Research on the pub sector in Scotland phase 1: scoping study

Study to help Scottish Ministers to decide whether legislation on the operation of pub companies in Scotland needs to be introduced.

Executive Summary

Background and aim of the study

E. 1. The last few decades have seen radical changes in Great Britain's ( GB) pub industry, with the trade facing a wide range of social, economic and regulatory pressures. The main challenges include increased competition from cafes and restaurants, social and demographic change, improved home entertainment, individuals switching their alcohol consumption towards off trade sources (in particular purchases from supermarkets) and drinking at home.

E. 2. As a result, there has been a significant contraction in the size of the pub industry in GB over the last 30 years, from almost 70,000 pubs in 1982 to about 48,000 in 2013. [1] This trend is also apparent in Scotland; between 2005 and 2015, the market in Scotland declined by 23%.

E. 3. Since the early 2000s, concerns have been raised about the unfairness of the relationship between Pub Companies and their 'contractually tied tenants' in England and Wales. Four Select Committee Inquiries conducted between 2004 and 2011 identified two principle areas of malcontent which related to the level of rents and price of beverages charged by Pub Companies to tenants on tied wet contracts. It was alleged that these tenants were unfairly treated and suffered more significant hardship than those free of tie.

E. 4. The UK Government ( UKG) sought a voluntary approach to the issue and a series of Codes of Practice were developed and implemented between 2004 and 2013. However, in 2013, the UKG concluded that the voluntary approach was not working sufficiently well and that they intended to legislate on the issue in England and Wales. Legislation was passed in the UK Parliament in 2015 and 2016 which enforced a Market Rent Option ( MRO) [2] . This legislation does not apply in Scotland because the issue falls within the competence of the Scottish Parliament.

E. 5. Until the UKG indicated it would legislate on the issue, no robust representations had been made to Scottish Ministers by anyone operating in the tied pub sector in Scotland, including taking any disputes to established dispute resolution schemes (such as the Pubs Independent Rent Review Scheme ( PIRRS) and Pubs Independent Conciliation and Arbitration Service ( PICA)). However, legislative activity in England & Wales prompted requests to the Scottish Government from parts of the industry to evaluate the tenanted pub sector in Scotland.

E. 6. Following a competitive tender, CGA was commissioned by the Scottish Government to carry out research which sought to provide a robust evidence base which would assist Scottish Ministers in coming to a view as to whether legislation on the operation of Pub Companies in Scotland should be introduced and, if so, where the parameters of that legislation should apply.


E. 7. It was envisaged that the research would comprise two parts: a scoping study and a follow up detailed study. The scoping study, aimed to carry out case studies of operators across the whole pub sector in Scotland, to provide an initial assessment as to whether any part of the sector was unfairly disadvantaged (after taking into account the whole contractual package). This initial exercise also looked to inform whether there was a need for further investigation through follow on research.

E. 8. The detailed study sought to expand upon key results of the initial case study through a robust quantitative assessment of the market via interrogation of a wider sample of pubs.

E. 9. This report summarises findings from the scoping study. In order to provide as broad an evidence base as possible, CGA used a combination of bespoke, project specific qualitative and quantitative analysis.

E. 10. In total, 25 pub licensees across a range of different pub models participated in the research. Specifically, data was collected from 10 Independent Free Trade ( IFT) outlets, 10 Fully Tied outlets, 5 Partially Tied outlets and 5 Pub Companies. No managed businesses agreed to take part in the self-completion survey. Fieldwork ran from February to July 2016.

E. 11. In order to assist with the research, a Sounding Board was established. The Sounding Board comprised key stakeholders from the Scottish Licensed Trade, relevant trade associations and related businesses. The group's remit was not to discuss individual members' interests but to provide expert advice to the contractor through the commission.

Key findings

Market Conditions

E. 12. In addition to a 23% fall in pub numbers between 2005 and 2015, on trade sales of alcohol in Scotland dropped by 30.4%. While many people continue to drink alcohol, consumers have moved away from drinking in pubs to drinking at home. [3]

E. 13. Sales revenue coming from drinks sales, so called 'wet sales', dominate the tenanted pub sector sales in Scotland - representing over 80% of current sales. Other pub sectors in Scotland have less reliance on wet sales. In England & Wales a similar commercial situation exists. However, there is more of a structural limitation in Scotland, in that a large proportion of pubs have limited opportunity to change their offer from a sole wet led business.

