The British boozer is pulling pints again

First published in the Financial Times on 14th August 2012.

Entrepreneurs are leading a reinvention

Pubs are a quintessential British institution and the classic small enterprise. They remain the social heart of most communities, with millions of regulars going to their local every week. Public houses were also, along with breweries, among the earliest business undertakings in limited liability form. Their evolution reflects the various cycles of capitalism and parallel changes in legislation, social tastes and economics.

Initially, many pubs were simply shops that sold beer. Others were inns on travellers’ routes that also provided meals and a bed for the night. Hosts were known as licensed victuallers. Brewing started as a cottage industry and gradually achieved scale within a region. The sector was fragmented and, like most other forms of commercial activity, has continued to amalgamate relentlessly.

As certain brewers grew, so they started to vertically integrate by buying pubs. They worked with housebuilders to construct new taverns in the booming cities of the industrial revolution in the 18th and 19th centuries. Economies of scale enabled the big companies to dominate territories. Samuel Whitbread opened the first purpose-built, mass-production brewery in east London in 1750. Others followed, and brewing in retail alehouses declined steadily.

Free houses became rare and more publicans served as tenants of the breweries. They were free agents who paid rent to the brewery and bought their beer. Eventually, the industry became subject to regulation, while consolidation continued relentlessly. Guinness went public in 1886, while Bass & Co floated two years later. They used the capital raised to increase their control further over beer sales. When the FT 30 index was created in 1935, Bass, Watney Combe & Reid and Distillers were all constituents.

Margaret Thatcher’s beer orders broke up the vertically integrated brewers. Small pubs became increasingly unviable and started to close; supermarkets increasingly sold cheap alcohol for consumption at home; tough drink-drive laws made life harder still for publicans.

There have been further shifts in the past decade. Thanks to endless mergers, large-scale brewing is dominated worldwide by four international corporations: Anheuser- Busch InBev, SABMiller, Heineken and Carlsberg – together they make more than half the world’s beer. A few years ago, a tiny number of financial constructs owned most of Britain’s pubs. I played a part in building up one of these vehicles. They worked for a while, but proved to be the wrong model in tough times. Now the huge pub companies are shrinking materially to reduce debt and so the ownership of Britain’s pubs has become more dispersed.

Alongside this there has been a revival of craft brewers and independent proprietors of public houses. I chair a small chain called Draft House, which is part of this trend. Many establishments have converted themselves into pub restaurants and their dependence on beer sales has fallen as consumers have turned to wine, coffee, cocktails and other drinks. Across the licensed trade there are thousands of small businesses who are leading a reinvention of an ancient facility, making it relevant and attractive to today’s customers. They are investing their own equity to bring novel ideas to the business of providing refreshment – and in many cases succeeding.

This reversal is bringing greater choice and innovation to the hospitality sector. Faceless public companies frequently lack the engagement and commitment that an individual landlord brings to the task of serving patrons. Moreover, such personally owned outlets tend to offer a greater variety of beers and other drinks, helping to foster diversity in the brewing trade.

Institutional investors and banks have tended to desert the pub and beer trade because both are seen as mature. But as with any field, innovation can generate opportunities, and talent will still make good “boozers” work, despite the challenges of competition, politicians, inflation and changing consumer behaviour.

Pubs represent a vital element of the fabric of British life: thanks to the energy and imagination of thousands of independent publicans, a strong future remains for these unique British meeting places.