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Morning Briefing Strap Line
Fri 4th Nov 2022 - Friday Opinion
Subjects: Debt and the demographic dilemma, resisting change can sometimes pay off, the wheel keeps turning, making a case for cask
Authors: Paul Chase, Glynn Davis, Sarah Travell, Paul Nunny

Debt and the demographic dilemma by Paul Chase

The idea that we can live in a world in which capitalism is no longer nation-state-based, have global capital and money markets but not globalise the market for labour is rooted in tribalism and economic fantasy, and is leading to some very unpleasant politics at present. This is the backdrop to the massive problem of staff shortages in the hospitality sector.
A recent joint survey by UKHospitality, the British Beer & Pub Association (BBPA) and the British Institute of Innkeeping (BII) found that 45% of operators are cutting back trading hours or capacity in order to cope, and that one in three businesses in the sector are closing on one or more days a week. Recent ONS figures show hospitality has a record 174,000 jobs available and is experiencing 83% more vacancies compared to March-May 2019, the most recent comparable period. Front of house roles, chefs, kitchen porters and assistant managers are the vacancies that operators are finding the most difficult to fill.
The outcome of this is a £21bn loss of trade that threatens our sector and the UK’s economic recovery. I think there are only two possible solutions. Firstly, for the industry to fill vacancies by recruiting older workers – people in the 50-plus age group – and the other is through immigration. Labour shortages are not restricted to hospitality, of course, with many other sectors experiencing this problem, notably agriculture. All these shortages have been exacerbated by Brexit, which has reduced our access to the EU labour market. But there is a deeper economic problem here that is plaguing the whole of the developed world: stagnant economic growth combined with inflation – ‘stagflation’. To achieve long-term gross domestic product (GDP) growth, our political leaders need to understand a simple formula: long-term GDP growth = population growth + productivity growth.
Demographics shape the destiny of nations and their politics, but we can’t grow GDP through demographics unless we have another baby boom – which seems unlikely because the modern trend is to smaller families, in part because of the rising private debt burden. In the UK, the solution to falling birth rates has historically been higher immigration, but politically, that is very difficult because popular support for Brexit was a product of politicians stoking fears about the impact of immigration on jobs and wages. Therefore, productivity needs to increase, but that can’t happen until the baby boomers die off!
Most retirees are economically non-productive. Those aged over 65 make up 45.5% of the population aged over 18, and 18.9% of the total population. In the past, productivity could be increased by raising fixed capital investment, but our corporate sector is in debt to the tune of some 50% of our GDP. In an attempt to offset the impact on public services caused by the fall in GDP growth, governments across the developed world, including our own, have presided over an explosion of debt. However, GDP is the income that is used to pay off debt and the interest on it.
So, how will government resolve the issue of high debt and low growth? This is the central dilemma facing our government and governments across the developed world. Liz Truss saw the solution as priming the fiscal pump to provide a stimulus to inflate growth over a short period of time. The issue with fiscal stimulus in a high debt world is it increases the ratio of debt to GDP, because GDP isn’t growing fast enough to generate sufficient increased tax revenues, so stimulus keeps increasing debt. It was this issue that caused the recent market response to the so-called mini budget. The game of debt growth to drive GDP growth is close to its inevitable end. Even in the United States, the Fed has realised that we can’t borrow our way out of recession and back into growth. There, the average rate of GDP growth since 2008 is 1.7% but debt growth is 6%. In other words, it takes three units of debt to make one unit of growth.
In order to take on more debt, or even to service our existing debt level, we require either the debt burden to go down or interest rates to be lower than GDP growth – in other words, negative real rates – and this has been the case since our debt bubble blew up. Every time real rates go positive, the government has to fill the revenue hole in order to service the debt by creating a fiscal stimulus, because if they don’t, the debt doesn’t get paid and the system fails. This is why central banks need to drive down real rates to negative levels again – and why we’ve had such a panic when the Bank of England started following the Fed by raising bank base rate. The problem is that positive real rates will bankrupt the system – and fast. This is why we may see some drastic measures to reduce our public spending and get us to a balanced budget when the UK government makes its much-anticipated Autumn Statement.
To grow our GDP, we need to grow the size of our working population as a percentage of the total or utilise the older demographic on a scale not previously envisaged. This is the only way we get the debt to GDP ratio down without swingeing cuts to public spending. This will involve some uncomfortable political choices for the UK government. I don’t expect we will rejoin the EU, but we will have to renegotiate Brexit, and howsoever it may be disguised, rejoin the single market to ease trade flows, encourage investment and once again access cheap east European labour to keep our input costs down.
The whole of our indebted system needs asset prices to rise faster than debt service costs, or the economic balance sheet collapses and debts become unserviceable. To do this, government has allowed inflation to debase the currency in order to lower the denominator to give the illusion that asset prices are rising. In essence, our economy rests on a fiat currency financial pyramid, whereby falling real productivity has been compensated for by novel financial engineering and too much debt leverage, with the government debasing the currency by printing the difference. We are in a precarious situation, and I don’t think the government has even begun to prepare the public for what is coming down the line.
Paul Chase is director of Chase Consultancy and a leading industry commentator on alcohol and health

