(One from the archives, but still very relevant and certainly worth reading)
How many times have you looked at pub prices these days and thought to yourself “bloody hell, I’m off to Tesco”?
It’s a fair reaction, so what I’d like to do is first explain why it’s a false comparison and then lay bare the typical costs that any pub must face, in an effort to convince you that most pubs are not ripping you off!
It’s not a rant, I firmly believe all businesses (and business people) must continuously adapt and change to maintain their competitive edge and give customers what they want, or at least what they think they want, but there’s only so much a business person can do within a restricted and heavily skewed marketplace. I apologise for the length of this post but if you have any interest at all in your own local pub(s), you’ll hopefully enjoy the read…
A False Comparison
Cast your minds back (if you’re old enough) to a time before we had a massive supermarket on the edge of every town. Can you remember where you bought your alcohol? Does anyone remember the old “off-licence“? That curious shop that was so ordinary and seemingly none-retail focused that it couldn’t even be bothered to give itself a proper name? To sell alcohol for consumption off the premises we need an off-licence, so let’s call ourselves off-licences … inspired. It would be like popping down to the pub and saying “I’m just going to the on-licence”. Of course, we still refer to shops selling alcohol as “off-licences” but the sale of alcohol has become so widespread it has removed the uniqueness from the name.
So what’s the relevance of this you ask? Well, the very name was endemic of the way alcohol was treated back then. It was sold by retailers who sold nothing else. If you wanted to drink in public, you went to the only place you could; a pub. If you wanted to drink in private then you headed, with a slightly shameful admittance that you were going to drink at home, to the off-licence. Okay, I’m being overly-dramatic for effect but there was a difference in the way that alcohol was treated; it was something you consumed as an aside to doing something else? Anyone who drank alcohol just for its own sake was, well, bordering on alcoholism! I remember my mum sipping the occasional Carlsberg Special Brew at home in front of her favourite TV programmes. It wasn’t a lot, it was the sort of quantities that wouldn’t even raise the Chief Medical Officer’s sober eyebrow nowadays, but she’d always feel the need to explain and justify every can as if it were filled with illegal drugs, because there was a sense that drinking at home was somehow naughty or only for special occasions.
That was almost 40 years ago. Fast forward to today and you can buy alcohol pretty much anywhere, in any store that can be bothered to apply for the relatively easy-to-get licence. As supermarkets were growing they obviously wanted to offer their customers a broad range of products, so they put up with the hassle of having separate, supervised alcohol aisles, with restricted opening times to fit in with the licensing laws of the day. In other words, it was an ‘off-licence’ within a store. That was the moment that alcohol ceased to be a special, restricted product and instead started its journey on the long trek to become just another commodity in people’s minds and in their shopping baskets. Sure, supermarkets stuck to the law, it was still a restricted sale, but the very fact you could now buy alcohol as part of the weekly shop caused a massive step-change in consumer perception and behaviour. Slowly but surely, alcohol’s uniqueness was chipped away. It’s now a FMCG that’s no more unique in the consumer’s mind than Kellogg’s cornflakes or orange juice.
But another thing happened during this time. As alcohol shifted from being a recognisably controlled drug to just another FMCG, it was treated as such by the retailers; in fact they were obviously driving this. We now see stacks of alcohol piled up at shop doorways as if it were bags of crisps. But, most importantly, it has now become a key player in supermarket FMCG pricing strategy. The old-skool-sales cliché of “pile ‘em high, sell ‘em cheap” has never been applied so vigorously and there’s a very good reason; because supermarkets know that alcohol is a desirable product with a high perceived value; the perfect combination for a promotable product. In alcohol, supermarkets have the perfect loss-leader with which to tempt people into their stores. This has catapulted the perception of alcohol way past the position of just another FMCG and into the realms of marketing fantasy. Unlike all other FMCG brands, alcohol is now pretty much on permanent promotion in most supermarkets, to the point where the promotional price is now viewed as the normal price by consumers. I challenge anyone to find a supermarket anywhere in Britain that does not have an alcohol promotion running?
