Research on the pub sector in Scotland phase 1: scoping study

5. Conclusions and recommendations

Conclusions

The on trade is currently a very testing market in which to operate a retail business, and has been for some time. There are financial difficulties driven by significant social, legislative and economic long-term changes.

Consumer behaviour has changed with in-home consumption and casual dining now the focus for many drinkers. Legislative changes, from the smoking ban, to recent changes in the drink driving laws, have had predominantly negative effects upon performance. Economically, the impact from the global market crash in 2008 through to current Government fiscal policy, have also impacted negatively.

The CGA/ CAMRA pub closure numbers and the findings of previous Governmental reports ( BIS Inquiries) in the sector are evidence of the challenges faced. These factors impact on trade retailers, Pub Companies, brewers and wholesalers. There is less demand from consumers for on trade consumption. This has impacted upon the economic viability of more pubs. As a result, closures will continue to occur.

It is difficult to compare Scotland to England & Wales because the structure is so different. The Scottish Pub trade has an emphasis towards the IFT pub business model. The research confirmed that the Fully Tied and Partially Tied pub model behaves differently to IFT. Many pubs have limited opportunity to change their offer due to structural limitations. This suggests that, as in England & Wales, there could currently be an over-supply within the Scottish pub sector.

The project ethos was to define whether any sector of the trade was being unfairly disadvantaged. It is extremely difficult to ascertain whether it is the operational aspects of the pub tie model, or the competitive environment created by differences in the pub trade structure, which is the primary issue here. The inference is that the business acumen and sector experience of the individual licensee can also have a significant effect on their potential for success.

The 'low cost' factor is very much about the cost of entrance, supported by both the tenants and the Pub Company view of the model. Essentially, licensees appear to have a tacit understanding that cost of purchase/ entry can link directly with the level of independence sought by tenants and pub owners. In essence, respondents understood that there was a higher price to pay for freedom within their business. The advantages, or disadvantages, of both clearly linked to this crucial factor.

From a rental perspective, their appeared to be little disparity between Fully Tied and Partially Tied rents. Unlike in England & Wales, living accommodation was not a contributory factor towards operational issues. Generally, most respondents confirmed a RPI rent review clause that provided a level of clarity to the review process. However, some individual respondents suggested value increases above this rate that may have the potential to cause future dispute. Overall, rents, within the context of the broader Scottish pub market, did not appear to be a significant cause of advantage or disadvantage.

Regarding the key issue of beer purchasing behaviour and charges there were some clear results. These mirrored broader opinions within the pub industry. Compared to Fully Tied pubs, Partially Tied showed a tendency towards mixed supply from a wider selection of drinks wholesalers and suppliers, rather than remaining with their Pub Company supply. This suggested they were actively 'shopping around' to ensure the most competitive pricing for the products for which they are not tied. There was also some evidence of purchasing of 'local' products for all Fully Tied respondents, which bears out the responses from Pub Companies that they offered limited local/ regional flexibility options for all. Cheaper beer prices are available however, there are trade-offs to be evaluated to realise this apparent advantage.

Analysis of overall beer costs between all models showed a clear purchase price advantage for IFT businesses. However, the differentials between Partially Tied and Fully Tied costs were minimal. Analysis of gross profit margins and retail prices corroborated the position broadly. All pub models provided similar levels of historical price changes/ uplifts that were within expected parameters. The key conclusion is that beer costs remain an advantage for IFT pubs over both the Tied models. However, none of the Fully Tied respondents stated that overall beer pricing was a specific issue of dispute within the contract itself. The analysis suggests that the 3 cohorts are making similar levels of profits, albeit at a total trade level and not specifically beer. SCORFA perceptions provided inconsistency between the value assigned by the Pub Company to the benefits offered, and the perceived value as viewed by the licensee. Interestingly, the fact that IFT respondents provided a far closer result to the Pub Companies suggests that those levels are closer to the overall reality. This based on the rationale that independent owners have to effectively purchase these benefits from outside (where necessary). The conclusion of this was that Fully Tied and Partially Tied licensees either undervalued SCORFA significantly, or did not feel that their Pub Company provided that level of value to the benefit - in their personal opinion.

There was undoubtedly a perceived disparity of SCORFA benefits provided by the Pub Companies. IFT based responses on estimated annual expenditure. However, the fact that licensees of all types assigned tangible values to a number of key benefits of SCORFA underlined the fact that it was an advantage to the Tied licensee compared to IFT pub owners. However, a suggested lack of communication between tenants and Pub Companies could complicate these perceptions.

Taking all the above factors into account, a final key sector of research revolved around contract disputes and resolutions. Irrespective of overall satisfaction levels in relation to Pub Company/ licensee relationships, no respondents stated that they had looked to take their issues/ complaints to PICAS or PIRRS for resolution. This was borne out by the responses from the Pub Companies interviewed who confirmed no referrals and a very limited number of formal complaints over recent times.

Ultimately, where the focus is upon the apparent advantages and disadvantages of the pub tie itself, the key argument is costs. The cost centres include beer pricing, investment, rental and administration. The key areas are discounts achievable from separate negotiation with suppliers, comparison of the tied rent against a commercial rent, and the option of outright ownership. The equivalised values assigned to SCORFA benefits are also a key area of consideration between Tied Pubs and IFT.

The variations seen on key metrics at the end of the financial analysis journey make it difficult to conclude definitively that there is disadvantage in any particular model. The on trade is a complex market. Sample research can only give a general indication. The samples in the research itself returned such varied responses and data that it makes specific evidence based decisions extremely difficult.

Recommendations

The evidence collected did not suggest that one sector of the pub market in Scotland is being unfairly disadvantaged in relation to another. As a result, it is our consideration that further dialogue between the relevant trade bodies, Government, and other interested parties, continues before any specific decision is undertaken.

The competitive state of marketplaces will continue to be the major influence on local market performance and business decisions. For some licensees the potential for an agreement, such as a MRO, could be more advantageous to them. For example, where Tied licensees are in a particularly competitive marketplace with other IFT pubs in their local area.

The differences between 'perception' and 'reality' are often a key area of issue for licensees as much as their agreements. As a result, there is a need for all parties to explore their relationships with greater clarity and communication. The new voluntary codes of practice, by placing emphasis back towards the Pub Companies and wider trade to independently implement ongoing change within the tied sector of the Scottish pub industry may go some way towards achieving this goal.

The evidence collected suggests, however, that more work is necessary to ensure that the relationship between Pub Companies and tenants/ lessees is strengthened and clarified. Beyond the clear and relatively accepted differentials in beer/ drinks and services supply costs, the understanding of the potential benefits of SCORFA for Tied licensees needs addressing.

The possibility exists that in this new environment, the individual voluntary reviews between licensee and Pub Company, afforded by the new voluntary code, will provide a framework for better working practices. A clearer, better communicated business arrangement that allows both parties to value and understand the benefits and advantages of the system to each. Whether, in the long term, some form of further legislative impetus, or guarantees from trade participants, is required in the future remains a moot point.