Resisting change can sometimes pay off by Glynn Davis

The Nag’s Head, The Grenadier and The Star Tavern in London’s smart Belgravia area have comprised my favourite concise pub crawl since I first came to the capital to work in the late 1980s. Every now and again I feel compelled to retrace my steps along the compact mews properties on Kinnerton Street and the enormous mansions on Belgrave Square and enjoy a few pints in these quintessentially London boozers.
It was fitting that The Star Tavern was the chosen venue for the recent launch of the 50th edition of the Good Beer Guide (GBG), because it is one of only five pubs throughout the UK to have appeared in all 50 publications since this annual CAMRA guide first appeared back in 1974. In that first edition, it sat alongside 114 other pubs selected from the capital’s thousands of outlets, and rather impressively, a very healthy 77% are still open – and 12 of them feature in the 50th edition, having been in and out over the intervening years.
This is truly heart-warming stuff when set against the current backdrop of difficulties facing the pub industry. Staff shortages, interest rate rises, tax increases, utility bills skyrocketing, cash-strapped consumers and rampant inflation comprise a tough menu for pub operators and owners to swallow. It has contributed to as many as 12 pubs closing permanently each week, according to the British Beer & Pub Association (BBPA), while the Campaign for Real Ale (CAMRA) has reported that the number of pubs that have closed as a result of business failure or have an uncertain future has doubled in the first half of 2022 versus the last six months of 2021.
The near-term future does not look too bright either, because as many as 50 pubs per month are set to disappear from around England and Wales, according to data from Altus Group, which it says represents a soaring of closure levels. These depressing statistics have contributed to a long-standing contraction in the pub industry that has seen the total number of venues, including those vacant and being offered to let, fall below 40,000 for the first time, to 39,973 at the end of June, compared with 40,173 at the end of 2021.
There is no set course of action to take in order to ensure a pub survives and thrives – the secret sauce, you might say. But there is one factor that is consistent in those businesses that have endured in the GBG over the decades – consistency of ownership and long-term managers. Of the five pubs that have impressively been in all 50 GBG guides, the Fuller’s-owned The Star Tavern has typically enjoyed an average tenure of its managers of six years – well above its portfolio average, according to Fuller’s chief executive Simon Emeny – while the other London boozer featuring in all the guides is The Buckingham Arms, which has benefited from the long-standing stewardship of Young’s.
Outside the capital, the Queen’s Head in Cambridgeshire has changed little since 1974 and has had only 18 landlords since 1729, and in Dorset, the Square & Compass has been in the same family since 1907. Meanwhile, the glorious Roscoe Head in Liverpool has been in the same family for more than 30 years, and they recently acquired the freehold after a long battle with its pub company owners. They wanted to secure its long-term future, and since it seems the consistency of the people in charge is massively important to the longevity of a pub, so the Roscoe Head will, thankfully, be with us for many years to come – and looks set to grace the pages of future editions of the GBG with its pristinely kept four compact rooms. 
It’s this very consistency that keeps me going back to my Belgravia pub crawl. Along with long-standing familiarity of The Star Tavern, it is a similar story at The Nag’s Head, where the irascible Kevin Moran has kept his free-house in eccentric order in all the years I’ve been visiting, and at The Grenadier, owners Greene King have sensibly sought to make zero noticeable changes to the pretty mews pub. Nobody wants to preserve things in aspic, but the careful management, with only subtle changes being made, has undoubtedly been the secret behind why these pubs have continued to remain incredibly popular over the decades, and they keep dragging me back to south west London.
Glynn Davis is a leading commentator on retail trends

The wheel keeps turning by Sarah Travell

You don’t necessarily have to reinvent the wheel to be successful. The wheel may already be there, but it might be able to do much more than what it was originally intended for. Take the burger and pizza categories in the UK hospitality sector.