This behaviour in itself is hard to turn around but what makes it even worse is that a loss-leader is exactly that, they’re selling it at a loss. So we find ourselves in a situation where the consumer now expects (even demands) to get alcohol at a below-cost price, everywhere, all the time and they feel cheated if they don’t! And we wonder why there’s a perception of “Binge-Britain” (although I also have much criticism on the scaremongering surrounding that phrase, when per-capita alcohol consumption has been falling for some time, but that’s a whole different blog subject)! I’m not making a personal, moral judgement on this, if we decide cheap alcohol is the way to go as a society then so be it, but you can’t have a society that complains about alcohol abuse on one hand yet allows such practises to exist on the other?
Throughout this period of transformation, we have seen all kinds of knee-jerk reactions in an attempt to counteract alcohol’s slide towards FMCG status and the corresponding change in the consumer’s relationship with it. But, ironically, many of these reactions have served only to bolster this relationship, not counteract it. For example:
- Action has been heavily skewed towards the segment of the market where alcohol consumption, and its effect, is visible (the On-Trade, or Pubs), rather than the segment that has been reinforcing this slide towards FMCG status (the Off-Trade, or supermarkets). It’s a perfect example of a “seen to be doing something” strategy rather than an effective strategy. There are many reasons this is so but the summary is that pubs are a much easier and more visible target.
- Related charities such as Alcohol Concern scream publicly for much tighter restrictions and controls on alcohol (and alcohol retailers, although they’ve only recently started targeting supermarkets); this bolsters the perception of alcohol being different, which is good, but unfortunately it does it at a time when there are fewer restrictions than at any point in alcohol’s history; a time when people have enjoyed almost unfettered access to cheap alcohol and have grown up treating it with little respect. So this simply feeds the perception that all of the responsibility is the product’s rather than the consumer’s. In simplistic terms, the vested groups don’t ask people to change, they ask for products to be made more expensive, or weaker, or for many more laws to be placed on the retailer, not the consumer. Catch an under-age drinker but don’t fine the kid, fine the publican. A drunk gets leary in the high street, let him sleep it off but restrict the pub’s license. All are credible strategies but not without targeting individual responsibility first and foremost. It’s akin to wagging your finger at a speeding driver and then fining the car salesman for not predicting that that driver might speed.
- The government has placed successive duty rises on alcohol, moreso since 1997 and much more than any other product, in an attempt to make it less affordable. Incredibly, it has increased by more than a third in the last 3 years alone! But what happens when you raise the general price on a FMCG that is used heavily in loss-leading? You increase the effectiveness of the loss-leading campaign! All you’re doing is pushing up the perceived value of the brand because supermarkets can, and do, hold the price and absorb the loss (or force suppliers to absorb the loss) while the price rises elsewhere.
So we finally get to why the opening line of this blog is a false comparison; alcohol sales used to be balanced but now they are heavily polarised. At one end, we have the on-trade (pubs), who still, on the whole, treat alcohol as the restricted drug that it is. Much more importantly, they are still forced to do so by legislation. A publican is legally obliged (and usually morally driven) to monitor your drinking level and restrict your purchases. At the other end, we have the off-trade (supermarkets) who treat it no differently to Cadbury’s Cream Eggs and have very little legislation placed on them? They can sell you enough alcohol to poison your whole family without as much as a thought. In the middle we have you, the consumer, who has been conditioned to view alcohol as a means unto itself; it’s just another commodity in your shopping basket, so much so that there’s a good chance you’re reading this and thinking “what’s the issue, lower prices are good for everyone aren’t they”? So it’s hard to understand why the pub is ‘ripping you off’ with its £4.50 pint when you can buy it for the equivalent of £1.00p a pint in Tesco? The pub must be making £3.50 extra profit?
