British Pubs Closing Doors Despite Growing Popularity Of Traditional Beer And Microbreweries

LONDON -- It seems antithetical: As artisanal craft beers and real ales enjoy a major resurgence on both sides of the Atlantic, with microbreweries popping up under railway arches and in abandoned factories across the U.K., the traditional British beer-drinker's bastion, the pub, is having trouble paying its tab. As a result, many are getting cut off.

The threat isn't due to a lack of beer drinkers -- on the contrary. Instead it comes from a business model that leaves pub managers handing over a big chunk of their revenues to the corporate pub companies, or “pubcos,” that many can't survive.

Cheap supermarket alcohol that encourages cash-strapped consumers to drink at home, the six-year-old ban on smoking in U.K. bars and restaurants, and high property prices add further reasons for the publicans to cry in their beer.

But campaigners trying to save old-school British pubs say the biggest threat of all comes from within -- from the pubco business model known as the beer tie. Pub company tenants pay a “dry rent,” the rent on the building, but are also locked into paying a “wet rent.” That means they have to buy their drinks from the pubco suppliers, too, at a huge premium to market prices.

Although any company that owns and rents out a pub could be called a pubco, large pubcos, defined as those owning more than 500 pubs, are singled out for the majority of the blame. They have about one-third of Britain’s pubs in their portfolios. Punch and Enterprise -- two of the largest of an estimated total of about 50,000 pubs in England, as of 2012 -- hold about 4,000 and 6,000 leased or tenanted pubs, respectively, and are trying to cut debt built up through acquisitions during the boom years of the 1990s and early 2000s, before the recession. They do this primarily by making it increasingly difficult for pub lessees to make a living and by selling off underperforming and even profitable pubs to developers who would convert the property into supermarkets, betting shops or luxury housing, pubco opponents complain.

“We’re losing not only valued but profitable pubs up and down the country, as pubcos sell off pubs to inject some money and pay off some debts to creditors,” said Greg Mulholland, Liberal Democrat MP for Leeds North West and chairman of the All Party Parliamentary Save The Pub Group.

80 Percent Markup

The Campaign For Real Ale (CAMRA) quotes data supplied by licensees pegging a keg of Fosters beer at £84.99 ($139) on the wholesale market but £150.22 ($246) at the pubco price -- a 77 percent markup. CAMRA estimates 57 percent of publicans with tied agreements to large pubcos earn less than £10,000 a year, compared with 25 percent of licensees with non-tied agreements. That’s well below the national minimum wage of just above £15,000 per year, based on a 45-hour working week.

No surprise, then, that CAMRA figures show 26 pubs closing per week in the six months ending this past March -- up from 18 per week in the previous six-month period. An additional 220 have been converted into supermarkets or betting shops since 2010, with many more thought to have slipped away under the radar.

Real ale -- a term coined in the 1970s to differentiate between traditionally brewed beers made with natural ingredients and the processed products offered by big brewers -- may have shaken off its fusty image, but having turned into a trendy drink isn’t enough. Campaigners say radical action is now needed to save the pubs themselves.

Pubs, whether cozy village inns or loud inner-city drinking dens, play an important role in Britain’s social life. With longer working hours, families and friends now often living far apart, and social media increasingly standing in for face-to-face contact, they can form an important focal point for communities too.

Pub closures likewise come at a huge cost to a wider economy that is just beginning to show signs of recovery after a painful recession, which has also hurt the pubcos. Punch Taverns PLC (LON:PUB) said in December it had made progress in talks with creditors and would formally launch a debt restructuring needed to stave off default in January. (Punch shares rose 20 percent in the month to Dec. 23.) Figures on Punch’s website showed it had £2.3 billion of net debt at the end of its last financial year in August 2013.

At its preliminary results presentation in November, Enterprise Inns PLC (LON:ETI), said it had reduced its net debt by £216 million to £2.5 billion, helped by the sale of 428 pubs.

Former Enterprise tenant Angela Ryan, who ran the White Hart Inn in South Harting, West Sussex, with her husband -- until they left over a dispute, saying the company reneged on a rent agreement -- said tenants could be helping Enterprise cut its debt. “The tied business model is in a terrible shambles; it's falling apart," she said. "It is all about squeezing their tenants out of every penny they can get to pay off their billions of pounds of debt. It is the publicans that could get them out of their serious debt if they treated them fairly -- it's so damned simple.”

Enterprise Inns said thousands of its publicans “recognize the benefits of the tied pub business model,” which it said “provides them with a low cost of entry giving them the opportunity to run their own business, and they receive the investment and support of a national pub company.” It didn't comment on Ryan’s case.

