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Fri 4th Apr 2014 - Friday Opinion
Subjects: The evolving battle for the Third Place, the pub sector’s sea change and the future of alcohol policy
Authors: Martyn Cornell, Ralph Findlay and Paul Chase
   

The ever-evolving battle for the Third Place by Martyn Cornell

“Sometimes you just want a glass of wine and a delicious bite to eat without going to a bar or making a restaurant reservation.” That’s the curiously half-hearted and oddly unconvincing reason Starbucks gives on its website for why you might instead wish to pop into one of its own outlets after 4pm for a glass of chilled Sonoma Valley Chardonnay and some Parmesan-crusted chicken skewers with honey-Dijon sauce, rather than a skinny latte and a chocolate brownie.
   
It seems, however, that, after four years of experimenting with selling alcohol in its coffee shops, starting with one outlet, and eventually rising to just under 30 stores in only five locations – Chicago, Los Angeles, Portland, Seattle and Atlanta – Starbucks has decided that there are, indeed, enough people who fancy a glass of wine, or a beer, but really can’t be faffed to go to an actual conventional bar to buy one that it will be well worth its while to roll the concept to perhaps 2,000 stores in the United States, out of 13,000, over the coming years. According to the company’s chief operating officer, Troy Alstead, “we’ve tested it long enough in enough markets – this is a programme that works. As we bring the evening programme to stores, there’s a meaningful increase in sales during that time of the day.”
   
Selling alcohol won’t work in all Starbucks outlets, Alstead says. The successes have come in urban areas near other restaurants, cinemas and theatres, where people are out at night. In addition, you have to suspect, selling beer and wine enables Starbucks to capture the going-home crowd. Did anyone ever grab a quick chai latte on their way from the office to the station before starting their commute? On the other hand, a beer before facing the cattle-truck conditions of the journey home …
   
Obviously, Starbucks is doing this to try to capture incremental growth, and the better margins available on alcoholic drinks, and keep those like-for-like store sales figures rising. It is going to need a degree of scale before the exercise makes sense from a whole-company point of view, rather than from what it does to the bottom line at individual stores (much better to spread the costs of a wine and beer-buying department, and training baristas to serve alcohol and talk convincingly about grape varieties and beer styles, over 2,000 stores than 30), and before it makes any difference to the overall profitability of Starbucks.
   
But this is also part of the battle for the “Third Place”, the arena for social interaction that is not the home or the workplace, an idea articulated by the American sociologist Ray Oldenburg in 1989 and which Howard Schultz specifically made the centre of the Starbucks philosophy from the start. From that point of view, Starbucks is not a seller of coffee, it’s a supplier of places to interact socially, and what is physically sold under the logo of the green mermaid is effectively irrelevant, so long as it gives a reason for people to walk through the door to make a purchase and then linger.
   
It is also, of course, a peculiarly Anglo-Saxon development: in most parts of the world, and certainly in continental Europe, it would be perfectly normal for a cafe to sell wine and beer, and for a bar to deliver a decent cup of coffee. Only in the UK and the US have the two types of drink, alcohol and caffeine, been traditionally sold by separate retailers.
   
All the same there is one big difference between the US and UK markets: the almost complete absence in the US of chains of branded alcohol outlets. There is nothing to match JD Wetherspoon, Yates’s, All Bar One, O’Neill’s, Revolution, Loungers, Slug and Lettuce, and the many other multi-unit branded drinking establishments on Britain’s high streets. Instead the US is home to a multitude of branded restaurant chains, many of kinds that are unknown this side of the Atlantic: BJ’s Restaurant and Brewery, for example, a Californian-headquartered chain of 150 or so casual dining restaurants supplied with a range of 14 or so draught beers at any one time from its own microbreweries that match, in variety at least, anything most specialist US craft beer bars could offer.
   
It is against this sort of background that Starbucks’ move into alcohol should be viewed. The Seattle giant may be trying to defeat the encroachment into its own big slice of the “Third Place” battleground by bars that are raising their coffee offer with a counter-invasion of bars’ territory, by selling wine and beer. This would certainly be a big motivation should Starbucks decide to try selling alcohol in the UK: British bar chains such as Wetherspoon have dramatically raised the standard of their coffee offer, largely as a spin-off from their attempts to capture the breakfast/morning market, and as a result posed a threat to the more traditional suppliers of early-morning coffee. This is more than likely part of the thinking behind the move by the Tesco-owned cafe chain Harris & Hoole to add alcohol licences to its outlets.
   
