Who's killing the British pub?

The UK has lost 21,000 pubs since 1980, with half of these closures taking place since 2006. In Closing Time, a new IEA report, I estimate that long-term cultural changes have been responsible for approximately 4,000 pub closures in the last eight years with a further 6,000 pubs closing as a result taxation, regulation and recession. As the graph below shows, the gradual trickle of pub closures became a flood from 2007 onwards.

 

 

Recession

Since 1980, there has been a modest correlation between declines in real wages and pub closures. There was a spate of pub closures in the early 1990s and, to a lesser extent, in the early 1980s. Pub closures peaked during the most recent recession of 2008-09 and have remained high in the period of wage stagnation that followed. There are sound economic reasons to expect leisure industries such as the pub trade will struggle when people have less disposable income, although it should be noted that the big spike in pub closures began in 2007 when incomes and GDP were at an all-time high.

Regulation

The most important regulatory obstacle for many pubs in recent years has been the smoking ban which, unlike that of most other countries, allows no exemptions whatsoever for the hospitality industry. The UK’s smoking bans correlate more closely with the collapse in pub numbers than any other factor and it is now widely acknowledged that the ban has damaged many pubs, particularly those which are land-locked and ‘wet led’.

Taxation

The price of a pint of beer in a pub has been rising above the rate of inflation since 1979, mainly as a result of taxation. In 2008, the government raised alcohol duty by six per cent in real terms and introduced a duty escalator that automatically increased alcohol taxes by two per cent above inflation every year thereafter. In January 2011, VAT rose from 15 per cent to 20 per cent. This, combined with falling real wages, has made drinking in pubs less affordable. The duty escalator was finally abandoned in 2014 but the high taxes remain and British drinkers now pay forty per cent of the EU’s entire alcohol duty bill. Alcohol has always been significantly more expensive in pubs than in off licences and supermarkets. Drinkers have traditionally been prepared to pay a premium for the experience of drinking in a pub, but it is not an experience that they will buy at any price. Successive rises in alcohol duty have made a round of drinks gradually less affordable for many.

These three factors have been responsible for the majority of pub closures since 2006. Some have also pointed the finger of blame at two other factors - the ‘beer tie’ system used by some pub companies (PubCos) and the decline in alcohol consumption - but my research suggests that these are of less significance.

PubCos

The case against PubCos, such as Punch Taverns and Enterprise Inns, rests on the belief that their pubs are closing at a faster rate than those in the independent sector. A close inspection of the figures does not support this. Net closures (ie. closures minus new openings) were very similar in both sectors between 2005 and 2013, amounting to 16.5 per cent in the non-managed (mainly PubCo)sector and 14.6 per cent of the independent sector. PubCos have sold off thousands of pubs during this period and many anti-PubCo campaigners have wrongly portrayed these sales as closures. This is highly misleading. Some of these pubs have been turned into flats or shops, but most have continued to operate as pubs. The big PubCos are in billions of pounds of debt and it can be argued that their mass sell-offs are proof that their business model is failing, but in terms of permanent pub closures they are not doing significantly worse than the rest of the pub sector. To claim that people are not going to the pub because PubCos are closing them down is to confuse cause with effect. In truth, pubs in every part of the sector are struggling from a fundamental lack of demand.

Alcohol consumption

Since 2004, there has been an eighteen per cent fall in per capita alcohol consumption and it is easy to argue that if people are drinking less, they need fewer pubs. There is some truth in this, but it may also be the case that if people are going to the pub less, they will drink less. In other words, we cannot rule out reverse causality, particularly with regards to the exceptionally large decline in beer consumption. On a per capita basis, the on trade is now selling half as much beer as it did in 2003 while the off trade is selling only 16 per cent less beer. Britons are therefore not just losing their taste for beer, they are losing their taste for beer in pubs in particular.

The decline in alcohol consumption since 2003 has been driven by a fall in beer consumption. Wine and spirit sales have barely changed and cider consumption has risen. It is clear that pubs have borne the brunt of the decline in alcohol consumption to a much greater extent than other alcohol retailers. Cause and effect cannot be proven, but these facts are consistent with the hypothesis that the decline in pubgoing has led to a fall in beer consumption which, in turn, has led to a fall in overall alcohol consumption. As a possible ‘cause’ of pub closures, it should be noted that although alcohol consumption has fallen in recent years, it is still higher than it was in 1960s and 1970s when pubs were booming.

Conclusion

Pubs are struggling from a lack of demand for pubs which has been largely due to government policy. The government cannot - and should not - undo the cultural changes that have led to people choosing alternative leisure activities, but it can undo the damage it has caused through taxation and regulation. If it is genuinely concerned about the future of the pub trade, it should significantly reduce alcohol duty, relax the smoking ban, reduce VAT to 15 per cent (and lower it further for food sales), abolish cumulative impact zones and scrap the late night levy.

 

Closing Time: Who's killing the British pub? can be downloaded here.

You let off pub companies far too lightly - you ignore the qualitative difference in the sites they've kept versus the sites they've let go. Not surprisingly they've been keeping the good sites and selling off the marginal ones. If even "BMW" sites under pubco ownership are closing at a greater rate than "British Leyland" sites under free ownership, then that suggests pubco ownership is a significant negative factor. You cite the BIS report from June 2014, so you've clearly read their evidence - on p21 the top four problems cited by tenants are the beer tie (91%), supermarkets and tax (both about 60%) and unfair treatment by the pub company (42%). The consultation did not investigate further on whether there was a problem with the pubco model as they regarded it as already proven, based on four previous government enquiries "in too many cases tenants are unable to secure a fair share of risk and reward in their agreements" - pubcos are good at sharing risks with tenants but keep most of the upside for themselves. That reflects the difference in power between a FTSE company and an individual, who often sinks their life savings into a tenancy and who finds it difficult to just move on when the pubco turns the screw. See also some of the case histories mentioned in that report eg on p68. If I ruled the world, I would insist that all pubs owned by big companies (say 50+) converted to turnover-based rents (with minimums), initially based on the current rent relative to the 5-year average, in time perhaps 10% of turnover might become the norm (subject to local variation). Crucially, that would align the interests of both pubco and tenant instead of the current antagonism which sees pubcos taking a short-term view to screw the tenant rather than develop a long-term partnership. [comment edited by moderator]
Smoking is banned public place like a park, cinema, and a pub. Since 2007 smoking is banned in pubs. Mostly in outdoor areas smoking is banned. We have also banned the smoking in some area of Sweden.
Before the smoking ban, all the people who didn't smoke said that smoking was the reason they didn't visit pubs, yet when it was banned, they never bothered to go back to them and just stayed at home drinking. However, the usual pub customers who did smoke and still frequented their locals, now had to stand outside in the cold. Realistically the smoking ban was just about the liberal set flexing there feeble political muscles

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