Thursday, 20 August 2015

Closing Time: an excerpt

The next in this series of excerpts from IEA lifestyle publications is from Closing Time. It looks at what should and shouldn't be done to save the British pub...


Given CAMRA’s preoccupation with PubCos, it is not surprising that their prescription for the ailing pub trade focuses on ‘PubCo reform’. They are campaigning for ‘guest beer rights’ and the ‘choice of paying a higher rent in exchange for being free to buy beer on the open market’. Both of these policies would sever the beer tie and fundamentally undermine the PubCo model.

The term ‘guest beer’ evokes an image of a cask of craft ale sat behind the bar of a picturesque tavern, but if a guest beer option was made available to PubCo tenants, it is more than likely that they would select their most popular lager as a guest beer, buying it at the market price and selling it at a higher margin. This would unbalance the pub franchise model of higher wholesale costs for alcohol and lower costs for property rent and other facilities. Whilst some campaigners would be happy to wreck the PubCo model, it should not be the aim of government.

CAMRA also proposes making planning permission a legal requirement before a pub can to be converted for other use or demolished. It is difficult to see what this will achieve. There may have been instances where badly run, but viable, pubs are sold off to developers, but these sales take place on the open market where prospective publicans can make their own bid. The price may be too high for the pub to be sold as a going concern, but tying the sale up with red tape will not make it any cheaper for the publican. It is more likely to leave derelict pubs standing empty for long periods with no good reason. 


In Pubs and Places (2012), the IPPR, a left-of-centre think tank, recommended that some pubs receive tax relief and be allowed to apply for third sector grants as ‘community interest companies’ (Muir 2012: 59). The IPPR accepts that regulation has placed a financial burden on pubs, but rather than abolish or amend costly legislation, it advocates ‘providing some compensatory support for community pubs through other means’ (Muir 2012: 19). In short, it wants taxpayer subsidies.

The IPPR’s concern is limited to what it calls ‘community pubs’ which, it says, ‘can be distinguished from town centre bars which serve mainly after-work or weekend drinkers and which have been the focus of concerns about binge drinking in recent years’ (Muir 2014: 5). The IPPR says that community pubs have ‘two distinct but intrinsically related functions. One is as a retail outlet to sell alcoholic drinks and the other is as a place for social interaction’ (ibid.). If these are the criteria, it is difficult to see the distinction between community and non-community pubs in practice. Both are places of social interaction including, and perhaps above all, those which are associated with ‘binge drinking’. Nevertheless, the IPPR not only wants ‘community pubs’ to receive state aid, it thinks that ‘any business that also acts as a centre of community’ should receive 50 per cent business rate relief (Muir 2012: 58).

The IPPR’s approach exhibits some of the reactionary protectionism that is often found in the pub preservation movement. There is a long history of self-proclaimed champions of the pub being more concerned by pubs changing than closing. Christopher Hutt’s 1973 polemic about the ‘death of the English pub’ was not so much about pubs dying as them being, in his words, ‘tarted up’. Today, many of his complaints seem perverse, including his lament that ‘Luxurious soft furnishings replace the wooden seats, wall-to-wall carpeting covers those worn-out old tiles, the ornate mirror and the dart-board make way for a set of tasteful hunting prints’ (Hutt, 1973: 116). For the IPPR, ‘the traditional community pub is felt to offer certain things that are becoming rare in a society being shaped by global commercial pressures’ (Muir, 2012: 40).

The problem with the IPPR’s recommendations is that they are concerned with resuscitating one particular type of pub without addressing the underlying lack of demand. Using taxpayers’ money to preserve a sentimentalised version of the ‘community pub’ is likely to deter innovation in an industry that has always been evolving and needs to adapt to changing tastes now more than ever. State funding and tax breaks for a select few pubs would distort the market in favour of loss-making businesses which would be incentivised to tick government boxes rather than meet demand. It may save a few pubs in the sense that the physical buildings would remain in tact, but some might wonder whether the IPPR’s vision of public houses as day centres/crèches/post offices would preserve them as pubs in any meaningful sense.

The IPPR also supports minimum pricing, a policy that offers little hope for publicans. A 2013 YouGov survey found that only 15 per cent of drinkers would drink less at home if minimum pricing was introduced (YouGov 2013: 31). Of this minority, only 2 per cent said they would drink more in the pub as a result (ibid.: 34). In total, only 0.3 per cent of the survey’s drinkers said they would drink less at home and more in the pub if minimum pricing was introduced. By contrast, 39 per cent said they would drink less in the pub and 50 per cent say they would drink the same amount in the pub (ibid.: 39). Minimum pricing will result either in drinkers drinking less or having less disposable income. Neither outcome would benefit pubs.

The Department for Business, Innovation and Skills

In June 2014, the Department of Business, Innovation and Skills responded to concerns about PubCos by unveiling a new statutory code for pubs. The final draft is unfinished at the time of writing, but it is likely to include a provision for tenants of large PubCos to request an independent adjudicator to set their rent if they feel that the PubCo’s rent is too high. The aim is to stop PubCos squeezing tenants, who already pay a higher price for alcohol (the ‘wet rent’), with an excessive ‘dry rent’.

The government’s explicit objective is to ensure that PubCo tenants are ‘no worse off than their free-of-tie counterparts’ (Department for Business, Innovation and Skills, 2014). This ‘no worse off principle‘ (ibid.: 43) may be laudable in theory but it is unworkable in practice. It would mean that pubs which are badly run or suffering from low demand will be given lower rents by government diktat. The government has conceded that rents could even fall to zero under such a system (Bothwell, 2014). It is questionable whether this would be seen as ‘fair’ by more successful publicans in either the tied or free-of-tie sector, let alone by the PubCos themselves, but it would certainly create major distortions in the market, as the Royal Institute of Chartered Surveyors (2014) explains:

‘By requiring all rental agreements to be based on valuation as opposed to market forces, it may significantly reduce the number of open market, freely negotiated transactions. Eventually, the number of open market transactions may fall to zero in the tied lease market, thus the market will become artificial. There will be no true market evidence. This may deter market participants (landlords) from investing in the sector. It will put pressure on existing landlords, including pubcos and brewers, to exit the market or find different methods of operation.’
In a market economy, rents are not set according to some objective standard, but by negotiation between two parties to find a mutually acceptable price. Both parties are free to walk away from a deal that is unacceptable or unaffordable. Some would argue that PubCos have the upper hand since they own the property, but this could be said of all rental negotiations. Unless you believe, as some anti-PubCo campaigners do, that PubCos wish to put their own tenants out of business, the landlord needs a tenant as much as the tenant needs a landlord. There is rarely a need for an adjudicator to establish the market price because the rent agreed between two parties is the market price.

Furthermore, it is doubtful whether an adjudicator can   make an objective assessment of a pub’s rental value, let alone one which ensures that the tenant is ‘no worse off’ than his free-of-tie counterpart (London Economics, 2013: 13). No two pubs are alike and no two tenants are alike. Even if a surveyor could find two comparable pubs in the tied and free-of-tie sector, he would not have access to the financial accounts of the free-of-tie pub with which to make a calculation.
Real solutions

It is not the intention of this paper to prop up a dying industry. If pubs are closing because people prefer to drink at home (or drink less), it is not the government’s business to rescue them. But if, as this paper argues, many pubs are closing because government policy has actively discouraged people from spending as much time in the pub as they would like, it is time to undo the damage.

The evidence strongly suggests that demand for pubs has been artificially reduced by excessive taxation and regulation. What follows is a four-point plan to undo some of the damage that has been wrought by government policy.

1. Reduce alcohol duty

British drinkers pay 40 per cent of the EU’s entire alcohol duty bill (European Commission, 2014) and alcohol taxes are regressive (Snowdon, 2013). CAMRA has called for a freeze on beer duty until 2020. The government should go much further by halving all alcohol duty to bring it closer to the European average. This would reduce the cost of living, reduce alcohol fraud and create jobs in the hospitality industry.

2. Reduce VAT and set a lower rate for cooked food

VAT should be lowered from 20 per cent to 15 per cent to reduce the cost of living and alleviate the regressive effect of indirect taxation (ibid.). This would reduce the cost of food and drink in pubs and other venues. There is also a strong case for setting a lower rate of VAT on food served in pubs and cafés.

Currently, food sold for cooking and eating at home is exempt from VAT whereas cooked food is taxed at the standard rate. Rising rates of VAT, from 8 per cent to 15 per cent to 17.5 per cent to 20 per cent have worked in favour of supermarkets and against pubs, cafés and restaurants.

The tax discrimination between cooked and uncooked food is somewhat arbitrary, as highlighted by the controversy over the ‘pasty tax’ in 2012.5 Many EU countries have lower rates of sales tax for food served in bars and cafés (BBPA, 2014: 62). Typically, these countries have lowered the VAT rate by at least 50 per cent. The UK should do likewise.

3. Amend the smoking ban

The Labour party’s 2005 manifesto contained a pledge to ban smoking in pubs which sold food while promising that ‘other pubs and bars will be free to choose whether to allow smoking or to be smoke-free’ (Labour Party, 2005). After intense lobbying from anti-smoking groups, this pledge was abandoned and the UK was given one of the most uncompromising smoking bans in the world. This has been devastating for many pubs and there is clearly a market for indoor venues that allow smoking in one or more rooms. The UK should follow the lead of the many European countries that allow the hospitality industry to accommodate smokers.

4. Abolish cumulative impact zones and the late night levy

At a time when pubs are closing in their thousands, government policy prevents new pubs from opening in areas of high demand. England and Wales currently have around 180 ‘cumulative impact zones’ in which there is a presumption that a new alcohol licence will be refused unless the licensee can demonstrate that it will have no adverse effect. This is a heavy burden of proof and it is costly to challenge the local authority in court. These zones should be abolished to allow demand to be met by the market. Sufficient laws already exist to regulate and, if necessary, close down venues that are associated with anti-social behaviour.

Similarly, the late night levy - an additional cost that pubs have to pay some local councils to open after midnight - should be scrapped. The levy has led to pubs in the late-night economy reducing their hours, thereby distorting investment decisions and reducing property values.

This study concludes that taxation, regulation and falling real wages have been the leading causes of the decimation of the UK pub industry since 2006, responsible for around 6,000 pub closures. The smoking ban and the alcohol duty escalator are particularly culpable.

Long-term cultural changes have been responsible for a further 4,000 pub closures. Other factors, such as the decline in alcohol consumption, may have played a part, but we cannot rule out reverse causality, particularly with regards to the exceptionally large decline in beer consumption.

The blame attached to PubCos has been greatly overstated - there is little evidence that their pubs have closed at a faster rate than those in the rest of the sector - and the solutions proposed by CAMRA and the government are misguided. A better approach would be to reduce taxes and cut regulation.

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