If I’ve explained myself correctly so far you’ll now understand why comparing prices between supermarkets and pubs is like comparing the proverbial apples and pears? The two sectors are so polarised in the way they treat alcohol that they’re incomparable. Much more importantly, it is not possible for pubs to move in the direction of supermarkets, neither legally nor morally, which is where the crux of the problem lies. So let’s move on to the other main issue…
Why IS a pub so much more expensive?
This first thing to say, if you haven’t already grasped it from what you’ve read so far, is that the real gap between pubs and supermarkets is much smaller than you think. If supermarkets sold alcohol at its real price (as they used to when they first started selling it), I wouldn’t be writing this blog! So let me list 10 reasons your local pub is most definitely not ripping you off. Some of these refer to supermarkets but only because that offers a good comparison:
The duty and VAT alone on a pub pint, just those two taxes, are around £1 of the total price you’re paying. So the next time you’re buying that 24 pack of bottles for £10, don’t ask yourself why it’s not the same price at the pub; instead ask yourself why a supermarket is willing to lose so much money?
Remember the “seen to be doing something” comment above in relation to on-trade legislation? Leaving aside the fact that most pubs do not make enough profit to offer heavy discounting, did you know that I, as a publican, cannot legally discount a drink in an effort to get you to buy more. I cannot legally do anything that may promote the consumption of my products. I can’t give-away free alcohol (in most circumstances). I can’t legally do anything that puts a time restriction on consumption (Eg. the old ‘happy hour’). The only way I can sell more is to sell to more people. What about a supermarket? Well, leaving aside practicalities, legally you could pull a 7-tonne truck into Tesco’s car park and buy every single bottle of spirit they possess. There is no restriction whatsoever. They can discount, offer Bogoff deals, and generally promote excessive drinking in any form they wish. How is that balanced legislation? Consider this as an example of the skewed legislation that now exists: a pub must legally offer FREE water to all customers, it’s written in law. Supermarkets regularly sell water at a higher price than they sell beer…
- The Experience
Let’s be realistic here, it’s always going to be cheaper in the off-trade because of the way it’s sold, they’re offering nothing except the product itself, in bulk, whereas in a pub you’re not really buying the alcohol, you’re buying the whole experience. You’re paying for the chance to sit and chat, stay warm, meet people, possibly listen to the free entertainment, etc. etc. Most of these things are a cost that is not borne by a supermarket. If you done a true comparison and compared the experience between spending an hour in a busy pub and spending an hour in a busy alcohol aisle in Tesco, you might start to understand where I’m coming from!
- Use of Space
Pubs make much less-productive use of floor area because of the nature of the business. Hence the building is much less profitable than a similar sized building housing another business, so it’s much harder to get a profit from the asset. Not impossible, of course, there are many very profitable pubs, but remember we’re only talking about why they’re more expensive. We have relatively low spend per head coupled with a relatively low customer turnover. In most other businesses you have either lower spend but a higher customer turnover (Eg. coffee shops, newsagents, etc) or higher spend and lower turnover (Eg. Spas, dentists, hairdressers, etc). I struggle to think of another use for a commercial building that would be less profitable per square foot? Any ideas? Of course, the obvious response would be to say “well don’t do it, become something else”, which is a fair comment in principle but in practice it’s a nonsense. If we all thought like that then we’d all be investment bankers!
- You’re Deluding Yourself!
Yes, you! Your perception of pubs being expensive is a false one. How can I say this? Well, let’s use the prices I’ve already mentioned and assume that it costs you £3.50 for a pint in a pub and 50p for an equivalent measure in a supermarket. Disgraceful, right? Now let us apply the same thinking to coffee. You’ll pay around £3.00 for a large coffee in most coffee shops. A pub selling a pint at £4.50 makes a Gross Profit (GP) of around £1.90. A coffee shop selling a coffee for £3.00 will make a GP of around £2.10. IE. they make a higher GP on a lower selling price. This also works through to a much higher Net Profit, for various reasons which I won’t go into here.Now compare that to what it costs in the supermarket? You can buy a bag of premium coffee beans that would make approximately 50 cups (IE. £150 worth of coffee-shop coffee) for around £3.50. So the price differential on alcohol between pubs and supermarkets is around 7:1 but the price differential on coffee between coffee shops and supermarkets is around 40:1? Why isn’t everyone rioting in the streets at this anomaly? I’ll tell you why, and it leads nicely onto my next point…
- You’re being deluded by the market!
