The Future of Pubs

Debate between Simon Kirby and Karen Bradley

Thursday 9th December 2010 Westminster Hall

[Karen Bradley]

My hon. Friend makes a valid and important point. That issue is part of the debate—again, we should not over-generalise and say that all pubcos and all brewers are bad. They are not bad; they are doing a job in difficult economic times. However, it is clear that the smaller ones are perhaps having more success than the bigger ones.

I would now like to explain what is so unique about a British pub. Pub closures are an issue that affects every single Member in this House; every constituency is affected by it. Running a pub is unlike any other business. It is a way of life, not a job. You live on site, and your home is a public house; people come into your home at all hours of the day and night, and expect to be welcomed into your home. Landlords—I apologise for using that generic term, and I want to make it clear that I mean landlords and landladies—have a civic responsibility to provide the heart of the community, and it should not be surprising to anyone in this country that the longest running TV programme in Britain, which today celebrates 50 years on our screens, is based, and has always been based, around the community pub.

Landlords have a responsibility to look after their customers, both in the pub and when they leave the pub. There are very few other businesses where the retailer can be held responsible for the behaviour of customers after they have left the premises. We do not often see a situation in which a supermarket gets into trouble if a customer uses a product that they have bought at the supermarket and then, let us say, disposes of it as litter; the supermarket is not held responsible. However, the pub landlord is held responsible when the customer leaves and engages in antisocial behaviour. Landlords also have a duty to the local community, to work with residents and authorities, such as the police, to ensure good behaviour. In my view, however, the most unique element of the pub business and one of the reasons why I think we are seeing so many pubs struggling is that no two pubs are the same, because pubs are absolutely dependent on the building in which they are located.

[Simon Kirby (Brighton, Kemptown) (Con)]

As someone who has run some 40 pubs in my time, I agree with my hon. Friend that pubs are absolutely essential as the heart of the community. She is absolutely correct in saying that they are all different—all special, but all very different at the same time.

[Karen Bradley]

I agree absolutely, and that is a very good contribution to the debate.

It is not possible to take what works in one pub, move it to another building and make it work. Pubs have different clienteles, they are in different locations and they have different layouts. I accept that there are some pub chains that have a sort of homogenous generic feel, but I would assert that almost all the successful ones have not moved into existing pubs, but have taken other premises, such as old banks and shops, and turned them into pubs. What works in one community pub cannot be moved to another building and made to work there.

As we know, some pubs are based on food sales, and they can be successful, but other pubs are drinkers’ pubs. I know from experience that a drinkers’ pub cannot be changed into a food pub. It simply does not work. Customers who come for the drinking will leave if they think that it is a food pub, and others will not necessarily be attracted.

[Karen Bradley]

I do not dispute that some pubs have closed as a direct result of the smoking ban, but I do not think that the industry wants the ban to be rescinded. The pubs that have closed as a result of the smoking ban would not reopen if it were rescinded. The wet pubs that are successful have adapted to the smoking ban and compensated for it.

Dependence on a building makes a pub unique, but it is also at the heart of many problems that pubs face. As for pub companies and the beer tie, the beer tie has a long history. It dates from the time when brewers ran their own pubs and wanted to ensure that their pubs sold their beer, which is a sensible business model. Brewers had a vested interest in ensuring that their pubs were well run, and self-employed tenant landlords ran the pubs for them. Again, that is a good business solution. People were given the chance to run their own business and, as long as they paid their rent and continued to sell the brewers’ beers, the brewers could leave the landlords to it. Brewers had a guaranteed and responsible drinking outlet; clearly, they wanted to ensure that their landlords sold responsibly.

In those days, landlords bought directly from the manufacturer, cutting out middlemen and their margin. However—I remember it well—the industry moved to gain more security of tenure for tenants, who often had 12 or 18-month tenancies, as well as the option for landlords to sell guest beer, which is lucrative and allows them to make a significant profit for little extra effort. As a result of that pressure, the beer orders were introduced in 1989. No doubt the intention of the orders was good. They were meant to increase competition by reducing the size of brewers’ estates. Offering tied landlords the option to sell guest beers was a good move that allowed them to make more profits. The orders also gave tenants the security of 20-year leases. My parents were some of the first to benefit from the changes when they took out a 20-year lease and introduced a guest beer. At the time, the industry was positive about the changes, and welcomed them.

As is often the case, however, the problem with the legislation was its unintended consequences, by which I mean pubcos. Under the beer orders, only brewers are restricted in the number of pubs that they can own, and pubs owned by non-brewers, which do not sell only one brewer’s beers, do not need to offer guest beers. Pubcos became the middlemen, buying beers from a range of brewers and selling them to their tied landlords, who lost the right to offer guest beers.

The pubco business model is certainly clever and innovative. I am a chartered accountant—that is probably another interest that I should declare—and I must say that I have always admired the pubco model and thought that some clever financial whizz kid came up with it. Pubcos raise finance to buy large estates of pubs from brewers by securitising future rental income, which is the only asset that they have. Some of those pubs are tenanted, some are leasehold and some managed houses. The pubco makes money from its margin on selling beer to tied landlords and from its rental income. If a pubco wants to increase its profits, it must increase either margins on beer sales or rents, or both, which leads to landlords being squeezed twice.

Rents are based on barrelage, or sales, not rateable value or any other measure that I would consider sensible. Rents increase in line with the retail prices index, even when pubs are struggling, and are reviewed upwards if sales increase. Even if a self-employed landlord is successful and increases beer sales, their rent will go up and the profits of all their endeavours will be given back to the pubco.

[Simon Kirby]

I do not intend to interrupt my hon. Friend too often, I promise. Does she agree that many landlords suffer a penalty of tens of thousands of pounds for having tied leases? They must compete not only with pubs that are free of ties, but with managed houses. The price of a 36-gallon barrel of beer is often hundreds of pounds cheaper free of tie than it is with the tie.

[Karen Bradley]

I am coming to exactly that point. The margin on beer is the pubco’s other source of income. When my family bought out their beer tie last year, the pubco from which they bought the tie told them that the average additional amount that it charged per barrel under the tie was £185. A 36-gallon barrel of Carling Black Label sold under the tie was £369, compared to a free trade price of £227. Imagine us allowing any other industry to disregard free-market pricing so blatantly.

Pubcos have clearly accepted that many pubs are closing. That is not in their interests, so they try to help landlords who are struggling, which is undoubtedly a laudable aim, but they do so either by over-managing or by giving with one hand and taking with the other. For example, they might install monitoring equipment, ostensibly to help landlords see what is selling well and what is failing to sell, but the equipment is then used to establish whether the landlord is buying out of tie. The monitoring equipment sees how much beer is travelling from the cellar to the pump; the pubco then says, “That is more than you are buying from us. You must therefore be buying out of tie,” perhaps forgetting that it is in all our interests for the pipes to be cleaned regularly, which involves liquids other than beer going through them. The feeling—I accept that some of this is anecdotal—is that it is “them and us”, and that the landlord is guilty until proven innocent. The two parties should be working together to run a successful pub for the sake of the community, but instead they are fighting each other.