But in the US, the absence of a big branded offer in the bar arena is a gap seemingly waiting to be filled: and it is this opportunity to bring to bar customers the guarantee of a known brand that is as much likely to be behind Starbucks’ move to extend its offer beyond caffeine, more than any defensive move. Coffee drinkers already know what they will get when they walk into a Starbucks outlet: if the company can persuade wine and beer drinkers that it can offer them the same brand quality guarantees, we could see the rise of a whole new force in the American bar scene, just as we did 25 years ago when Starbucks began its rise to dominance in the coffeehouse market.
Martyn Cornell is managing editor of Propel Info
   

The pub sector’s sea change by Ralph Findlay

There are encouraging signs of life in the economy, and the pub sector’s relationship with government, as evidenced by a budget described as being from “the most beer and pub-friendly government seen in a generation”, is improving. Most of us applaud this improved relationship, while pointing to some very significant issues still to be addressed, not least that pubs and brewers still suffer a very high overall tax burden, on which more later. But the fact is that the pub sector is again being seen as innovative, generating profitable growth – and jobs. This is a sea change.
   
The point on jobs is critical to the government’s more “pub-friendly” policies, and is important. It will be the key to further tax cuts in future. The numbers are too big to be ignored: at a meeting with George Osborne at Marston’s last week, just three pub businesses, Marston’s, Spirit, and M&B, described how they employ 65,000 people, are investing around £250m in pubs in 2014 alone, and have around 4,000 apprenticeships up and running, with more planned. Add in Greene King, JD Wetherspoon and Whitbread, and you begin to see that there is a transformation taking place in the pub sector. The excitement felt by commentators about innovation in the beer market (a very important development for Marston’s) is more than matched by what is happening in pubs.
   
Until recently, media coverage of the pub sector has been dominated by political themes connected with the tie, decline and closed pubs. But that does not reflect the enormous investment, energy and innovation now seen in pubs across the country. Pubs increasingly reflect better consumer insight into trends and behaviours which, when enabled by social media and technology, are expanding our customer base and the number of reasons to visit pubs. For example, I am writing this piece from my mobile “office” – a Marston’s pub (free Wi-Fi) – on a Monday afternoon, and am struck by how busy the pub is with people with young children, retired folk dining when it suits them, and people like me catching up on emails and having a coffee.
   
These transformations are encapsulated by Marston’s strategy. At some point this summer, we will complete the building of our 100th new pub-restaurant since 2009: to put this in context, since then we have “built” a £125m turnover business from scratch. These pubs have been highly successful, offering customers what they demand from pubs today, and typically creating around 50 jobs per pub, mainly for young people and often in places where jobs can be hard to come by. In five years we have created nearly 5,000 jobs. Even over this relatively short period, pub design, the use of technology and menu development have all moved forward at a pace.
   
The tenanted sector, having been under severe pressure, has also produced innovation. In 2009 Marston’s introduced the franchise model, to replace much of what was our tenanted estate. This has been hugely successful, and has introduced hundreds of new licensees attracted to our business by the combination of support, reduced risk and reward that this model offers. The franchise business at Marston’s is fast becoming an exciting place to be, with real creativity around menu development, recruitment and drinks ranges being pushed from licensees and “head office”, who have the same commercial interests in driving the business forward. Similar models are now being introduced by other companies, signifying a period of change across the sector.
   
The pages of Propel are regularly filled by great examples of innovation and development in the independent sector, and good lessees have long been well-regarded for their invention. After a few very tough few years, Marston’s lessees who have been able to adapt and evolve during this very challenging period look stronger. Successful lessees have differentiated themselves effectively in terms of their offers, service and marketing – and in their creative use of social media, independent operators exhibit flair and energy not always evident amongst bigger companies.
   
This is an exciting time for the pub sector, but significant challenges remain. Some pubs remain structurally challenged, by location, demographic changes or lack of amenity, and such pubs will continue to struggle. At Marston’s, in the few years up to the end of 2015 we will have sold more than 500 pubs, the consequence of years of high taxation, legislation and changing market trends, as we focus on improving the quality of our pub estate through a process of disposal and reinvestment.
   
