Investment: Should you invest in... breweries?

FOR SOME time, the brewing sector has had to share its billing with pub and restaurant companies. Now the traditional brewing business is seen as the least attractive of the three, even by companies long-established in the sector.

"We are not keen on brewing per se," says Finlay McLaren of Edinburgh Fund Managers. "It is not an attractive business because brewing volumes are in decline."

The Share Centre's Damian Larkin says: "The UK brewing market remains very complex. It is still oversupplied and vulnerable to increased imports. Demand hasn't been favourable either."

Brian Tora of stockbrokers Greig Middleton says: "It is a mature sector that changed from being a brewing-driven industry because the 1989 Beer Orders limited to the big brewers to owning 2000 pubs.

"So they have been churning their pub estates but retained brewing, because it can maintain good volumes and good margins. You cannot get many more synergies out of brewing, so these companies have been looking at where they can get the best return, and that is not necessarily from making beer."

Christopher Willmott, director of institutional equities at Hill Samuel, says: "Companies are focusing on either brewing or pub retailing. For companies that can get either of those businesses right, the potential for enhanced returns on those businesses could be huge."

The emphasis is increasingly on those outlets which sell drinks rather than make them. " `Concept retailers', such as Yates and Wetherspoons, have tended to be new developments, so they are not saddled with pubs in unattractive locations," says Billy Whitbread, manager of Aberdeen's Taverners Investment Trust, the only UK-based fund to concentrate on the sector. "The national brewers made the mistake of trying to shoehorn their assets into the concepts they already have."

The picture is similar for the major drinks retailers of the Beverages sector. Christopher Willmott says: "Some of the increases in sales volumes of individual spirits brands have been very impressive, but the question is, `What is happening to the bottom line as overall volumes are remaining stable?'. The companies which were successful have a few premium brands but they have been driving those brands very hard. The problem for the international spirits companies is that their tails are very long - they have a lot of brands that are not profitable."

As far as UK investors are concerned, "international drinks retailers" means Diageo and Allied Domecq. "For both companies, the real story is this dichotomy of premium brands and tail brands," Mr Willmott adds. "The holy grail is to find a spirit brand equivalent of Coca-Cola and they haven't got there yet. Most investors are waiting to see whether the creation of Diageo has been a success."

Damian Larkin says: "The outlook for spirits companies is still grim. We have seen Diageo making itself bigger in order to make itself better and we are still waiting to see if that has actually worked. But what it has done is force Allied Domecq to take action of its own."

Which leads us back to the business of brewing and pubs, because Allied wants to offload its pub estate, with Whitbread the front runner to buy. "There is a feeling Allied is negotiating from a position of weakness and really should be seeking some higher bids," he adds. "But who- ever wins the battle for Allied's estate at the right price is on to a winner, especially if it goes to Whitbread or Bass who have shown they know what they are doing. Allied should also be able to do something with the cash to enhance earnings."

For small brewers, the picture is less positive. "Regional brewers tend to concentrate on real ales and real ale volumes fell quite significantly last year," says Finlay McLaren. "There is no particular demand for beer." Brian Tora says: "Regional brewers can survive only if they get their marketing right. They have either got to have a good brand or the size of their pub estate must match their capacity in order to maximise cost efficiency".

Billy Whitbread says: "I have invested a little in regional brewers recently, as some of these are really tenanted pub companies with breweries attached. They are steady earners.

Fuller Smith & Turner has recently produced the very strong `Fine Line' pub concept. It is a well-managed company operating almost as if they were a concept retailer but as a brewery. They still have a very strong beer brand in London Pride, which is increasing at 15 per cent per year, and a very conservative accounting policy."

Prospects for smaller retail companies are much brighter. "I invest in the smaller companies," says Billy Whitbread. "I think we are going to see some good news there. Surrey Free Inns, my biggest investment, is already running 7 per cent ahead on a like-for-like basis."

Whitbread also has positive words for his fund's second-largest holding, Enterprise Inns. "Enterprise Inns has just done a stellar deal with Century Inns, which will probably give it a 10 to 15 per cent earnings enhancement next year. People are realising that tenanted pubs are very steady earners."

Finlay McLaren says: "One of the key factors has been the break-up of the vertical integration of the brewers, following the 1989 Beer Orders. Since then, independent retailers have been calling the shots more and more."

Things may be changing. "Effectively you have two major brewers and the balance of power may moving back to them," he adds. "As the independent chains get bigger, they have to source from major suppliers, which limits their choice."

The major effect of the beer orders has been to force brewers to decide whether they wish to be either producers or retailers.

Brian Tora adds: "Bass said last week it is committed to brewing and wants to develop its estate, but they can't get any bigger in pubs. They will look at which business offers the better prospects and probably float the other one off."

Damian Larkin says such diversity is positive. "If there were any major companies that were just breweries, we would not be very keen," he says. "But Bass also has an excellent Hotels & Leisure business and so does Whitbread. Bass' hotels business is up 30 per cent and there is good growth in some of their branded pubs as well."

Finlay McClaren says: "The major operators have been reducing the discount on beer sales in recent years and there is very little opportunity to squeeze more out of that side, so they are going to have to increase the amount they get from their tenanted pubs.

"As a result, you are going to see a drop in the earnings from these tenanted operations, which, in turn, will reduce the amount of capital flow from these businesses. Which is why the tenanted pub companies have to keep doing deals in order to move in the right direction."

Damian Larkin says: "Our view on the sector is similar to that for the economy as a whole, in that it has been poor for a while and looks likely to improve. That is why sentiment has been improving and was backed by the Bass statement. Although its profits were down on expectations, the fact that trading was up over recent weeks is a positive sign."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement