawn up by politicians who have never worked in business. It applies to a fictional world where people and buildings are homogenous, identical units, the value of which can be objectively calculated by a bureaucrat. It is fantasy economics. The idea that the government can adjust the price of one overhead so that one publican is no worse off than a completely different publican is ludicrous.

A surveyor could only make such an evaluation if there was an identical pub run by identical publican to use as a comparison and, of course, there never is. It is highly unlikely that there would be a free-of-tie pub that was even remotely comparable, but even if there was, the surveyor wouldn’t have access to the books to see how much its rent and overheads cost.

Aside from being inherently impractical, this system of rent assessment will lead to horrendous market distortions. Its absurdity was exposed when the government admitted that an adjudicator might demand a tenant be charged no rent at all in order to be made him ‘no worse off’ than a free-of-tie tenant. The message is 'run your pub worse than the pub over the road and you pay a lower rent. Run it into the ground and you pay no rent.' It is economic insanity.

In practice, we must hope that surveyors exhibit more common sense than politicians when they are called in to deal with rent disputes. What we can be sure of is there will be plenty of disputes. Inevitably, many tenants will choose to go free of tie and, equally inevitably, PubCos will increase the rent when they do. Faced with a higher rent, the tenant will realise that the Save the Pub group hasn’t given him a free lunch after all and will move on to phase two and demand a rent assessment. Why wouldn’t he? It’s the PubCos who have to pay for it.

And so either the adjudicator will agree with the PubCo that the rent should be higher, in which case the tenant will face much the same costs as before, or he will decide that the PubCo isn't allowed to charge what the PubCo feels it needs to charge, in which case the PubCo has a fairly easy decision to make. The government has decided that it is no longer in the pub business, it is in the commercial property business. So the PubCo decides it’s going to rent the property to somebody else, but not as a pub, or it decides to sell the property, in which case it may or may not be bought by someone who wants to run it as a pub.

The best case scenario for drinkers is that these pubs are bought by independent publicans who keep it as a going concern. One does not need to read between the lines too much to work out that CAMRA’s real agenda is to force PubCos into selling off their estates to rosy-cheeked landlords and their ample-bosomed wives who will stock a cask of Old Thumper behind the bar and sing All Around My Hat.

If this happens, I will be happy with the ends even if I don’t approve of the means, but there are good reasons to suspect that this is not what will happen at all.

When is the last time the vast majority of Britain’s pubs were in the hands of individual operators? Certainly not in the lifetime of anyone in this room, nor in your grandparents lifetime. The tied house system is centuries old. Since the Victorian era, pubs have predominantly been owned by either brewers or PubCos. It is highly doubtful whether there are enough aspiring publicans with sufficient capital to buy a pub, particularly when beer sales are going through the floor and it is well known that the licensed trade is struggling.

Phase three: Planning restrictions

If no would-be publican can raise the money to buy the pub, the PubCo is going to sell it off to developers who will turn it into a shop or a private dwelling. But the pub preservers are once again ahead of the pack and have foreseen this unintended consequence of government action and - guess what? - they see yet more government action as the solution. They want to stop pub buildings changing their use without planning permission. Unlike the rest of their policies, this one didn’t quite make it through parliament although a second-best option has been brought in and pubs are now busy getting themselves listed as Assets of Community Value.

Pubs will flock to have themselves listed as Assets of Community Value and many will succeed. [UPDATE: In today's news, every pub in Otley has applied.] Getting this protection against a change of use is easy enough to do since it is easier for the local community to support their local pub in the abstract than it is to actually spend money in it, which is, of course, what the pub really needs.

The intention of this change to planning laws is to keep pubs on the market for long enough for an investor to come in and buy them, but although there may be exceptions, this seems to be a solution looking for a problem.

I am not convinced that the pub trade’s biggest problem is a lack of boarded up pubs standing idle up and down the country. The problem is a lack of buyers which stems from a lack of demand for pubs as they currently exist. The most likely outcome of the change to the planning laws is that pubs will stand derelict for months or years until the local community finally accepts that it is never going to bought as a pub and it would be better for everyone if it was turned into a house or shop.

Phase four?