Coffee is an excellent example, because it has evolved the other way. Coffee has always been a commodity (if we ignore the relatively short period in history when it was a precious trading item enjoyed only by the rich). It was something to be consumed at home without even thinking about it. It has been cleverly marketed to turn a banal commodity into an occasion. That’s why you don’t (usually) consciously think about the coffee itself or its price when you visit a coffee shop; you’re there “for a break” or “to put your feet up”. Most people are motivated by the coffee shop itself and the occasion rather than the coffee. Alcohol, for reasons already explained, has gone the other way and has been commoditised to the point that many people will see the price as the main stumbling block, even though you’re actually getting much more for your money!
- UK Pub Market
Because of the structure of the UK pub market, primarily a result of flawed legislation called The Beer Orders in 1989, most of the prime pub sites in the UK are owned by large Pub Co’s/Property Companies. These companies then either put managers into the best sites (or only operate managed sites; Wetherspoons being the biggest example) or they lease the buildings to independent lessees (like me)! The discussion about the merits and flaws of this business model would fill many websites on its own but it can be summarised as thus: the costs of the leased business are far above the costs of the managed operation. The effect of this is twofold: Firstly, it obviously results in higher costs which are inevitably passed on to the consumer and for other reasons that are too complicated to list here, the costs for many lessees have reached the point where they’re ruining the business. The level of rent alone, and the way it is calculated, is a shock to anyone not familiar with the industry. Secondly, it creates another major polarisation in the market; not only do consumers compare pubs to supermarkets on pricing, they also compare pubs to each other! So, just when you’re convinced on the whole FMCG argument, you then say “hang on, Wetherspoons are much cheaper, so you must be ripping me off”? On the whole, it is impossible for a leased pub to match the pricing of a managed pub, because the managed pub enjoys many benefits of scale. That’s business of course, and that’s why many pubs are either diversifying to the point of being unrecognisable as a pub, such as gastropubs, or are simply closing down. The Pub Co’s screw enormous discounts from the brewers, which are not passed on to their tenants, whereas Wetherspoons are always known to supply cheaper beer and products.
In my opinion, business rates as applied to pubs is one of the biggest official scams of our time but it is also the most overlooked. A full explanation of the calculations are given in the previous link but business rates are simply a business tax that all business must pay, linked to the building they occupy. It really has nothing to do with the building, it’s just a way of calculating a business’ size. Historically, a pub’s rates are calculated differently to other businesses. This was originally to balance the anomalies mentioned in point ’4′ above, to make the system fairer; so whilst most business’ rates are calculated on floor area, a pub’s rates are calculated on a formula using turnover and rent. This worked in the days when a pub’s turnover roughly equated to a similar net profit as other businesses, and its rent was calculated on market forces. However, with an incompetence bordering on criminal, this formula has never been updated to take into account the massive changes to these two measures over the years. Turnover for pubs is now much higher than it ever used to be but this is due to the much higher prices, not additional business. Net Profit as a percentage of turnover is at an all time low. And rents have not been based on comparable market rents for years. Instead, PubCos base rents on what they think a business should be doing (which itself is usually based on overly-optimistic trading projections) and the costs of doing it which, you’ve guessed it, are usually woefully underestimated.
So, when we reached the 5-yearly rates review last year, what happened? Many pubs saw their rates bills drastically increase. My own pub’s rateable value increased from £20K to £54.5K. Yes, read that again! This has resulted in an actual increase of around £1K per month (because rateable values are then re-calculated using a multiplier percentage, for reasons only known to government). The increase is stepped over a 5-year period but it is still a very real increase.
