THE UNINTENDED CONSEQUENCES OF REMOVING THE BEER-TIE FOR THE SCOTTISH PUB TRADE – STUART ROSS – FORMER BELHAVEN BOSS

Stuart Ross

Having spent most of my entire working life in the Scottish Licensed Trade, I was very interested to read (Dram Issue No 330) the views of both the Pubs Advisory Service ( “ PAS “ ) and the Scottish Beer and Pubs Association (“SBPA” ) on the Neil Bibby Bill which proposes to introduce Market Rent Only (“MRO”) measures which effectively remove the beer tie in the tenanted sector of the pub trade.

My view is that, however well-intentioned this proposal might be, this piece of legislation will have serious unintended consequences and will not prove beneficial for the landlord or the tenant in the medium term. At first sight, it looks great for the tenant as, simplistically, he or she will be able to buy beer cheaper at the expense of paying a bit more in rent.

The majority of landlords are in the tenanted sector to secure some measure of control of supply in the beer sector as well as achieving an acceptable return on capital through the dual income streams of rent and supply profit. If their right to control beer supply and make profit is denied them, the probability is that they will come out of the tenanted sector altogether or radically reduce their involvement in it. Tenancy durations will be reduced to shortish-term lets (unlike England there is no security of tenure for tenants as the Landlord & Tenant laws do not apply north of the border ). Tenants who take the MRO route are unlikely to be offered continuity of tenure at the end of their contract. Property owners will switch the better-facilitated houses to managed retail or introduce more complex franchises or similar-such arrangements .

Capital investment will decline and I suspect that many of the larger property owners will reduce the number of tenancies in their Scottish portfolio to a level below whatever artificial threshold is applied to the new laws. ( In England, the law does not apply unless the landlord has more than 500 pubs. Since there are a host of regional brewers below the threshold, their tenants may well be aggrieved that they cannot go free-of-tie but local competitor tenants can do so simply because their pubs are owned by bigger property companies with more than 500 units. It`s an artificial and unfair playing field, from whichever angle you address it ).

In my opinion, this legislation will see the demise of the tenanted house model which, admittedly not perfect, has offered a huge opportunity for first-time operators to dip their toes into the pub game without the need for significant funding/financing, thus reducing risk for the newcomers. During my lengthy spell at Belhaven, we saw (and helped) many tenants progress to freehold ownership and become successful multiple-unit operators. Wearing my Montpeliers (non-executive) hat, we used the tenanted model in the early days to help build a solid foundation of café bars in the heart of Edinburgh. More recently, operators such as Kained Holdings in Glasgow and Andrina Bowes in Edinburgh have used the tenanted model to showcase their impressive skills in modernising a portfolio of community pubs.

I would challenge PAS`s claim that free-of-tie tenants will be able to secure funds to meaningfully invest into their pubs to create the end product of their vision. On short-term lets with no bricks-and-mortar to proffer as security? I think not, at best they may be able to attract smallish amounts of Advance Discounts from beer suppliers. But this carries a beer-tie with it and the balance on the Advance has to be repaid when the tenancy contract ends, so the tenant is back to square one.

I also think it is grossly misleading for PAS to claim that consumer choice will widen as a result of this Bill. Most pub landlords offer their tenants a wide variety of choice from a broad range of beer brand owners. The tenant picks the brands that his or her consumers want to drink. If a MRO tenant has to split modest beer volumes between five or six brand owners, the price benefit of being free-of-tie will quickly dissipate.

The fundamental problem with this type of legislation is that it impinges on free-market arrangements. The market always reacts to interference, one way or another. People my age remember The Supply of Beer Orders 1989 which were designed to break the “monopoly” of the then big six brewers by restricting the number of pubs they were able to own to an artificial limit. The purpose of the UK parliament was to widen consumer choice. What happened? Within a few years the big six brewers were all in the hands of foreign owners (no doubt hitting the considerable UK tax take in the process) and the trade saw the spawning of two massive property companies who dominated the tenanted sector and created business models which were deemed by many to be far too one-sided, compared to the previous “ beer landlord `s“ style and culture of operation. Unintended consequencies.

Things have changed since these days. Successful landlords know that it is in their interest for their tenanted publicans to earn good money from their pubs. The share of economic profit from the property and its operation has to be balanced and fair.

The old adage of “Be Careful What You Wish For” sprang to my mind when I first read Neil Bibby`s proposal. It is supported by many different and highly respected groups and individuals, all understandably anxious about the beer pricing issue. My anxiety is more focused on the inevitable “unintended consequencies” of the MRO introduction.

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