Companies turn to economies of scale to balance the books

The principle that ‘big is beautiful’ has been adopted by hotel and pub groups alike, but it is consumer choice that suffers, says George Pitcher

At first glance, a pub in Manchester may not seem to have a lot in common with The Ritz in London. And, true, the differences are rather more identifiable than the similarities. The pub would probably serve better beer and I have no idea whether The Ritz serves pork scratchings, but I rather doubt it. It almost certainly doesn’t have a dart board.

On the other hand, I suspect The Ritz does a rather better filet de sole meunière than the pub and, of course, you don’t have to lock yourself in the gents if you want to stay overnight.

Yet there are similarities between the two hostelries. They would both, we are led to believe by events last week, benefit from economies of scale.

Greenalls Group launched a 480m recommended share and cash offer for Boddington to create the UK’s largest chain of pubs independent of a brewer – according to Greenalls, large scale is required to drive hard bargains with brewers, cut costs and create critical mass in drinks wholesaling.

Meanwhile, Trafalgar House was selling The Ritz to Ellerman Lines, the investment vehicle of “reclusive” (meaning they don’t speak to journalists) twin brothers David and Fred Barclay. The move marks the latest instance of a luxury hotel being consolidated with another – the Barclays already own The Howard on the Embankment – in order to provide catering economies of scale.

It is an accepted commercial truth in catering that scale is a good thing. And it may well be that scale provides competitive advantages that are beneficial to the guest, which boosts business and comforts shareholders. But I am not sure the system always works like that and last week’s deals, at both extremes of the catering gamut, should be tested to see whether the “more means worse” principle applies.

Take the Greenalls/Boddington deal. Boddington brings some 450 pubs in the North-west to the party and, with Greenalls’ 1,000 in the same area, the combined group will own roughly one in six pubs in the region. The brewers are old Mancunian mates that have pursued practically identical strategies – abandoning brewing to focus on pub ownership and drinks wholesaling.

Getting together appears a logical development. The only wonder is that they didn’t do it sooner. The commercial savings are impressive – Greenalls reckons it can save 18m a year from the deal, by merging wholesaling and head office operations. Debt will be removed from the joint balance sheet and the sale of Boddington’s retirement homes could fetch 70m.

But there are other ways of looking at it. According to some City sources, Greenalls had plateaued in earnings terms and needed an acquisition as a means to provide shareholders with a prospect of earnings growth.

As the number of British brewers dwindles, size will be vital to provide the clout required to negotiate competitive beer deals.

We can expect to see more pub retailers swallowed up to build purchasing power into a few consolidated groups.

Meanwhile, life is likely to become tougher for the owners of tenanted pubs. They will be altogether less attractive, because they will be harder – if not impossible – to integrate into a branded pub chain. Without the buying power of the major, consolidated groups, their margins are bound to be squeezed and, in many cases, they are likely to be put out of business.

This cannot have been what Lord Young intended, when he took on the tied-house “beerage” during the Eighties, in an ideologically driven attempt to introduce competition – the sacred cow of the past 16 years of Conservatism – and to break what was seen as restrictive trade practice on the part of the major British brewers.

Instead, what we have seen is a widespread departure from the business of brewing in favour of national chains of pubs and a degree of consolidation that has seen tenants put out of business by onerous new lease arrangements and the sort of power that has emerged in the hands of super-groups such as Greenalls/Boddington.

And so to the other end of the market, where The Ritz stands proud above cheap tourist bric-a-brac on Piccadilly. It is the latest in a long line of great hotels to be shunted around into groups that talk of economies of scale as though they are a great thing in their own right. The Savoy group has finally been infiltrated by the Forte debasers – and the wonderful Lancaster in Paris will probably be lost as a result.

The Regent in London has been sold to the Landmark chain; the Stafford, another Trafalgar House gem, has gone to Shire Inns. The Plaza in New York has been bought by CDL Hotels of Singapore. All of them slowly adopting a common, chain identity.

And all of them shunted around conglomerates’ balance sheets as they have, in turn, consolidated and rationalised. This is what 16 years of “letting the market decide” has delivered in British catering, whether in pubs or luxury hotels – fewer independent hotels and pubs, less choice and, ultimately, less competition.

I hope a Labour government introduces a tax break for the free house and the independent hotel. Otherwise, we won’t be able to find one soon.

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