Sapient’s Peter Hansen suggest that when governments introduce legislation – they rarely achieve their announced goals and create a number of unintended negative consequences.
The pub sector has consistently been on the receiving end of such legislation. Perhaps the best known example is the so-called Beers Orders of 1989, which required the “Big Six” brewers to reduce the size of their tied estates. Unfortunately, this replaced one oligopoly with another one in the form of the tenanted pub companies.
The greatest threat to the sector comes from wrong-headed and poorly thought through Government legislation that achieves unpredictable or undesirable outcomes. Some of it will, of course, meet one unspoken Government objective – identifying new sources of tax. A review of recent legislation reveals that most legislation fails to meet its intended goal.
The UK is not the first country to impose a tax on soft drinks. Mexico, where obesity is high and diabetes is a significant problem, instituted a tax that increased the price of soft drinks by 10%. Consumption levels dropped by between five and nine per cent, depending on the source you believe.
But an analysis of sugar consumption in the UK shows how ineffectual a tax on soft drinks will be in reducing obesity. According to the Institute for Fiscal Studies, “added sugar” accounts for 14% of UK consumer calorie intake. Chocolate and confectionary are the largest source of added sugar, with biscuits and cakes second on the list. Neither are affected by the tax, a curious decision.
Soft drinks (excluding squash) account for just 12% of the added sugar. Overall, soft drinks make up less than two per cent (i.e. 12% of 14%) of daily calorie intake, which is 2,500 for a typical male, or less than 50 calories a day. A 10% reduction in soft drink consumption would result in a reduction of just 5 calories per day, a “drop in the caloric ocean”. It is difficult to understand chef Jamie Oliver’s pride at the introduction of the soft drink tax given how little impact it is likely to have on obesity.
Why did the Chancellor introduce the tax? Of course, he is pandering to the health lobby but the real answer is that the Government expects the soft drink tax to raise £500m for the Treasury, which desperately needs the cash. Expect the health lobby to be creative in suggesting new targets such as crisps, chips and fast food generally. Health campaigners have figured out how to appeal to the Treasury.
National Living Wage
Proponents of the National Living Wage say that it is a small price to pay to help those struggling to get by on low incomes. However, research from the US shows that only 13% of workers earning the minimum wage live in low income households. The majority of minimum wage earners are actually members of better-off households where there is a second or third earner; almost 50% of the benefit goes to people in households earning three times the poverty line.
There are also negative effects from the Living Wage. For those who are unemployed or disabled, the Living Wage makes finding a job much more difficult.
The large increase in the National Living Wage places the sector in new territory. No country has seen a step-change of this magnitude – and no one can forecast the outcome in terms of employment levels, particularly in a labour-intensive sector such as ours. It is very likely to lead to fewer hours for employees.
Alcohol duty and other taxes
Alcohol duty and taxes on tobacco are highly regressive; that is, they are paid disproportionately by those on low incomes. For example, those who earn less than £20,000 a year are more than twice as likely to smoke than those who earn more than £40,000 a year according to the ONS. The same is true with alcohol and soft drinks. Lower income groups have a greater propensity to consume those products and the amount they spend is a much greater proportion of their income than it does for the better off.
Another example is lottery tickets, which are bought by many on lower incomes. Society as a whole benefits from the contributions made by lottery profits to worthwhile public projects. It is an irony that those on lower incomes make a disproportionately large contribution to the funding of these projects. The lottery is, in essence, a transfer tax from low income groups to those on middle incomes.
Market Rent Option
The Government has introduced the Market Rent Option (MRO) legislation with the goal of creating greater equality of income between licensees and landlords, granting the right, in certain circumstances, for licensees to operate pubs on a free-of-tie basis at a market rent. In practice, it will drive wholesale change in the operating models of the tenanted pub companies in a way that the government and campaigners have failed to anticipate, to the detriment of many licensees who are currently happy with their tied agreements.
Under the Landlord and Tenant Act a landlord has the right to reoccupy its property at the end of the lease or tenancy agreement – there is no automatic right of renewal for the licensee, contrary to what many campaigners say.
The tenanted pub companies are moving quickly to implement “operator agreements” whereby they control the retail offer, placing the pub outside the provisions of MRO. Under an operator agreement the licensee becomes a self-employed independent contractor who is paid a share of turnover as compensation.
Those licensees who have 15 years or more unexpired on their agreement may well benefit from MRO until the agreement expires. But publicly available data from Punch, for example, shows that just seven per cent of their licensees have ten years or more left on their leases.
It is unlikely that MRO will prove to be a panacea for down-trodden licensees. A lucky few will benefit and the rest will see no benefit at all and even risk losing their pub. More likely MRO will be seen in hindsight as a trigger for a radical rethinking of the tenanted pub company model with the pubco’s having more control, not less, over their pubs.
Where governments wade in “to level the playing field”, they usually get it wrong. In 10 years’ time we will wonder what all the fuss was about MRO. There will still be tied pubs but tenants will have little security of tenure. The irony, of course, is that we are back using the same occupational model used by the Big Six brewers at the time of the Beer Orders.
That cannot be what the campaigners intended.
Peter Hansen is the founder of Sapient Corporate Finance