Beer, pubs and pubcos in the United Kingdom

• Why there has been a decline in the pub industry?
• Why beer is most affected?
• Did tax play a role?

The pubs in the United Kingdom are termed as ‘the heart of England’. The bars in the nation serve drinks as a part of an establishment such as hotels, restaurants, universities, etc. or independently as wine bars, style bars, private membership bars, etc. However, the outfits mainly selling alcohol for consumption on its premises are public houses or pubs (these majorly sell beer).

These pubs can be further classified into:

1. Managed/franchised houses: owned by a pub company (pubco) or a brewery, which employ managers and staff to run a pub (Mitchells & Butlers PLC and JD Wetherspoon PLC)
2. Tenanted/leased pubs: tenants lease these pubs from a pubco or a brewery, which receive a fixed rent (dry rent) for the estate. This is very low as compared to the market rent. Thus, in order to compensate for the low rent to pubcos, the tenants have to purchase the alcoholic beverage (wet rent) from a pubco, which is priced higher than compared to the wholesale price (EI Global PLC & Punch Taverns PLC)
3. Free houses: are pubs owned and managed by the licensee, these have freedom to purchase the beer from any pubco or brewery.

The bars and pubs form a part of the British culture and the market in the United Kingdom consists of more than 50,800 licensed public houses. This includes around 10,000 managed, branded and franchised outlets, additionally, 18,000 tenanted and leased and 22,000 independently owned pubs. The industry contributed £22 billion to the British GDP and generated £12 billion in total tax revenue (2014). This sector employs over 900,000 people in the country. In the recent past, the industry has observed a declining trend and this is shown through the below data.

Through the past decade, there has been a decline in the consumption of alcohol per person in Britain (this declined by 15.4% in 2015 as compared with 2007). This was more profound for beer (25% decline over the period) and was a cause of concern for the industry as it is the most served alcoholic beverage in pubs (and command 36% of the drinks market share by volume in the United Kingdom).

The major factors for the decline in consumption of beer were taxation and governmental regulations, shrinking real income and cultural transformations. Televisory analysed these aspects in-depth and found that there was an inverse correlation between the sale of beer and its price. In the past decade prices of beer saw an uptrend due to a sharp rise in taxes and duties by the British government and thus, beer consumption saw a decline. The taxes on beer increased by a whopping 42% in the country (from 2008 to 2013) and the sales declined by 21% in the same period. This led to the closure of 7,000 pubs and a loss of 58,000 jobs (Source: British Beer & Pub Association). Furthermore, legislation such as smoking ban deterred smokers from visiting pubs for a drink and they instead preferred to buy drinks from supermarkets. Subsequently, with a decline in beer consumption, there was an increase in the proportion of wine intake (there was a decline of only 11% for wine vis-à-vis 25% of beer in the past decade).

Secondly, there has been a direct correlation between the shrinking real wages and pub closures in the United Kingdom due to lesser consumption of alcohol and leisure activities like visiting a pub.

While the decline in real wages impacted the sales of beer in pubs (on-trade), the proportion of sale through supermarkets (other retail outlets or off-trade) saw an increase during the same period owing to much cheaper prices vis-à-vis prices in pubs.

Lastly, cultural developments in the United Kingdom has impacted the pub industry. There has been a decline in consumption of alcohol and people prefer cafes over pubs. It is due to this reason there was an increase in the number of cafes and a decline in the quantity of pubs in the past 6 years.

Significantly, as the pub industry saw an overall fall. The tenanted pubs were the worst hit due to a decline in consumption of alcohol. There has been a decline (41.3% from 2007 to 2015) in the number of tenanted pubs in the past decade. This occurred as in tenanted pub model purchase of beer is agreed among pubcos and tenants. Moreover, as higher prices were charged from a tenant by a pubco (although compensated by the lower than market rent), which, in turn, limited the offering (same brewery products) to customers and this declined beer consumption in the United Kingdom.  This also led to closure of less profitable establishments. The pubcos in order to counter the revenue decline started focusing on the direct management of pubs and consequent expansion.

Televisory analysed the data of two major managed and two tenanted pubcos. It was observed that while the number of tenanted pubs saw a decline, the managed pubs registered an increase, this was in-line with the industry trend.

In addition, pubcos drew a complete sale revenue from managed pubs, while only a fixed lease revenue and beer supply cost was garnered from tenanted pubs. The total revenue of pubcos from managed pubs saw an increase, while the revenue from tenanted pubs saw a decline during the same period due to shutting down of tenanted pubs.

The expenses borne by a pubco in managed pubs include bar and food supplies and payments to bar staff, while for tenanted pubs the major expenses incurred by a pubco are beer supply cost and the minor one is expense related to leasing of estate. Thus, the cash OPEX as a percentage of revenue is higher for managed pubs, while this is lower for tenanted pubs.

Thus, in-line with the expenses, the EBITDA margin of pubcos from tenanted pubs was higher than that of the managed pubs.

Although there has been a decline in the United Kingdom’s pub industry. But, there were few steps, which were taken by the government to put a check on the weakening of the sector. In 2014-15 government decided not to raise tax rates on beer, this slowed the rate of pub closures per week.

In July 2016, the British government came up with ‘The Pubs Code Regulations 2016’ (only tenants of pubcos, which have more than 500 pubs were covered). This pub code gave tenants the option to buy beer elsewhere (or ‘break the tie-up’). This code wanted pubcos to surrender a large chunk of their profits to tenants (however, a pubco in this scenario can charge increased rent based on the market rate in lieu of giving up the mandatory beer supply). This added fuel to fire in already declining tenanted pubs, with major pubcos considering shifting from leased or tenanted estates (due to declining profits) to managed operations and viewed expansion. While, on the other hand, tenants with lower restrictions and cost competitiveness (due freedom from a tie-up) may experience a slowdown in the closure of pubs. Only time will tell what will be the impact of the new legislation on the United Kingdom’s pub industry.

Televisory believe that in the near future, the overall industry will continue to recede in conjunction with low consumption of alcoholic beverages in the nation, while supermarkets will remain a dominant force in beer sales.

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