Time, Cable, please!
26 April 2013
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Of course, more regulation is just what the British economy needs. In particular, we need more regulation of those very small businesses that are struggling to get access to finance. Those routes to finance that they do have need restricting. At least that is what Vince Cable seems to think. Hot on the heels of last week’s announcement of stricter inspections for nurseries, publicans are next in the government’s firing line.
The government is planning a statutory body (let’s call it ‘OffPub’ – perhaps there will be a sister body ‘OffOff Licence’) which will be able to fine pub owners with tied tenants who do not charge ‘fair’ rents and beer prices. It should be noted that there is already a voluntary code of practice and an arbitration board. What is proposed is statutory regulation.
The issue of tied tenants has been investigated before by the competition authorities (the last time as recently at 2009-10). Surely, it is difficult to argue that there is a competition issue here. If we define the market not as ‘market for pubs’ but as the market for places where one can sit, drink alcohol and eat food, there are low barriers to entry and there is an incredible array of competition. Whilst I have only one supermarket within seven miles of my house, I have seven establishments that sell alcohol and food within ten minutes’ walk (in a village) and probably well over 150 within seven miles. Even defining the market for supermarkets more widely as ‘food retailing’ there must be over ten times as many eating and drinking establishments as food retailing shops. So, there is no consumer detriment from lack of competition.
The difficulty that has been cited is that the ‘beer tie’ involves a tenant taking on a pub from a pub chain company at a low rent but then the tenant is required to sell the pub owner’s beer whilst paying a relatively high price to the chain. Vince Cable sees this as a case of powerful pub companies making life difficult for tied tenants (which he regards as suppressed small businesses) rather than pub companies providing an alternative entry route into the market for people who wish to enter the licensed trade.
If Vince Cable were correct, then it raises the question of why those wishing to enter the licensed trade do not try one of the other routes available. Pubs are closing down rapidly. Independent pubs are closing down more rapidly than tied pubs – there is no shortage of opportunities to buy an independent pub. Opening competing alternatives to tied and independent pubs – such as restaurants and cafes – is also not difficult. Even our planning laws are not a huge obstacle given the decline in many retail high streets.
The reason why those alternatives are often not available to the potential tied tenant, of course, is because they generally lack the capital – or the cost of capital and a business mortgage may be too high. Indeed, this precludes entry into most capital intensive sectors for many people who might wish to set up a business.
The cost of monitoring loans to new businesses is high; new businesses have great difficult signalling to banks that they are creditworthy because of ‘information asymmetries’. This is why new businesses often do not pay dividends – self-generated financial capital tends to be the cheapest form of capital. Pub companies provide a way round this by allowing tenants into the business with very little capital. Tenants can then develop their business and move on if they wish.
It is, indeed, interesting that Vince Cable spends much of his time trying to get banks to lend more money to small businesses. If anybody needs to understand the problem of access to capital by small businesses it is Vince Cable.
There is another reason why pub chains can be beneficial to a potential new entrant. Chains can establish a reputation from which a new tenant can benefit immediately. This overcomes another big hurdle for small businesses operating independently. The new sandwich shop down Victoria Street might sell the best ciabatta in the world, but how does it signal that? It might go bust before enough people find out. New media are a boon to small businesses in this respect. But chains are also important. Every Nicholson’s pub sells a decent wild boar burger. I do not need to know the pub manager to know that (I believe that Nicholson’s pubs are managed and not tied-tenanted, but that is beside the point). A tied pub tenant can work for a chain, establish his reputation and then, perhaps, move on to an independent pub at a later stage.
So, the market has designed mechanisms for overcoming two of the greatest hurdles to small business establishment – the cost of capital and the difficulty of establishing a reputation. The Campaign for Real Ale would like tied pubs to be more like independent pubs. But, the reality is that the tied pub option provides another entry route into the licensed drinks and food business when entry might otherwise be impossible. It expands the range of business opportunities.
The problem faced by small businesses in accessing capital is something that Vince Cable spends much time worrying about. If he regulates tied pubs in the way he seems to be suggesting, he will have to spend even more time worrying about that problem. Perhaps it is time to call time on his Department. After all, that was once Liberal Democrat policy.
The government is planning a statutory body (let’s call it ‘OffPub’ – perhaps there will be a sister body ‘OffOff Licence’) which will be able to fine pub owners with tied tenants who do not charge ‘fair’ rents and beer prices. It should be noted that there is already a voluntary code of practice and an arbitration board. What is proposed is statutory regulation.
The issue of tied tenants has been investigated before by the competition authorities (the last time as recently at 2009-10). Surely, it is difficult to argue that there is a competition issue here. If we define the market not as ‘market for pubs’ but as the market for places where one can sit, drink alcohol and eat food, there are low barriers to entry and there is an incredible array of competition. Whilst I have only one supermarket within seven miles of my house, I have seven establishments that sell alcohol and food within ten minutes’ walk (in a village) and probably well over 150 within seven miles. Even defining the market for supermarkets more widely as ‘food retailing’ there must be over ten times as many eating and drinking establishments as food retailing shops. So, there is no consumer detriment from lack of competition.