I don’t know how many pubs will have to stand derelict before the penny drops within the pub preservation movement that the problem is a lack of demand, not a lack of supply. Perhaps the penny will never drop. Perhaps the next step will be for CAMRA et al. to lobby the government to step in where the market has supposedly failed by buying up all these ‘community pubs’ - these Assets of Community Value - and running them itself.

This is not as far-fetched as it might sound (remember the Carlisle experiment?). It would be in keeping with the big government interventionism of the pub preservers and it is not a million miles away from the proposals of the left-wing think tank, the Institute for Public Policy Research, which envisages pubs as state-subsidised post offices/internet cafes/creches/community centres. In other words, as National Heritage sites which preserve the physical building but cannot preserve the spirit of the pub, or even retain its primary purpose of serving alcoholic beverages.

Government ownership is, perhaps, the logical conclusion of a series of policies that pile intervention upon intervention to make up for government failure. If you distort the market so much that there is no market left then the only people who will be daft enough to enter the market are politicians. This is what I mean when I say that by 2020 we could be on our way to some form of nationalisation if we continue down the path of intervention.

Demand, not supply

It seems to me that the pub preservation movement has got just about everything wrong. Not just wrong, but diametrically wrong. The problem is not that PubCos are preventing people from going to the pub by closing down their premises and driving their tenants out of business. In fact, rates of closure have been about the same in the non-managed sector as in the free-of-tie sector for years and the Save the Pub group has been frankly dishonest in its manipulation of statistics to disguise this inconvenient fact. Pubs have been closing in every sector because of a fundamental lack of demand that has been largely due to government intervention.

Since 2006, the number of pubs in this country has fallen by 10,000. I estimate that around 4,000 of these have closed as a result of long-term social changes that I won’t go into here, but about which you will be familiar. That leaves 6,000 closures that cannot be explained by the secular decline.

What has happened since 2006 that can explain this dramatic increase in pub closures? I put it to you that the most likely culprits are the smoking ban, the alcohol duty escalator and the recession. The recession is now at an end, but - as I said earlier - I’m not holding my breath for a new golden age for pubs. The recession was the final nail in the coffin for many pubs, but it was not the underlying cause of the trade’s decimation. That leaves the smoking ban and alcohol duty - the first of which is extremely draconian and uncompromising by international standards, the second of which is extremely high by international standards. Almost incredibly, British drinkers pay 40 per cent of the EU’s entire alcohol tax bill.

The government could put right these wrongs tomorrow if it was genuinely committed to the pub trade. It could, and should, halve alcohol duty. It could, and should, amend the smoking ban to allow publicans to permit smoking in at least one room of their pubs.

What chance of this happening? Very little, I suspect. But it is what you would do if you were serious about reviving demand for pubs. You would look at the reasons why demand dropped off a cliff after 2006 and rectify them.

Instead, we have to endure the nauseating sight of watching MPs who voted for the smoking ban crying crocodile tears over the demise of the pub and blaming anything, including immigration, other than themselves. Instead of a united coalition campaigning for a big cut in alcohol duty, we see many publicans - and, once again, CAMRA - getting into bed with the temperance lobby to support minimum pricing—a policy that will leave even less disposable income in people’s pockets and therefore leave them less to spend in the pub.

Lest we forget, this is the same CAMRA that urged publicans in 2007 to - I quote - “prepare for a boost in demand for real ales following the banning of smoking in all pubs in England”. Now CAMRA thinks that raising the price of a can of lager from 80p to a pound will make people rush to buy a pint in a pub for four pounds. It would be funny if it weren’t so serious to those of us who want a living, breathing, thriving pub industry, rather than the mere preservation of ‘community pubs’ (whatever they are).

This, then, is my conclusion. If you believe, against all evidence and experience, that more government is the solution, then you will continue to get more government and you will get it good and hard.


Christopher Snowdon said...

Very good speech and, as I said on Twitter, nobody ever really seems to be willing to debate with you on these points. I'd be surprised if you get any coherent opposition in the comments on here. I've gone on until I'm blue in the face about how the "pubs crisis" is overwhelmingly a crisis of demand, not supply.

FWIW I don't think that this pubs campaigning resonates at all with most CAMRA members on the ground who recognise that most of the pub that have closed didn't really have much of a future anyway, even if they held fond memories, and trying to save them would be an exercise in flogging dead horses.