Over half of our employees are 25 years old or younger, and they have joined an industry which is competitive, vibrant and recognises the need to offer careers as well as jobs. George Osborne has this week said that the government is committed to “full employment”, saying that tax changes will help achieve it. If that is true, this can only be good news for a pub industry in which job creation is already running ahead of the market. Increasingly, it is clear that lower tax equals stronger consumer demand and more jobs. Making a positive case for tax cuts that stimulate job creation in our sector – VAT, employer taxes, duty, business rates – becomes a plan with a purpose.
Ralph Findlay is chief executive of Marston’s
   

The future of alcohol policy by Paul Chase

On 25 March I attended a seminar titled The Future of Alcohol Policy. What made this seminar more interesting than most was that drinks industry representatives were invited to speak, along with a variety of speakers from the public health sector. It was noticeable however that the two “sides” were kept well apart, lest people went away with the impression that we are all on speaking terms!
   
First up was Rosanna O’Conner, who is director of alcohol and drugs at Public Health England. We had a bog-standard rendition from her of the health lobby’s usual mantra about alcohol: “price and availability” (raising the first and reducing the second) as the way to reduce alcohol consumption across the whole population, and thereby reduce health harms. The “whole population” approach to alcohol harm reduction is now so ingrained in the thinking of health lobbyists that they don’t even bother to try and justify it any more.
   
Just to dramatize how awful the alcohol problem is she showed us a graph which depicted a doubling of alcohol consumption between 1952 and 2004 to 11.5 litres of undiluted alcohol per head, since when, she said there had been a small dip. A small dip? Try a 16% reduction in consumption since 2004! When I suggested to her that choosing a start-date when alcohol consumption was at an historic low, and then comparing it to today’s level of consumption was simply a way of inflating the problem, she got distinctly sniffy. As a later speaker, Phillip Snowdon, put it: “In the 1930s we had the Great Depression, followed by the Second World War; then post-war austerity and rationing – so of course alcohol consumption was low in the 1950s. Using that as a comparator is entirely disingenuous.” Quite so.
   
Later that morning we heard from Daniel Kleinberg, head of tobacco, alcohol and diet in the public health division of the Scottish government. His talk was titled Moving on with Minimum Pricing in Scotland. He repeated the mantra on “price and availability” and rehearsed all the usual arguments in favour of minimum unit pricing. I wanted to ask the same question of him and of Rosanna O’Connor, but she had left immediately after her presentation, clearly not interested in anything anyone else had to say. So Kleinberg was left to answer my question, or rather, to fail to answer it.
   
I asked this: “I understand you want to raise the price of alcohol and reduce its availability in order to reduce alcohol consumption – so I’m clear about your direction of travel. But what I’m not clear about is your destination. By how much would alcohol price-inflation have to exceed wage inflation for you to conclude that alcohol was now sufficiently unaffordable? And since reducing availability means either reducing opening hours or revoking licences, what is the maximum number of hours you think licensed premises should be open each day, and how many businesses do you want to shut?”
    
I was hoping for an answer that might enable me to position him as more or less ambitious than Elliot Ness, but I was about to be disappointed: “That’s up to the politicians” is all he managed to splutter. “But you’re the guy they’ve put up to speak, so what’s your opinion?” He wouldn’t be drawn. I decided to have just one more go: “But can’t you see that if you’re not prepared to tell us at the beginning of the journey what the destination is, then how will you, or we, know when you’ve arrived – you must have some idea of what success would look like?” Well, if he did he was keeping it to himself, which led me to try the chairman’s patience even further: “Either you don’t know the answers to my questions, in which case don’t you think you ought to know? Or you do know the answers, but you don’t want us to know. I suspect it is the latter – you don’t want to say ‘alcohol consumption as close to zero as possible’ because that would give the game away. And the name of the game is prohibition by stealth.” At which point there was a minor uproar from the back of the room from all the other anti-alcohol public health zealots who don’t like awkward questions.
   
We heard excellent presentations from the Portman Group’s Henry Ashworth, Diageo’s Mark Baird, the Wine and Spirit Association’s Miles Beale and lifestyle economist Chris Snowdon. But for me the quote of the day came from Paul Kelly, external affairs director of Asda. “People don’t come into our stores to be told what to do. They want choice.” He said that customers were becoming more health conscious and more conscious of body image and that low-alcohol wines were a fast-growing category, but that customers weren’t prepared to sacrifice taste or quality. This to me is a key point: if we want to encourage consumers to make healthier choices then we have to do so in a way that meets their aspirations. Businesses survive and thrive by giving customers what they want, not what public health moralists think they ought to want.
Paul Chase is a director of CPL Training and a leading commentator on on-trade alcohol and health policy

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