Looking at the books of a once-mighty brewing company reveals some sticky lessons in the world of economics.

For a man who often has beer on the brain, Mark Wilson confesses that he doesn’t actually drink the stuff all that often.

“I’ll pop over to the local pub on a Thursday, but I don’t keep beer in the fridge at home. I drink a lot more wine,” he says.

Whatever he prefers on the palate, there’s no getting around the fact that the amber ale is never far from top of mind for this economist. He’s writing a PhD that draws deep on the accounting history of Tooth & Co., once one of the largest breweries in Australia. By doing so, he plans to see how franchising theories play out in a real-world case study.

At the height of its success in the 1950s, Tooth & Co. laid claim to more than 80 per cent of the beer market in New South Wales. Sydney was the epicentre, home to the company’s breweries and most of its pubs. At one point, more than half of the 650 drinking holes in the Metropolitan Licensing District were either owned or leased out by the brewer. As Wilson puts it, you could barely walk a city block without tripping over a Tooth’s establishment. But the company’s fortunes faltered in the 1980s, and its assets were eventually sold off to what is now Fosters.

In the subsequent years, decades’ worth of Tooth’s accounting records and board minutes were deposited at the Noel Butlin Archive Centre at ANU. These files and ledger books are preserved in acid-free boxes, taking up more than one and a half kilometres of shelf space. A large part of the collection consists of yellow cards, about the size of 12 coasters or so, on which company employees recorded an array of information about each of the brewer’s managed and leased pubs, and even about its competition. Each card describes 10 years of a pub’s history and normally includes a contemporary photograph of the hotel exterior. These records cover basic bookkeeping – licensee details, total beer and spirits sales, lease terms and rent paid – but also what Wilson describes as metadata: the distance to other pubs, the kind of district in which the pub was located, whether or not there was a TAB outlet nearby.

“The advantage of studying this case is that the source of information has no incentive to be biased,” Wilson says. “This data is coming from board decisions and comments, something that was never going to be sent out to the public. The company wouldn’t have lied to itself; the reasons that are given by management should be honest. You can find things in the archival sources that no one would ever have dared speak of outside the company.”
Before its demise, the company recognised the historic value of its records and allowed previously confidential information to be viewed by outsiders, even economists. Wilson considers the information to be gold on tap. By studying it closely, he’s been able to build up an honest and detailed picture of the relationship between the brewer’s head office and its franchises, and how this related to comparisons between the company’s managed and sublet hotels. In the process, Wilson has also been able to observe how regulatory changes around the sale and service of beer were reflected in the company’s books.

“When I first obtained the records that showed the financial performance of the managed hotels, it was quite clear that Tooth & Co. made quite a bit of money out of these. The next question was obvious: why didn’t they manage more?”

Wilson says practical limitations come to bear on retailers when they expand rapidly. Unless a company wishes to invest a lot of its money and effort in setting up extensive management structures, it will eventually exhaust its ability to control retail outlets. This is the impetus behind franchising, which is the business model of choice for many current retail giants: McDonalds, Starbucks and Donut King, for example.

Yet when he looked at the records for Tooth & Co., Wilson was puzzled. “It did seem to me that they had fewer of the pubs being managed than you would think if short run profitability was driving their decisions,” he says.

“Franchising literature explains what they call the ‘dual distribution mix’, or the ratio of company-operated to franchised outlets. The one thing that struck me, which has only really been mentioned once or twice in the literature, to some extent, is that large franchise chains use the performance of the managed outlets as a benchmark of what they expect from the franchised outlets, and then also vice versa. They use the performance of the franchises to try and motivate the managers.”

In order to illustrate this broad principal, Wilson narrowed in on a specific aspect of the Tooth’s empire, limiting his study to the 30-year period leading up to 1965.

“I’m studying how the company used the financial performance of its managed hotels to reduce the cost of contracting out the sublet ones,” Wilson says. “Specifically, I’m tracking how much goodwill arose in the sublet hotels.”

In financial terms, ‘goodwill’ describes intangible assets such as reputation, which might build up around a company’s name, or, as was the case with Tooth’s leased premises, the services of a publican. Wilson’s work charts how this goodwill affected how much the company charged its licensees in rent relative to profits.

“In hotels where the goodwill was extremely high, Tooth & Co. could have been charging higher rent. But they didn’t want goodwill to disappear entirely, because they wanted to motivate people to build up the business.

“But, all other things held equal, if you’ve got poor information about the profitability of a particular hotel, the difference in the information set between the guy at the coal face and the brewery is relatively great. It’s more likely that excessive amounts of goodwill would build up in those hotels, because the brewery ended up charging a lot less rent than it probably could get away with and still motivate the manager.

“Now, if there is a company-operated hotel next door, you’ve got a very good idea of how much it costs to run a pub there, and you’ve got a very good idea of demand. In those cases, the amount of goodwill that builds up shouldn’t be enormous. In cases where there isn’t a company-managed hotel in the suburb or in the adjoining suburb, your information is much more dependent on what the tenant tells you. It’s more likely they’ll be able to fib or understate things, so the tenant will be able to sell out with a great deal more goodwill.”
By observing how a major franchise system played out in the real world, Wilson is also able to reflect on the implications for economic theory. He says that the Tooth & Co. case is representative of the problems facing any manufacturer who needs to exert some sort of control at the retail end. “It pertains to any case where effort at the retail stage matters to the manufacturer. Food is a good example. Part of the production process doesn’t finish until it’s in the customer’s hand.”

Aside from providing an amber-tinted illustration for otherwise dry economic theory, the accounting history of the once-great brewing company has also allowed Wilson to chart major social shifts concerning the sale and consumption of alcohol.

As was its inclination in so many other areas at the time, Australia followed Britain’s lead during World War I, legislating so that all pubs had to shut at 6pm. While the mother country lifted this requirement soon after the war, in Australia it remained in place until 1955.
Wilson says that the lifting of the curfew had a direct effect on where pubs could be operated, but also on Tooth’s ability to manage its own hotels. Before 1955, pubs were concentrated in the inner city, close to where people worked. In the evenings, flocks of thirsty employees would flutter to their preferred watering holes, forced to drink their fill in the short period between home time and the six o’clock close. Once this restriction was lifted, pubs were able to stay open later, which meant they could migrate further out into the suburbs where people lived. This diaspora also meant that pubs were moving farther away from the brewer’s head office. “The usefulness of having all these company-operated hotels reduces after 1955, partly because hotels started scattering out into the suburbs,” Wilson explains. As the ratio of sublet hotels increased, so too did the importance of accounting information in determining things like rents and goodwill.

So there you have it: economics is not just for the world of fusty financiers. Wilson’s work shows that dry theory has a place in describing even the wettest of activities, provided there is some sort of commercial relationship being transacted.

The lure of the schooner has helped the economist attract new audiences to his work. “I’ve managed to explain what I’m doing to people in pubs on George Street [in Sydney]. It obviously helps that it’s about pubs, then a lot of people are interested because it’s about beer. It’s certainly a lot easier to talk about than the economics of joint venture contracts between US multinationals and their Chinese partners.”

We can all drink to that.

^^

ANU Reporter 
Spring 2007