The difficulty that has been cited is that the ‘beer tie’ involves a tenant taking on a pub from a pub chain company at a low rent but then the tenant is required to sell the pub owner’s beer whilst paying a relatively high price to the chain. Vince Cable sees this as a case of powerful pub companies making life difficult for tied tenants (which he regards as suppressed small businesses) rather than pub companies providing an alternative entry route into the market for people who wish to enter the licensed trade.
If Vince Cable were correct, then it raises the question of why those wishing to enter the licensed trade do not try one of the other routes available. Pubs are closing down rapidly. Independent pubs are closing down more rapidly than tied pubs – there is no shortage of opportunities to buy an independent pub. Opening competing alternatives to tied and independent pubs – such as restaurants and cafes – is also not difficult. Even our planning laws are not a huge obstacle given the decline in many retail high streets.
The reason why those alternatives are often not available to the potential tied tenant, of course, is because they generally lack the capital – or the cost of capital and a business mortgage may be too high. Indeed, this precludes entry into most capital intensive sectors for many people who might wish to set up a business.
The cost of monitoring loans to new businesses is high; new businesses have great difficult signalling to banks that they are creditworthy because of ‘information asymmetries’. This is why new businesses often do not pay dividends – self-generated financial capital tends to be the cheapest form of capital. Pub companies provide a way round this by allowing tenants into the business with very little capital. Tenants can then develop their business and move on if they wish.
It is, indeed, interesting that Vince Cable spends much of his time trying to get banks to lend more money to small businesses. If anybody needs to understand the problem of access to capital by small businesses it is Vince Cable.
There is another reason why pub chains can be beneficial to a potential new entrant. Chains can establish a reputation from which a new tenant can benefit immediately. This overcomes another big hurdle for small businesses operating independently. The new sandwich shop down Victoria Street might sell the best ciabatta in the world, but how does it signal that? It might go bust before enough people find out. New media are a boon to small businesses in this respect. But chains are also important. Every Nicholson’s pub sells a decent wild boar burger. I do not need to know the pub manager to know that (I believe that Nicholson’s pubs are managed and not tied-tenanted, but that is beside the point). A tied pub tenant can work for a chain, establish his reputation and then, perhaps, move on to an independent pub at a later stage.
So, the market has designed mechanisms for overcoming two of the greatest hurdles to small business establishment – the cost of capital and the difficulty of establishing a reputation. The Campaign for Real Ale would like tied pubs to be more like independent pubs. But, the reality is that the tied pub option provides another entry route into the licensed drinks and food business when entry might otherwise be impossible. It expands the range of business opportunities.
The problem faced by small businesses in accessing capital is something that Vince Cable spends much time worrying about. If he regulates tied pubs in the way he seems to be suggesting, he will have to spend even more time worrying about that problem. Perhaps it is time to call time on his Department. After all, that was once Liberal Democrat policy.
3 thoughts on “Time, Cable, please!”
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Surely tied arrangements like this are just a form of franchise like, say, McDonalds? When you sign up to run a McDonalds you agree to supply the Big Mac and all its variants, to use the companys recipes and source your supplies from them. So does the ever-active Mr Cable want to interfere with this too?
I would normally say that anything that saves our pubs is a good thing but, surely, the government has more pressing matters to attend to than this?
I’m no fan of the “chain pubs” but it does seem to give people an easier route into the “running a pub” game.
It does not seem to prevent them from setting up their own independent pub though which would allow them to set their own prices and select their own beers etc. if they have the funds to do this (although I realise that this is half the problem – most people don’t have the funds).
The biggest threat to landlord livelihoods is actually the government themselves with their onerous tax takes on alcohol – a pint in the local is now a pretty expensive business so most people stay at home and buy alcohol from a shop or supermarket.
Would suggest Cable does something about this or does nothing at all. Anything else seems to be more government meddling where they’re not needed, wanted or required.
”It is, indeed, interesting that Vince Cable spends much of his time trying to get banks to lend more money to small businesses.”
Suddenly politicians have started to sing hymns in praise of ‘small business’. This newly acquired religious zeal for ‘small business’ cuts across centre-right and centre-left political divide. This is after more than a decade of courting big business aka big banks and big media.
And where does it lead to? Vince Cable and those of his ilk wish to have a say in banks’ credit standards!
Banks develop credit standards by using their historical knowledge of markets, products, customers and business cycles. They then use these credit standards to decide who to lend to, for what and how much. When they get it right they make profits and when they get it wrong they make losses. It is hoped that the better ones learn from the losses and improve their credit standards for future use.
In all of the above, where does the government figure? What role does it have? Why should a government be telling banks who they should lend to? It cannot be that way in a free market system.
Now if we as a society do not want free market or privately controlled banks then that is fine. In such a society the government can tell the banks who to lend to and can tell its citizens who to marry!