Every year, new challengers enter both looking to show that their products represent a point of difference, or an upgrade on what has gone before. With consumer spend coming under pressure, customers will invariably seek assurance in categories they know and trust, whether that is a national or regional businesses.  

Burger and pizza concepts were again well represented in the Propel Premium database of multi-site companies released last week. The database has now grown to include 2,702 companies, which operate 67,442 sites. An additional 28 companies, which operate 186 sites between them, were added during October 2022.

South Yorkshire burger concept Urban Burger was among them. Led by managing director Mahmet Kent, the business currently operates two restaurants in Doncaster and one each in Halifax and Rotherham, and is to open its fifth site, at The Glass Works in Barnsley. The concept offers a range of burgers as well as sides such as hand-cut fries, mozzarella sticks and onion rings and drinks. Fellow burger specialist Band of Burgers was another addition. The London concept, founded by Zeeshan Amin, operates sites in Brick Lane, Southgate, Walthamstow and, most recently, Lillie Road in Fulham.

Midlands burger concept Burger Boi also made its first appearance on the list. Founded and led by Surj Bassi and head of development Wayne Timbrell, the duo currently operate six sites across the Midlands and have openings lined up in Derby, Harbourne (Birmingham), Shirley (Birmingham) and Longbridge (Birmingham). This summer, the business also opened a new franchise site in Metz Way, Gloucester, after a £450,000 investment. It currently also operates sites in Coventry, Wolverhampton, Wylde Green and Leicester. 

Other burger-led additions include better burger brand Fat Hippo, which made its London debut last month and plans to open a further six locations across the UK in the next 12 months, including a second in the capital. The company, which was founded in 2010 by Michael Phillips, opened its debut London restaurant on Great Eastern Street in Shoreditch on 14 October, taking its portfolio to 15 sites. It will also open in York, occupying the former Jimmy’s site in Low Petergate. Those two openings are expected to create around 70 new jobs. 

The brand plans to open a further six locations over the next 12 months, which will create an additional 160 jobs, taking the number of employees across the group over 600. Phillips told Propel: “We are on an ambitious growth path and are delighted to be bringing our patties to London for the first time. We’re being very selective in terms of the cities we’re considering for our new restaurants and are only looking at vibrant, dynamic locations that fit with our brand aspirations.”

Chef Gordon Ramsay has seen an opportunity in both categories, launching his Street Burger and Street Pizza brands over the course of the past three years and quickly expanding both. Last month, his Street Pizza concept made its regional debut in Edinburgh. Ramsay, who is also set to open a Street Burger site in the Edinburgh St James scheme, opened the new restaurant in Henderson Row, in the Scottish capital. He recently converted his Street Burger site in London’s Islington to his Street Pizza concept, which now operates six sites in total. The chef opened a Street Burger restaurant on the former Byron site in Upper Street last summer. 

Others looking to take a slice of the market include Pizza1889, which was founded in 2014 by Daniel Southwell, Richard Sweet and Simon Barbato, and now has five sites in its portfolio. The company, which operates out of shipping containers, has sites in Bristol, Cambridge, High Wycombe, Surrey Quays and its latest, in Oxford’s Templars Shopping Park.

Meanwhile, London-based pizzeria Zia Lucia opened its latest site, in Canary Wharf, at the end of October, featuring the brand’s first cocktail bar. Founders Gianluca D’Angelo and Claudio Vescovo launched the 80-cover restaurant – their eighth – on the ground floor of 75 Marsh Wall. It offers Zia Lucia’s 48-hour slow fermented pizzas such as the Arianna Sbagliata with mozzarella, fresh Italian sausage, gorgonzola, honey and truffle oil. Zia Lucia opened its first site in 2016. The business also operates pasta concept Berto in Islington.

