Sunday, 28 February 2010

What's in a price

Yesterday I Spotted on Twitter this comment about the difference in pub and supermarket beer pricing which was apparently quoted in a Parliamentary debate on the Future of the Pub...................
"When Labour came to power beer in pubs was priced 2 times the price in supermarkets. Now it is 7 times the price. #ukpubs"
According to My Supermarket  Carling is currently an average of £1.05* per pint in the supermarket, for @arfurd to be right then pubs must be punting out pints of Carling at £7.37 a pint!! Actually the truth is that the average price of a pint of Carling (according to Nielsen) is £2.54 and even in fancy London town only reaches a peak of £2.79, so either @arfurd is drinking in very posh pubs or maybe things aren't actually that bad.

This week I presented at a BII forum on how to attract more women into pubs and over lunch sampled some Kasteel Cru which went down very well until one licensee asked me if it was available in supermarkets. When I sad yes he put the bottle down in disgust and said "well I'll never be able to sell it in the pub then" which to me seems short sighted - do we honestly believe that on and off trade prices should be the same? I do think that supermarket pricing needs to be addressed, using alcohol as a loss leader should be stamped out and a minimum pricing policy be enforced to build the right level of respect for alcohol but to suggest on and off trade pricing should be the same undermines the pub service offer.

At home I drink Sainsburys Italian Coffee at £1.95 which is about 13p a cup and it's very nice, I've experimented with other coffees and this one's my favourite. But, almost every day I stop at my local Starbucks and part with, by comparison, a whopping £3.20 for a Grande Skinny Caramel Macchiato (with full fat syrup of course, credits and debits after all). Now I could recreate this at home, Starbucks sell all the things I need to do that, but I wont because what I'm paying the extra for is the service that comes with it - the fact that a barista they've taken the time and expense to train makes it for me, that they use their electricity instead of mine and they offer me a muffin to go with it.

And the same goes for pubs, if I went into my local Sainsburys and they asked me what beer I wanted, offered me a seat at a table their staff had cleaned, went out the back and got a bottle they had chilled for me, poured it into a glass they had washed and allowed me sit there and enjoy it whilst using their heating and lighting then I'd be prepared to pay a lot more for it. A good pub with a good service offer must be able to command a significantly greater price than the supermarket for the same product, if they cant and customers wont spend the money they need to look at their offer and make sure they are offering value for their drinkers and a reason to be drinking in their pub, not at home on the sofa.

But, said the BII man, the reason that supermarket beer is so cheap is not the difference in offer but because the brewers sell it to them for them for next to nothing. But is that really the case or are the supermarkets prepared to lose money on beer to drive punters into store in the hope that they'll also buy toilet rolls and milk and a whole host of other things they can off set the loss against.

Using the average selling prices above what is the actual difference in cost price to retailers........

So why the difference I hear you cry - well firstly the VAT, obviously the higher the retail price the more the government want to grapple off retailers. The biggest difference is the retail margin £1.11 of the £1.49 difference because pubs need to charge much higher margins as they have to cover all their costs (cost of beer, staff, cleaning, rent, rates, electricity etc) from this margin. The supermarkets obviously have similar costs but spread over a huge range of products - beer makes up a fraction of their total sales.

That leaves about 15p difference on average on the price of beer sold by brewers between pubs and supermarkets - not such a great difference after all eh? Especially when you consider how much more it costs a brewer to service a pub versus a supermarket - extra distribution costs (delivering to lots of individual pubs is more expensive than one supermarket distribution centre), the cost of dispense equipment, engineers and that 15p difference is very quickly spent.

So the brewers are making the same amount of money from pubs and supermarkets, if we want supermarkets to charge more for beer we need to be lobbying the government not the producers.

And if pubs really believe they cant charge any more than supermarkets for beer then it's time they reviewed their service - that's what should set them apart not having completely different products.

*at the time I wrote this, it changes all the time as they pick up new offers.


Curmudgeon said...

A good post that shows the truth about relative beer prices and the reason for them. The claim that pub prices are 7 times those in the off-trade is utter nonsense - I wonder how he can substantiate this. You also have to look at typical prices paid rather than the cheapest offers.

For premium ales, the pub/off trade differential is only about 67%.

Kristy said...

Thank you! Apparently it was in a Parliamentary debate repeated BBC Parliament but you're right, it's nonsense and I have no idea how they could substantiate it.

Cooking Lager said...

Corking post Kristy. Give the lass a guild award!

Anonymous said...

One has to ask where the £.86 retail prices comes from; there are Pubs Tied to Enterprise Inns and Punch that would die for it so cheap!

Anonymous said...

While I agree with the general thrust of your argument the costs you use to demonstrate the difference in retail price are unrealistic.
I doubt if there are many pubs that can buy a firkin of session bitter for much under £90 ex VAT never mind an 11 gallon keg of lager for £75.68 ex VAT.
Run your example again with a more realistic purchase price of about £115 (ex VAT) a keg.
I also suspect that the average selling prices in pubs includes the heavily discounted outlets. I haven’t seen top brand lagers much under £3 a pint for over a year in a typical pub and certainly not in London for a good deal longer than that.

Tony said...

The problem with the above is the cost asumption. I am a tied publican and from my Feb 2009 price list (now more expensive but I don't have it to hand so don't want to make prices up), a pint of Carling costs £1.44 excluding VAT for me to purchase. To make your 60% Gross Profit, I would need to sell at £4.23 - for a pint of Carling (in Yorkshire). That is just not going to happen. I also think the assumption on purchase costs for the off trade - specifically mass volume delivery models like supermarkets, is askew and they will command a somewhat more profitable purchase price.

So you see, even leaving the supermarket purchase price alone (and at Christmas, A well known orange supermarket was selling Stella at 68p per pint equivalent) the cost price differential is 73pence. These are the areas that force the cost differential. The massive purchasing power of supermarkets - because the volume distribution infastructure exists - entices low profit selling by suppliers. Even at 1p profit, if you sell 1 million bottles (41,666 cases) you have £10k profit and no distribution costs along with the whole country as an outlet.

And in terms of distribution costs to pubs, the brewers like S&N, InBev along with suppliers like Waverley TBS, TradeTeam etc., are already supplying the pubs so a supply chain is already established.

In the middle of this, a tied house will pay what I pay - what you may be looking at is a freemarket pricing structure. I know for example, I can purchase my Stella £140 cheaper if I were a freehouse. The Pub Companies take the difference to service massive debts they have accrued.

So the price you pay at the pub is a combination of considerably higher purchase costs for the tied publican driving sector prices upwards and creating an artificial price expectation in the pub market against insanely low prices in the supermarket where brand value is meaningless and price is king.

You are correct - I would also expect to pay more for good service. But how much more? When, in hard economic times during, say, summer, you can get the BBQ out with pals drinking chilled bottled beer from supermarkets at £18 for 48 bottles or whatever against my £3+ for one pint (even if in a convivial environment with exceptional service), where would you gravitate?

Pubs closing recently at a rate of 52 a week seems to suggest the BBQ seems to be the option chosen.

Pubs CAN charge more than a supermarket, but the profit margin differentials are somewhat more than 15p. I'm lucky to achieve 40% GP - and that is impossible to work with. I charge £3.25 for a Stella. I think that is a lot of money.