United Kingdom: Is the demise of the British pub inevitable?
Rises in the minimum wage and the death of the beer tie are forcing pubs to adapt or die
By Ben Martin
August 31, 2015
“We are the nation’s biggest fish and chip shop, every Friday,” proclaims the sandwich board outside The Sir Michael Balcon, a JD Wetherspoon pub in Ealing.
For £5.25, a punter in the west London borough can feast on battered cod, chips, mushy peas and a soft drink. And it is not just fish and chips that are on Wetherspoons’ menu of deals. On Tuesdays the FTSE 250 company has a “Steak Club” deal, on Wednesdays chicken meals are on offer, and on Thursdays it’s curries.
It is a world away from the traditional image of the British pub, where in the past a packet of pork scratchings might be the best that some hostelries could offer. Pub companies, now faced with ferocious competition from fast-growing casual dining businesses, have been forced into food sales in recent years to battle for market share. The industry, however, also faces fresh headwinds.
The increases to the minimum wage, announced in July, and the cutting of the beer tie, which comes into effect next year, have raised fears that more hostelries will close.
Those concerns were heightened last week when Punch Taverns sold 158 sites to shopping centre owner NewRiver Retail. While NewRiver insisted it will not close locations, it does hope to use surplus land on the sites for residential developments and convenience stores, and part-convert some pubs. Karl Burns, an analyst at broker Panmure Gordon, says the deal illustrates pub companies’ challenges.
“What it tells you is that some of [the operators] have still got too many pubs,” he says. “It also tells you that some of these pub companies are still overly leveraged.”
Punch, which on Tuesday issues a trading update, is using the £53.5m raised from the sale to cut its £1.5bn debt-load. Like rival Enterprise Inns, Punch embarked on a debt-fuelled acquisition spree before the financial crisis and smoking ban hit the industry in the late 2000s. It still has a hang-over from that expansion and has an on-going programme of disposals.
Pub companies that remain too leveraged will struggle to compete, according to Mr Burns.
“Cash is king, as they say, and it’s certainly evident in the pub sector,” he says. “Operators need to have the capital available to invest in each individual pub to make it an attractive place to compete with these brand-spanking new casual dining chains.”
With more people working longer hours, consumers are less inclined to cook at home, driving the demand to eat out. As a result, the competition facing pubs is intense. “Pubs are doing breakfasts, coffee shops are starting to serve lunch and alcohol. Everyone’s trying to move into each other’s space,” says Mr Burns.
Brigid Simmonds, the chief executive of the British Beer & Pub Association (BBPA), notes that “there’s always has been issues” facing the pub trade. According to the BBPA, the number of UK pubs dropped from 69,000 in 1980 to 55,400 in 2010. Last year, the number of hostelries in Britain stood at 51,900 and the BBPA estimates they are now closing at a rate of 13 a week.
There are fears that legislation to cut the beer tie could hasten that decline. The 400-year old system forces tenants to buy beer from their landlords, usually at higher prices than on the open market, in exchange for benefits such as lower rents.
Opponents argued the system favoured the landlords and MPs last November voted to include the so-called Market Rent Only (MRO) option in the Small Business, Enterprise and Employment bill, which breaks the tie at companies with more than 500 leased and tenanted pubs.
Punch and Enterprise are expected to be hardest hit, and pub bosses are worried the uncertainty caused by the MRO will deter investment at a time when it is needed most.
“There is a significant concern that one of the unintended consequences of the MRO is a serious reduction in the amount of investment into tenanted pubs,” says Kevin Georgel, the chief executive of Admiral Taverns, a leased and tenanted business with over 900 pubs. “You don’t have the medium or long-term confidence about your return on investment.”
The impending MRO has forced a rethink at some companies, with Enterprise, which has about 5,200 pubs, recently outlining a radical overhaul of its business model.
Aside from the pressures of the MRO, the increase in the minimum wage is also expected to cause problems by pushing up costs, particularly at firms with hostelries that offer plenty of food – which in any case is lower margin than drink – and run large sites, two factors that require more staff.
The wage rises, which will see workers aged over 25 paid £7.20 an hour from April and £9 by 2020, have already been attacked by Tim Martin, the founder of Wetherspoons, who warned they could cause more pub closures.
“The living wage is going to be a challenge,” concedes Ms Simmonds. “But it’s a challenge that we need to accept. It’s not in our interests to be seen as a low-pay industry.”
She says that if the government is pushing up wages “you’ve got to give us help in other areas” by reforming business rates and reducing beer duty.
Ultimately, however, the survival of pubs rests with publicans and the public, Ms Simmonds says. Pub owners “have got to look at how they can diversify to meet the market there is now”, which includes offering meals that compete with the best the casual dining chains have to offer, and the public have to eat and drink in them.
“If you don’t use your pub then it’s going to fail,” warns Ms Simmonds. “These are not charities, they are commercial businesses, and if you want them to survive you’ve got to be prepared to go and use them.”