Decision making process

E. 14. The three main factors that contributed to the decision making process of a licensee on which type of pub to choose were: the level of experience, the cost of entrance and the level of independence sought.

E. 15. In particular, the Fully Tied model appeared to be more preferable to those with less experience in the sector, who saw the model as a 'low risk, low cost' alternative. The cost of entry was estimated to be around 13 times lower for the Fully Tied model compared to a freehold purchase.

E. 16. Professional advice was available and actively sought by most licensees. However, the level of advice requested was directly linked to the level of knowledge and experience of the licensee.

Contract types

E. 17. Overall, there appeared to be limited flexibility to amend an agreed contract once a commitment was made within the current system. Fully Tied outlets had the opportunity to choose longer term lease options at the start of their agreement, compared to Partially Tied outlets. However, the latter appeared to enjoy less restrictive contractual arrangements.

E. 18. The degree of flexibility in contractual arrangements did not improve satisfaction levels of tenants. Overall, there was a general dissatisfaction with the tie itself (both for fully and partially tied outlets) and a feeling that there was an overall lack of support.

E. 19. Despite some dissatisfaction from tenants, at the time that the research took place, none of the licensees stated that they had referred a dispute to PIRRS or PICAS. This supported the view shared by Pub Companies that the overall level of serious dispute across the tenanted trade in Scotland was low.

Products & Services

E. 20. There was little difference in beer purchasing behaviour across the different pub models. Partially Tied licensees as well as IFT outlets were actively shopping around to obtain the most competitive price. There was also some evidence of 'local' flexibility from Pub Companies to Fully Tied pubs to purchase regional beers and Scottish spirits.

E. 21. Analysis of overall beer costs between all models showed a clear purchase price advantage for IFT businesses. The differentials between Partially and Fully tied costs were minimal. All pub models provided similar levels of historical price changes/uplifts that were within the expected parameters. Beer prices, however, did not appear to be a primary factor within the context of licensee disputes. Most disputes related to maintenance issues.

E. 22. Special Commercial or Financial Advantages, or as more commonly known SCORFA benefits, were considered to be an important part of the Pub Company and Tied licensee relationship. The research found that Fully and Partially tied outlets undervalued SCORFA and there was a lack of understanding regarding all the potential benefits available.


E. 23. Analysis of the financial data showed that while turnover was very similar across the different pub models, there were some marked differences where IFT outlets outperformed the other models. In particular, IFT pubs recorded higher profit margins and a higher liquidity ratio. Overall, IFT pubs appeared the most robust and solvent businesses.

E. 24. Between Fully and Partially tied outlets, there were financial variations. However, due to the limited sample and data collected, it was not possible to conclude whether any specific model was unfairly disadvantaged compared to the other from a financial point of view.


E. 25. The research found that the on trade market is currently a difficult area in which to operate a retail business. There are significant financial difficulties driven by social, legislative and economic changes. These factors have impacted adversely licensees, Pub Companies, brewers and wholesalers. As a result, pub closures are likely to continue.

E. 26. Overall, the evidence collected did not suggest that any part of the pub sector in Scotland was unfairly disadvantaged. Despite some dissatisfaction among tied licensees with their contractual agreements, none of the licensees stated that they had referred a dispute to PIRRS or PICAS.

E. 27. Despite variations in beer prices or rent across pub types, these were not identified as areas of dispute. The main concern voiced was on maintenance and pub upkeep issues.


E. 28. The evidence collected did not suggest that any part of the pub sector in Scotland was unfairly disadvantaged in relation to another. As a result, further dialogue between the relevant trade bodies, government, and other interested parties, should continue before making any changes to legislation.

E. 29. Based on the findings from the research, it is clear that there is more work to be done in ensuring that the relationship between Pub Companies and tenants is further strengthened and clarified. Further clarification is also required on beer costs, the cost of entry into the sector and the value of SCORFA benefits.

E. 30. The contractor faced significant challenges in recruiting licensees and Pub Companies to participate in the research, created by an apparent unwillingness to engage on the subject at a detailed level. As a consequence, it is recommended that a further more detailed study should not be undertaken without a significantly increased level of interest and involvement from the wider industry.


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