The Government Gets Involved

But the big pubcos may have a more-formidable enemy than traditional-pub campaigners: the British government. Business Secretary Vince Cable, a Liberal Democrat member of Prime Minister David Cameron’s coalition cabinet, declared war on the pubcos in January, when he announced a plan to break their stranglehold through a statutory code and independent adjudicator. What he wanted, he said, was to enshrine the fundamental principle that a tied pub licensee should be no worse off than a counterpart that rents the pub but is free to buy beer on the open market.

On Dec. 13, the government published 8,000 responses to a consultation on the plan, from tenants, pubcos and campaigners. Consumer Affairs minister Jo Swinson said the government is committed to “intervention to address the unfairness in the relationship between pub companies and tenants,” but that it’s still evaluating how to do so. Campaigners say that delaying a decision puts thousands of pubs at risk.

According to Mulholland, the chairman of Save The Pub, the government should mandate separation between dry and wet rents, in a “market rent-only option.” That would break the double hold pubcos have over their licensees by giving tied publicans the option to buy drinks from anywhere they like or, if they chose to buy supplies from their pubco, pay lower rent to compensate.

“The market rent-only option is absolutely the key thing. A statutory code and adjudicator will not do anything to resolve the fact that large pubcos take more than is fair of the profitability, leaving licensees sometimes not able to make a living,” Mulholland said. “Under the market rent-only option, all tied licensees of large pubcos would also have the option of an independent market rent assessment, which could make the tied agreement fair and competitive.”

Pubcos have hit back, claiming the reforms would lead to more closures as more of their pubs become “unviable” and may be sold off.

But pub owners disagree. Durham Atkinson, managing director of the Hops & Glory craft beer pub in Islington, north London, said he steered clear of tied pubs when he was looking for a site to open his business, which has just celebrated its first birthday. “I looked into about 100 pubs over a year, tied and untied pubs, and a pubco pub just seemed too financially risky.”

No Heineken Here

Because the Hops & Glory is free of a beer tie, paying a standard rent instead, it can quickly change a beer if its customers aren't enjoying it, Atkinson said. “We have a lot of suppliers, so that means more paperwork, but you get used to it. It means we can get the lowest price we can negotiate on beer. For normal lager, we don't buy Heineken but we could get a keg for £100 ($164), where a pub round the corner is paying £165 ($270) for the same keg. If you get through 5 or 10 kegs a week, that could add up to a difference of as much as £30,000 a year."

Whatever form the industry shakeup takes, it will come too late for Kirsty Valentine, who ran the Alma in Newington Green, north London. She was evicted in November after a long legal battle over rent with owner Enterprise Inns. An independent adjudicator, part of the proposals set out by Cable, might have helped her. “I had nowhere to go that would listen and fight in my corner in an independent manner,” she said.

The pub itself has been given a reprieve. It has reopened under new management, and local people managed to have it listed as an Asset of Community Value, meaning the building can't be sold for another purpose without the community being given a say or a chance to buy it. Mulholland wants that approach to become a regulation to systematically protect pub premises. “Pubs are simply traded as pieces on a monopoly board, when they are valued community assets,” he said.

Atkinson said he thinks the tied model is putting off people who could otherwise step in to save at-risk pubs. "If everything moved to the open market, there are historical buildings of great worth to their communities that could work on a free-of-tie model. If I look into a lease on a building and see that it's tied, my interest is lost. If there was an open market, they could really work and really benefit their communities."

Meanwhile, the Hops & Glory, which has just started brewing its own beer, and aims to always stock a beer brewed within London’s M25 ring road, illustrates the revival in “real ale” and a spike in the number of microbreweries selling local brews to a more discerning post-recession clientele. That’s cause for cheer in the embattled industry.

CAMRA said 187 new breweries opened in Britain in the twelve months to September, taking the total to 1,147, while the number of breweries in London doubled.

“People are really focused on their quality. A lot of this quality focus has come about since the recession: people question spending £4 on an average pint of lager when they can spend maybe 10 percent more for a lager they really enjoy,” Atkinson, the brewery’s managing director, said.

But those numbers aren’t enough for the defenders of traditional pubs.

“It’s wonderful to see the incredible expansion not only in quantity but also in quality of breweries in the U.K.," Mulholland said. "We’re brewing some quite fabulous beer and that’s increasingly what consumers want to buy. But the place where they should be enjoying this wonderful beer is under threat. We need to ensure we have a fair deal for local pubs.”