Re-bottling of an industry

The big British breweries are moving away from pubs and consolidating. William Kay and John Shepherd look at a sector in ferment again

FIVE years after Lord Young, the then Secretary of State for Trade and Industry, attempted to break up the market dominance of the brewers with the Beer Orders, the brewery industry is in ferment again. But this time a chain of events appears about to unfold that will be considerably more far-reaching than before. It will affect nearly every pub in the land and may cut the present big six national brewers to a choice of just three.

On Friday, Grand Metropolitan and Courage, the UK subsidiary of Foster's Brewing Group, announced a revamp of their jointly owned pub company, Inntrepreneur Estates - which was a direct creation of the Beer Orders and controls 6,500 pubs.

At the end of January, while Grand Met and Courage will remain 50/50 shareholders, management of Inntrepreneur will switch from Grand Met Estates to its own independent management teams.

By the end of this month, the 320 Chef & Brewer pubs owned by Inntrepreneur and leased to Scottish & Newcastle will be transferred to a subsidiary of Morgan Grenfell, the merchant bank, in a pounds 203m deal.

Lord Sheppard, Grand Met's chairman, said: ``The immediate impact will be to reduce significantly our management involvement in Inntrepreneur, allowing us to focus on our international food and drinks businesses.''

With those words, Lord Sheppard almost certainly bowed out of pubs, having sold Grand Met's Watneys breweries to Courage in the deal that set up Inntrepreneur. Industry insiders are convinced that Courage and Inntrepreneur are being tidied up either for a stock market flotation or a trade sale. The likeliest buyers are Whitbread and Scottish & Newcastle, the two groups fighting it out neck-and-neck with market shares of 13.5 per cent and 13 per cent respectively.

The Inntrepreneur revamp is believed likely to be followed by an unscrambling of Allied Domecq's 50 per cent stake in Britain's third-biggest brewer, Carlsberg-Tetley: the other half is owned by the Danish Carlsberg group. An announcement could accompany Allied's interim results on Thursday. Allied's chief executive, Tony Hales, has made little secret of his wish to emulate Lord Sheppard and get out of brewing. Again, Whitbread and S&N will probably be at the head of the queue for any assets that go under the hammer.

These are only two of the deals in the pipeline as the beer industry takes a long, hard look at itself after living with the once-hated Beer Orders since 1989. Despite the recession, most beer groups have emerged from those five years fitter than they were, and are now ready to redesign the industry for the 21st century.

By the end of the decade, there will be thousands fewer pubs, and far fewer pub companies, than today. The big six brewers could shrink to just three or four.

In the process, many more town pubs could be turned into restaurants or leisure centres, while their rural counterparts face the threat of a new breed of mega-pub.

The word ``pub'' may even become a misnomer as the traditional boozer is relentlessly erased from the system, with companies such as Whitbread starting to buy farm buildings to open ``superpubs'' some three times bigger than the normal sized hostelry. The potential economies of scale are all too obvious: a quiet pint is likely to become more elusive.

The Beer Orders stemmed from a 500-page review of the industry by the Monopolies and Mergers Commission published in March 1989. That concluded that a ``complex monopoly'' existed in favour of brewers who made, wholesaled and retailed beer through the long-standing system of tied houses.

Lord Young was vilified a few months later for ordaining a watered-down version of the report's recommendations. This still enraged the industry while prompting consumer groups and political opponents to accuse Young of being in the brewers' pockets. The so-called ``beerage'' have traditionally been large contributors to Conservative Party funds, even though in recent years there have been fewer of the peerages that gave rise to the epithet.

The top six beer groups were ordered to sell half their pubs in excess of 2,000 each - a total of 11,000 outlets. The big groups' tenants, as opposed to their directly managed houses, would be able to stock a ``guest'' beer made by a rival and buy low-alcohol and soft drinks from any source.

The Consumers' Association called the package a ``disappointing compromise''. Bryan Gould, now departed back to New Zealand, but then Labour's Trade spokesman, said it was a ``craven and complete capitulation'' to the brewers. Allied said it would continue to oppose the proposals, but the City had clearly been fearing far worse: the sector's share prices rose when the Young formula was published.

The brewers are unlikely to admit publicly that the Beer Orders did them a monumental favour by awakening them from their slumbers, and bringing about necessary change that would have been forced on them eventually - but that is what has happened. At the very least, it has made the main players focus on what they are supposed to be doing, and what they can expect to get out of continuing in the beer business. Since the enforced sell-off of 11,000 or so pubs under those Orders, the truly free-trade share of the pub beer market has risen from less than 40 per cent to around 45 per cent and continues to climb. Free trade, including off-licences, is currently around 60 per cent and is expected to rise beyond 70 per cent in the next five years.

These statistics, despite being cast against a backdrop of declining beer sales, mean that the brewers are almost compelled to improve market shares by pitching for free-trade business, armed with a concentrated portfolio of beer brands. In the past, they have relied on beefing up market shares through gaining more pub licences, but this route has been choked by the natural contraction of the pub market itself.

The prime driving force behind the change is the stark fact that beer consumption in pubs is now at its lowest since the end of the 1960s and, allowing for artificial blips in long hot summers, looks set to continue falling. By the turn of the century, the brewers will have the capacity to produce an extra pint for every four pints they expect to sell - unless, that is, they close more breweries.

Overall, competition among the big boys has intensified since the Beer Orders finally became law two years ago, after a three-year run-in. Bass, the market leader, and Courage have been the main sluggers in a profit-damaging price war in the wholesale market. Discounts of 40 per cent on a barrel of beer have been common. But like most price wars, the ground gained has been nil.