Now compare this to say, oh I don’t know, a local dentist? Dentists occupy much smaller buildings, typically converted houses. They operate much more profitable businesses. for example, my business employs 13 people in a large building, operating 7 days a week for a minimum of 13 hours a day and with a turnover of £650K it gives one person, me, a reasonable wage. A typical dentist I imagine would turnover a similar amount but employ a couple of receptionists and one assistant for each dentist, is open 5 and a half days a week for 8 hours a day, and gives 3 or 4 dentists a wage of +£100K? So if my rateable value (IE business tax) is £54.5k per year what do you think would be a fair rateable value for the dentist I just described in my town? £70K? £100K? How about £6K! Yes, that’s right, a business that produces around 800% more net profit than mine is taxed at only 11% of my business tax!
- Running Costs
I’m not going to bore you with lots of detail here. Suffice to say, most pubs are in old buildings, are open to the public for at least 80 hours a week and have to accommodate a varied mix of people, often in large groups who want to enjoy themselves. We all know how much everything has risen in price over the last couple of years but even with price rises at the pumps, retail price has not kept up with costs. It’s easier if I just list a few of the main costs in my pub and let you do the math (all costs are monthly): Goods: £15K, Staff: £12K, Rent: £7K, Rates: £2K, Utilities: £2K, Maintenance & equipment: £1K. Shocked?
- The Market itself
It’s no secret that people’s leisure time has been transformed in recent years. All businesses have had to adapt but pubs have faced an unprecedented set of hurdles that do not seem to be slowing anytime soon! The shift to off-trade consumption (now well over 70% of all alcohol sold is via the off-trade, a ratio that was reversed only 25 years ago), the smoking ban, recession, increased opening hours, tighter legislation… to name but a few. A far bigger portion of a pub’s profit must now be spent on trying to capture a much smaller piece of the consumer’s leisure pound, and it’s not going to get any easier…
Well, if you made it this far then you’re a
person who has far too much time on their hands personal hero of mine :o)
Drop me a comment and let me know what you think? Agree, disagree, bored
Steve at the Kings Head
Hi Steve, a great Blog.
The whole industry has been screwed by Local Authorities allowing unrestricted growth of both ON and OFF licences in towns and urban areas without justification of need or viability, hitting the urban and rural pubs, in a dash for additional rating income.
Previously neither licences were allowed without justification of need, and the rules were very strict, keeping a balance with both, in fact most pubs had a steady Off Sales business because the price variation was minimal.
Because of all these controls responsible drinking existed in the majority of pubs.
Now we have a constant price war because of an over supply in both sectors, the big Multi Nationals in Supermarkets and Pub Chains have enormous buying power, creating a constant price war on a shrinking market with loss leaders.
The anti Smoking and Drinking lobby have driven the retail prices up in the pubs with increased taxation and the exit of smokers to drinking at home.
The Pub CO’s rent demands and failure to pass on realistic discounts, relying on rents rather than sales has further increased prices and these idiots that caused all this complain about pub closures.
If you read about the Pub Co Model, the massive discounts the Pub Co’s get from any supplier within the terms of the lease, should in our opinion be factored into the divisible split of profit, which is not, in fact it is never mentioned, if the lease was not Tied, on a 300 barrel a year pub, at a minimum discount of £200.00 a barrel this equates to £60K on top of the rent, I was receiving far more than £200.00 a barrel a number of years ago???
Some of us are trying to change certain problems in the Rent and Rates having successfully raised a considerable number of issues with RICS and the last two BISC’s.
We have formed a new company to combat Rent and Rate reviews, none of us have been tainted with taking the Pub Co Shilling, two are Chartered Surveyors and I was a member of the RICS very briefly before I bought pubs, if you have a Rent Review in the next eighteen months, please contact me at firstname.lastname@example.org to see if we can help.
The views expressed are not necessarily the editors and www.buyingapub.com accepts no responsibility for them, we do try to avoid offensive or litigious statements being made. They are written by concerned professionals in the industry who feel that these issues should be raised to ensure that all licensees are made fully aware of many hidden pitfalls.
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