As we’ve seen through our own work in the sector, these categories also continue to receive investment. Last month, fast pizza brand Fireaway, the Mario Aleppo-led business, secured new investment from six new backers, which values the company at £18.7m. Aleppo has, until now, been the sole shareholder of the company, which he founded in 2017 and currently operates 127 sites in the UK, plus a site each in Ireland and Holland. Aleppo sees the potential for the brand to grow to 500 sites within the next ten years.

Fireaway, which is a “Subway-style” pizzeria concept that offers true Italian pizza in just 180 seconds, made its debut in Mitcham, south London, in 2017. It opened its latest site at the start of this week, in Enfield. It may be a case of something borrowed or something old, but countless businesses are still making good money (or should that be dough?) out of categories that continue to underpin the sector, and it seems the wheel has plenty of turns left in it.
Sarah Travell is the founder and chief executive of Virgate, sponsor of the Propel Multi-Site Database.  The comprehensive database is updated monthly and provides company names, the people in charge, how many sites each firm operates, its trading name and its registered name at Companies House if different. Companies can now have an unlimited number of people receive access to Propel Premium for a year for £895 plus VAT – whether they are an operator or a supplier. The single subscription rate is £445 plus VAT for operators and £545 plus VAT for suppliers. Email to upgrade your subscription.

Making a case for cask by Paul Nunny

Last week, I attended the launch of the CAMRA 50th Edition of the Good Beer Guide. Cask Marque are sponsors, and it was pleasing to see the 949 Cask Marque pubs included in the guide, which had our logo by the side of each of their entries. King Charles III wrote the foreword as he is very supportive of the British pub. Sadly, he did not attend the function!

The occasion highlighted to me that now is a critical time for the future of cask. Volumes are down 20% from 2019, with the over-50s being slower to return to the pub and many people changing habits and routines. As chair of Cask Matters, made up of brewers and retailers who are keen to champion cask, we have identified three areas that need to be addressed – quality, commercials and image.

Quality of all beer is the remit of Cask Marque. To take quality standards to the next level, from January 2023, all Cask Marque pubs will have to pass a cellar inspection as well as an unannounced assessor visit which checks the quality of beer in the glass covering temperature, appearance, aroma and taste. As well as improving beer quality and sales, using best practice in the cellar will also help improve yields.

With regard to commercials, cask gives the retailer the lowest margin of all draught products but requires the most skills to deliver and has a short sell by date.  Cask Marque undertook a survey this year which showed cask was, on average, 11p cheaper than standard lager, but when asking consumers, 57% thought it was either the same price or more expensive. Let’s learn from this and encourage more competitive pricing including a price ladder dependent on ABV and credentials.  Timothy Taylor Landlord have been very successful in this area.

Image also needs to be addressed. Cask is the original craft beer, but craft keg commands that space. This needs to be addressed, hence a campaign being trialled in early 2023 called Fresh Beer. This is targeting the under-40s and creating a modern image for the beer. A presentation can be found on the Cask Marque website.  Fuller’s ran a similar campaign, and not only did it increase cask ale sales, but sales of all beers. When we have the learnings from the trial, it is planned to put together a three-year marketing programme.

However, this still begs the question “Why should retailers bother with cask?” Research shows that:
·     Cask attracts people to the pub. Frequently, it is the cask ale drinker that decides where his peer group will drink.
·     Cask ale drinkers visit a pub on average 2.2 times a week, 29% more than the average British drinker.
·     Cask drinkers drink 5% more.
·     Frequently they spend more. On average, £33.45, 12% more than other drinkers.
·     Consumers say it defines the pub.

Cask Marque itself, with the support of Cask Matters, has:
·     Originated a social media campaign #Stand up for cask
·     Organised a very successful Cask Ale Week 
·     Held a Future of Cask seminar at Brewer’s Hall

Cask needs all our support for the benefit of brewers, pubs and consumers. CAMRA has a key role to play, just like they did some 50 years ago. Remember – the pub is the only place where you can drink cask ale.
Paul Nunny is a director at Cask Marque

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