Sunday, July 19, 2009

Economics 19/07/2009: 'Punter's perspective' in my INIA report

A quick reply to a box-out by Liam Fay in the main section of the Sunday Times with a critique of the Irish Nightclubs Industry Association (INIA) report, launched last week, which was prepared by me.

I like Liam's column and was certainly amused by his allegory for my economic career. Not being familiar with Mrs Sophie Ellis-Baxtor's career or personality, I would presume that Liam's reference is a positive one, especially given my suspicion that he is familiar with my established credentials as a champion of competitive and lower cost markets for consumer services and goods and the opponent of the rip-off culture that is a feature of some areas of our economy.

Liam has an acute eye for bulls**t and he spotted something that was missing in my report. "But one of the chief reasons most adults avoid nightclubs is the extortionate prices charged for booze. If Gurdgiev had surveyed the nightlife scene from the punter's perspective, he would've discovered that it's actually the greed of club owners that's killing the groove".

Liam is correct to say that my report was not based on the 'punter's perspective'. I was asked to provide a professional opinion on specific proposals presented by the INIA, not to conduct a general research into what is right or wrong with the industry. Like a lawyer providing a specific client advice, I have my remit and scope of research, and this remit is clearly identified in the title of the report.

But Liam is incorrect to imply that the different approach of my report somehow acts to glance over "the greed of club owners that's killing the groove". If high cost is a deterrent to night clubs attendance, then, as I hope Liam would agree, reducing this cost would help.

Reducing this cost can be done via many alternative ways. Cutting the price of drinks is one, but it is not the policy objective of any of our policymakers, so to deal with high cost of drink, induced by high taxation structure, in a legislative proposal framework would be a waste of time and effort.

Other charges do enter the determination of the cost of entertainment in a nightclub alongside the price of drink. My report clearly shows that these charges can be made more competitive, allowing a punter buying the same drink for the same price to enjoy more entertainment per Euro spent. These are:
  • longer hours of access to entertainment,
  • better quality of music and dancing environments,
  • more regulated and safer entertainment conditions,
  • better trained staff etc
These benefits are to be delivered as a result of the reforms I was asked to evaluate and these benefits surely provide better value for money to a punter. So, Liam's argument that high cost of drink matters to the decisions made by the punters does not clash with the report findings - it actually supports them.

I do not compare costs of drink in different types of licensed venues, nor do I provide any assessment as to whether a price of drink premium in Irish nightclubs over that of other licensed venues is out of line with other countries. My work did not require this and none of my conclusions depend on any assumptions or inputs relating to these, otherwise very interesting, comparisons.

But even if there are such differentials, to suggest that price of drink is high in the nightclubs (in absolute terms or in relative terms, compared to elsewhere) due to 'greed' of the nightclubs owners is simplistic. My report supplies evidence to show that, at least in part, the cost of drink in the nightclubs is driven by external factors other than 'greed':
  1. Table 1.6 on page 9, shows that annual licensing costs to operate nightclubs in Ireland are 8.91% of the total nightclub sector turnover. This is 31 times greater than licensing costs for operating an ordinary on-trade venue and 99 times greater than the off-license licensing cost;
  2. nightclubs have to maintain larger physical premises than other on-license venues (e.g at least 20% of the floorspace in the nightclub will be allocated to a dancefloor, which yeilds no drink-related revenue);
  3. nightclubs operate shorter daily and weekly hours (section 3.7 of the report and Table 3.7);
  4. nightclubs face higher rate of amortization of premises (section 3.4);
  5. nightclubs maintain higher ratio of staff to clients than oridnary venues (Table 3.7);
  6. nightclubs have higher capital cost per each person entertained than other on-license venues (section 3.7 of my report);
  7. Table 3.7 in my report clearly states various areas of operations, relating to technology, space utilization and staff requirements, where nightclubs are incurring higher costs than other on-license premises. In fact, of 10 areas related to the subject of my research, 7 show higher cost of operations for the nightclubs;
  8. Tables 3.5 and 3.6 show that out of the expected gains in alcohol sales of €122mln pa due to reforms, the Exchequer will receive some €62mln in alcholo-related tax revenues. Roughly 50%, overall value added to the Exchequer will increase by over 2 times tha rate of increase in the value added attributable to labour and 30% more than the value added attributable to physical capital stock. Since roughly 89% of this increase is expected to come from substitution away from home consumption of alcohol, these figures clearly show a vast differences in tax-induced costs of alcohol consumption at home and in the licensed premises.
The bottom line is - over 50% of what we pay in a nightclub for a drink has absolutely nothing to do with the nightclub owner's profit line. The above points - all clearly identified in the report - suggest that the cost of drink to the punter might be driven by the greed and/or other considerations of the Exchequer.

Once again, Liam is correct, this is not a report written from a punter's perspective. As much as I would have loved to work on such an exciting topic of research, limitations of time, resources and brief require that this research be postponed for the future. Economics, like legal profession, is a field of professional inquiry and this means that one works within a given brief.

However, I see no evidence to suggest at this moment in time that the industry I describe in the report is driven by some exceptional greed or short-termist pricing policies that are killing the groove.

If anything, there is evidence in the report to show that the opposite is true. For example, the proposals for nightclub permit set very strict and costly (to the owners) parameters for what constitutes a nightclub. This is not done because there is a pursuit of a groove-killing quick profit, but because the sector participants have recognised the need to explicitly focus on long-term sector development.

The end result of these proposals would be to deliver better value for money for the punters and safer and more responsible entertainment from the social point of view. These are hardly the reforms a 'greedy' profit-stripping business owner would subscribe to.

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