Having said that, a growing number of new bars are opening up, often in former shop premises, and doing very well - the affluent yet still trendy Manchester suburb of Chorlton being a prime example.

Christopher Snowdon said...

The only solution IS government intervention. Pubco's have no interest in pubs, only in the salaries of their directors and the perfunctory need to repay interest on debt they will never, ever repay the capital on. The Beer orders were nefariously fiddled with as they went through parliament and lords and through into legislation. They were made to have loopholes that pubco's could germinate and grow out of. Pubco's DO exploit tenants. Pubco's asset strip pubs. The evidence is all over the British landscape in the thousands of chronically under-invested pubs from Land's End to John O'Groats.

None of it is complicated, what is happening to pubs is a low grade, in plain sight, corporate scam on a massive scale. Pubco's charge over market rent and up to double the price for supplies that tenants would pay if they were free of tie. This makes the businesses tenants try to make a profit out of in the pubco's massive dilapidated estates of shamefully neglected pubs fail. It is no more complicated than that. When one business fails another publican comes along and sets up shop, convinced the reason the previous tenant failed was because they didn't know enough, work hard enough, spent their money on the wrong things, had the wrong attitude, appealed to the wrong type of clientele - whatever there's a thousand reasons why a new tenant takes on an already serially failed business and sets up shop in a pub only to fail a year or two down the line... When so many tenants have churned through a pub never investing enough to arrest the long term decline in the pub's fortunes that the pub has become unlettable - ie the pub is in such dire condition that there is no one foolish enough to persuade themselves that spit, elbow grease and thirty grand or so will be enough to make hay - then the pubco decides to flog off the freehold 'asset' for cash to pay down the interest on their gargantuan debts... the debts they have no intention of ever repaying, the debts they raised to buy the estates in the first place.

Then the pubco's fall back on their lexicon of fertile excuses for why the pub failed and is 'no longer economically viable' and say to the world 'times are changing and there's nothing we can do about it, sadly we have to sell it is the only business decision we can take that makes financial sense... the pubco's are shifting about 1,500 pubs a year between them like this.

As for surveyors and rent do you know what parallel rent assessment is? Oh and by the way - the people who write the statute are publicans who know what is happening... not academics with grand naive ideas about how the pub sector works, or doesn't.

Anyway. The only force strong enough to slow this assault on our traditions, history, way of life and our very sense of place IS government. And they aren't that interested really. IF they WERE interested they would have acted twenty years ago and got rid of the Tie altogether. There's no place for it in contemporary society. The beer tie and the tied pub sector is a gross anachronism, a playground of unsupervised crony capitalism for dull witted bullies to play out their poor quality business ideas secure in the knowledge that even people who love pubs, beer and the people and places they serve, people like you - get it wrong all the time and end up protecting the people that are committing a cultural crimewave under the nation's noses... the pubco's, the pub killers.

Christopher Snowdon said...

I couldn't agree more with 95% of what you say. A spot-on analysis of the likely outcome of the proposed legislation. But amending the smoking ban as a solution? Smokers are - literally - a dying breed. And is there any evidence that smokers would flock back to the pub if the ban were amended? Perhaps you should ask YouGov to conduct a survey - but frankly, after eight years of the smoking ban, I don't see amending it making any real difference to the survival of the pub.

Christopher Snowdon said...

Mark, you are, as usual, ignoring two important things. (1) the pubco tied house model enables would-be publicans to start running their own pubs with far less initial capital outlay than they would need under any other system. Scraping the pubcos will mean thousands of people will no longer be able to become licensees. Where are all the future licensees going to come from? (2) as Chrisopher so eloquently describes, the result of destroying the pubco model will be massive numbers of pubs being closed.

Christopher Snowdon said...

As usual, Mark, in your obsessive campaign against the pubcos, you refuse to acknowledge all the various factors that have led to a massive secular decline in the demand for pubs over the past thirty or so years. Even if all the pubs had been run by really on-the-ball independent freeholders, the vast majority of those that have closed would still have closed. There simply isn't the market for anything like the pub provision of 1985.

A complete end to the beer tie would sign the death warrant of most of the independent family brewers and thus lead to even more concentration in the beer market. And where is the capital going to come from for independent operators to buy pubs, or to maintain and develop them on an ongoing basis?