Industry’s glass is left half-empty as UK brewers are caught on the hop

Mar 26 2008 by Alex Turner, Liverpool Daily Post

Faced with ever-spiralling costs and tax hikes, 57 pubs a month are closing down. Alex Turner reports

BREWERS, like bookies and bankers, find sympathy in short supply when times get tough.

Beer alone accounted for profits of £810m in 2000, according to a report by accountants Ernst & Young, so it will be difficult to find too many drinkers crying into their pint glasses at their current plight.

But the sector is going through some very tough times – pubs are shutting at an alarming rate and profits were down to £65m in 2005 – as it fights battles on several fronts.

The smoking ban has been followed by the next moral crusade, against excessive drinking.

Alcohol duties continue to rise at a time when consumer spending is being constrained. Global rises in food costs have caused steep increases in the cost of the industry’s raw materials, malt and hops. To cap it all, beer drinking is falling.

And that’s before the indirect, but potentially damaging, effect of England’s failure to reach this summer’s Euro 2008 football championships. It’s not just at the FA headquarters in Soho Square that this has caused concern.

The British Beer and Pub Association estimated that, in Euro 2004, supporters consumed an average of an additional 7m pints during the three group games and 10m pints in the defeat against Portugal.

Two years later, defeat to Portugal in the World Cup quarter-final took an additional 15m pints to help ease the suffering.

It was estimated that £285m was spent on beer during the tournament, a figure that will be badly hit by the failure of any of the home nations to qualify for this summer’s tournament in Austria and Switzerland.

While this accounts for only a fraction of the annual UK consumption of around 10bn pints, it is a missed opportunity that the industry can do without. The consumption of beer fell 7% – more than 700m pints a year – between 2003 and 2006.

The effects are not only hitting profits, but they are affecting the viability of pubs and chains.

Last week, Laurel Pub Company, the owners of brands such as Slug & Lettuce and Hog’s Head, was reported to be on the verge of entering administration after it failed to find a buyer for its loss-leading stores, which made up about one-fifth of the group’s 460 outlets.

This led to the closure of most of the 95 loss-making sites, including Yates’s Wine Lodge in St Helens. In January, the Sports Cafe chain went into administration, blaming the smoking ban and poor trading conditions. Investment fund Agilo bought five of the eight sites, but Liverpool, Manchester and Bristol were not part of the deal.

And Agilo is also expected to step in to rescue the UK’s second-largest nightclub operator, CanDu Entertainment, after the company was reportedly close to going into administration.

Last week Luminar, the UK’s biggest nightclub operator, which owns brands including Oceana and Liquid, announced it was slowing down its expansion plans to focus only on sites in prime target towns in light of “challenging” trading conditions.

Three UK pub chains have recently announced falls in like-for-like sales during the second half of 2007. Regents Inn, owner of Walkabout and Jongleurs, were down 3.8%, Punch Taverns complained of “subdued” trading as its like-for-like sales fell 2.2%, and JD Wetherspoon’s sales fell 2%. The decline was attributed to reduced consumer confidence resulting from a combination of the banking crisis and rising prices, and the impact of the smoking ban in the colder and darker winter months.

The Budget increased the cost of a pint of beer by 4p a pint, wine by 14p a bottle and spirits by 55p a bottle, and it was also announced that duties will increase by 2% above the rate of inflation in each of the next four years.

It is expected to deliver £1.53bn in additional tax revenue for the Government over the next three years.

However, the chief executive of the British Beer & Pub Association (BBPA), Rob Hayward, said: “By aiming a tax hike at beer, the Chancellor is shooting himself in the foot. Treasury revenues will continue to fall, pubs will continue to close and beer sales sink further.

“Every single day, the Treasury is losing over £1m in beer taxes and four pubs are closing. People are now drinking 1m fewer pints a day compared with last year. That trend will continue.

“It’s a decision doomed to failure – bad for taxpayers, beer, pubs and bad for the Treasury as well.”

According to BBPA figures, the Government receives £1.14 per pint of beer sold in the on-trade, split 33p on beer duty, 37p on VAT and 44p on employment taxes.

Tax revenue from the off-trade is just 55p a pint.

This is becoming more significant as beer-purchasing habits change. There has been a continuous shift in recent decades away from the hospitality sector to the retail sector. In 1970, about 10% of beer was bought in shops, but by 2000 this had grown to 33% and last year it was 43%.

And the gap in market share could continue to narrow as the gap in price continues to widen.

The price gap between supermarkets and pubs is already significant. The average price of a pint of Carling 10 years ago in a managed pub was £1.65 and is now £2.32, while a premium lager in a supermarket costs less now than it did 10 years ago, at £1.05 versus £1.14.

The Campaign for Real Ale (Camra) campaigned for a cut on beer duty ahead of the Budget after a survey it undertook found that 57 pubs were closing every month.

Camra chief executive Mike Benner said: “Pub beer prices have increased above inflation over the last 10 years, and the Chancellor must give beer a break.

“Supermarket beer prices, on the other hand, have actually fallen in real terms, often making beer cheaper than bottled water.

“Supermarkets can absorb tax rises, while small pub operators can’t, and the clear effect of this is to drive consumers away from the pub and into the armchair to drink cheap alcohol.”

The industry has seen a decline in traditional pubs in recent years, but now it has real concerns about the decline in the number of pubs. Its cup of cheer is no longer running over.

alex.turner