The origins of the war can partly be explained by a need to recoup business lost through the sale of pubs. The more fundamental reason, however, has been the widening gap between the amount of beer the industry can produce and what is actually being consumed. Something in brewing has had to give. Many big breweries have already been closed, and the pain has been shared fairly equally among the leading companies. The problem now, though, is who will make the next move.

``Change is inevitable,'' says Miles Templeman, managing director of the Whitbread Beer company.

Whitbread's interim figures last week revealed a crisp picture of the shift in drinking habits and tastes. While half-year pre-tax profits rose from pounds 132.3m to pounds 143.1m, turnover was just 3 per cent higher at pounds 1.22bn. Peter Jarvis, Whitbread's chief executive, revealed that cask-conditioned ales, downtrodden for many years by the prolific advance of lagers, are back in fashion. Premium lager sales, at the expense of standard brands, are also growing - and so too are stouts.

These three specialist categories are faring considerably better in the licensed on-trade than dozens of other standard beers. But the overall pub market is flat. According to Whitbread, drinkers in pubs, clubs and restaurants drank 3.7 per cent more premium lager, 6.6 per cent more cask ale, and 4 per cent more stout in the six months to the end of August, compared with the same period last year. But pub sales fell by 1.7 per cent, while 5.9 per cent more went through off-licences.

The trend to home consumption may have been stimulated by burgeoning cross-Channel traffic in duty-free drinks, further loosening loyalties to the local pub.

The message coming through is that the customer is prepared to pay more for better quality. Good news for cost-efficient brewers, who stand to cream off a greater profit margin on premium products. Tougher for the more change-resistent backwaters of the trade.

Higher living standards and more competition from other drinks are just two factors forcing a rethink in brewing parlours. Until the 1970s, a million males replenished lost body fluids after shifts in steel foundries, coal mines and shipyards by downing 40 per cent of the beer produced in the UK. They overlapped with and were succeeded by the teenage and 20-year-old 10-pints-a-night session drinkers that became such an unlovely feature of the ``loadsamoney'' 1980s.

Those days have gone. The boozer is dead, long live the pub-restaurant, the leisure activity pub, the pub complete with purpose-built cheap hotel accommodation and many more variations.

The big brewers and pub operators, ever alert to changes in the market, are reacting accordingly. And their strategic shifts will have an inevitable impact on the smaller brewery brethren.

The regionals face an uphill struggle to keep pace with change and hold market shares. The Beer Orders have not proved as advantageous to them as originally thought. More than three-quarters of the pubs that had to be sold by the big brewers were unviable businesses, protected for many years by a large parental umbrella. They were quite rightly labelled by potential buyers as ``bottom of the barrel'' outlets.

The regionals gained little by buying the best dregs from that miserly barrel. But that has not deterred a succession of enthusiastic entrepreneurs, from George Walker onwards.

Ushers of Trowbridge Group is in the throes of gaining a stock market listing, which it will use to buy small, and possibly financially stretched, pub companies. The market is so soggy that it should not have to pay over the odds.

But Ushers does not have the the field to itself. Powerful companies such as Labatt's of Canada are also in the hunt.

Labatt's, as big in beer sales in its home country as Bass is in the UK, has come from zero to 500 outlets in less than three years. But, like the established UK brewers, it understands the growing importance of brands.

Michael Izza, Labatt's UK managing director, said: ``We took the decision of getting into pubs to control distribution. As a brand owner we found it difficult to get distribution in a market that was not free.

``Of all the new pub companies, we are one of the few that is going to stay around.''

While that may work for an international group such as Labatt's, the industry believes that the smaller regional brewers will have to come to terms with joining forces with generations-old rivals as they exhaust the few remaining growth opportunities: sweating more out of pubs by concentrating on food, increasing beer sales in the take-home trade through putting gas-filled widgets in cans, and cutting brewery costs.

The impending sales of Courage and Carlsberg-Tetley could have the effect of dropping two boulders in a pool. The resulting waves could drown some of the tiddlers, and make the survivors rethink their strategies.

If capacity has to be taken out, a takeover of Courage, which has five breweries, is the most obvious way of achieving that. Besides stripping out vast amounts of costs by closing some of Courage's breweries, a successful predator would gain three of the top 10 selling beers in the UK and Courage's dominant 40 per cent share of national accounts, incorporating big drinks buyers such as First Leisure, owner of the Blackpool Tower and other recreational areas where large quantities of beer are downed.

Profit margins on those national accounts have been squeezed hard. Brewers have almost had to give beer away; price freezes for five years are not uncommon. Concentration among the brewers would therefore swing the bargaining pendulum back towards the brewers who would by then have solved the capacity problem and could afford to start being choosy about whom they sell beer to. The scope for big corporate buyers to shop around for the best deal would be reduced considerably.

Moreover, the extensive beer brand portfolios will shrink. Big brewers have already started to reduce the number of popular beers they offer, such as standard lagers and keg bitters.

However, as so often, the regulators may have the last word. Sales of Inntrepreneur or Carlsberg-Tetley would be easily big enough to attract a reference to the Monopolies Comission, which could lead to another investigation into one of Britain's most-investigated industries.

And then there is the European Commission. The UK currently has a block exemption from laws that bar brewers from controlling more than 1 per cent of the retail market. That is up for review in 1997.

It is a moot point whether any of the industry's leaders have a clear vision of the future. Goldman Sachs, the securities house, has published an in-depth study of the drinks sector in which it sees Bass as ``the power play'' and Allied's outlook ``improving''. But the firm adds: ``The possibility of industry consolidation does not make us more positive towards the sector.''

(Photographs and graph omitted)