Tuesday 18 November 2014

CAMRA's "historic victory"

The Campaign for Real Ale is celebrating this evening after persuading lots of Lib Dem and Labour MPs to vote for an effective end to the beer tie. This will mean that large PubCos such as Enterprise Inns and Punch Taverns will have to allow their tenants to buy their beer on the open market instead of at their own inflated rates.

Three cheers for that, right? Sticking it to the man and allowing the free market to reign!

Actually, no. The reason PubCo tenants pay more for their beer is that they have signed up - contractually and voluntarily, in a free market - to a business model that is essentially a franchise.

On the one hand, they get the benefits of the PubCo's economies of scale (bulk insurance, fixtures, fittings, televisions, glassware and so on) and, generally speaking, a lower rent. This gives people a low cost entry into the pub trade without needing to acquire the capital with which to buy the pub outright.

On the other hand, they have to buy their alcohol from the PubCo at a higher price than is available on the market. This is known as the 'wet rent' and together with the dry rent (the property rental), it makes up the slice that the PubCo takes from the business. The tenant keeps the rest. The idea is that if a pub is selling lots of beer, both parties share in the prosperity. If the pub is doing badly, both parties suffer and the PubCo has an incentive to help out (unlike the average landlord who just wants his rent).

A lot of people don't like the PubCos and I'm not particularly keen on them either. CAMRA really hates them, but it is partly thanks to their suicidally counter-productive pressure group that they exist, as one of their members explained in 2005:

Roger Protz, beer writer and leading light in the Campaign for Real Ale (Camra), grins sheepishly when I ask what happened next. "Basically, we were naive," he says. "The Beer Orders said the big brewers couldn't own more than 2,000 pubs, and we thought, 'They'll be happy with that.' But they weren't happy, because they weren't prepared to open up their pubs to other brewers' beers." Instead of selling some pubs and keeping the rest, the big brewers created something new - pub companies - to which they sold all their pubs. And because they didn't brew beer themselves, these companies, known as PubCos, were exempt from the legislation.

This is not the only example of CAMRA shooting themselves in the foot. They were "naive" again in 2007 when they confidently predicted that there would be an "invasion" of millions of people flocking to Britain's pubs as a result of the smoking ban, including 840,000 people who didn't currently go to pubs at all. As we now know, what actually happened is that 10,000 pubs closed down in the biggest wipe out in the history of the British pub trade.

Not to be deterred by their inglorious track record, CAMRA have recently been using some highly dodgy figures to pretend that PubCo pubs are closing at a faster rate than independent pubs in an effort to get legislation to shatter the PubCo model. They have now succeeded.

CAMRA's hapless members believe that the new legislation giving tenants the legal right to source their beer from wherever they like will make publicans rush out and order casks of foaming real ale, thereby finally winning a battle in their forty year war against kegged lager. In fact, it is vastly more likely that tenants will buy big sellers like Fosters and Smiths, thereby leaving the PubCos needing to find revenue elsewhere.

What will the PubCos do to balance the books once they have lost their 'wet rent'? The obvious step is to jack up property rents, but - in another statist move - the government is setting up an agency to adjudicate on rental disputes. Put simply, the government will decide whether a PubCo is charging a "fair" rent, ie. a rent that is not higher than that of an equivalent pub in the independent sector.

How this will work in practice, God knows. The Royal Institute of Chartered Surveyors has tried to warn the halfwits of Westminster about the "unintended consequences of requiring transactions involving lettings, to be based on a valuation, as opposed to market supply and demand interaction." An adjudicator will have no way of knowing what a "fair" rent would be anyway because no two publicans are the same, no two pubs are the same, and he wouldn't be able to see the accounts of the other pub even if they were.

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 enough to make it worth their while, in which case the PubCo will throw in the towel and sell the pub.

If the PubCo decides to sell, the best case scenario for drinkers is that the pub is bought by an independent publican who keeps it as a going concern. This, however, requires aspiring publicans to have sufficient capital because the government has just destroyed the only low cost method of entry into the business.

If no publicans can afford to buy the pub, it is likely to be sold off to developers and turned into a shop or a private dwelling, as has been happened on a large scale since 2007.

PubCos currently own 19,000 pubs in the UK. Enterprise Inns and Punch Taverns, in particular, are in enormous debt. What do you think they are going to do with their property portfolio now that the government has torn up their contracts and destroyed their business model?

Did your party vote for the smoking ban? Yes? Then sit down.


Christopher Snowdon said...

If they sell up then what will the pubco business be and who will buy the brewers beer? And in my experience brewers do not share the risk, if a pubs doing well they've been known to jack up rents and force tenants out, then put in employees who don't take a share of the profit, thus effectively profiting from the very hard work of the people who built the pub up

Christopher Snowdon said...

The PubCos are not brewers (despite what you might infer from misleading headlines like this: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/leisure/11239112/Pub-landlords-tied-to-big-breweries-win-historic-victory-in-Commons-Bill.html).

Either they will continue as property management companies, but that requires them to raise the dry rent to compensate for the lack of wet rent, or they find another use for the properties, or they sell up. Insofar as CAMRA have thought it through, they may be hoping they sell up. Despite CAMRA's constant claim that PubCos are flogging off their estate to Tesco, most of the 5,000 or so pubs that the PubCos have sold off since 2006 have gone into the independent sector. If so, fine, but is questionable whether the independent sector can absorb so many pubs considering the underlying problems (smoking ban, high alcohol duty, VAT, declining beer sales).

Christopher Snowdon said...

I agree that CAMRA are coming at this naively, but am struggling to share your doom-laden predictions. Surely there is a certain amount of demand for pub services, which generates a certain amount of available value chain to be shared amongst brewers, landlords and property owners. Yes there are effiiciences in insurance/glass purchasing etc but I would have thought these were outweighed by the excess value currently being hoarded by pubcos who fundamentally add little else to that value chain and squeeze franchiseeses to the lowest sustaintable returns. If we genuinely had all breweries competing hard to sell to independent pubs at market prices, wouldn't that
release enough value to maintain and improve the supply and make it more responsive to customer demand locally? I think your data about pubco-sold properties going independent rather than to Tesco supports my thesis.

Christopher Snowdon said...

Are you a twat or just paid to write this tosh?