Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 206 - 219)




  206. Good morning, gentlemen. Could I welcome you to this session with the Committee, the first session of the new year, and could I ask you, please, for the purposes of the record, to introduce yourselves to the Committee?
  (Mr Stewart) Could I start? I am Brian Stewart, Chairman of Scottish & Newcastle.

  (Mr Gibb) I am Richard Gibb, I am the Director of Corporate Affairs for Scottish & Newcastle.
  (Mr Sharp) I am Russell Sharp, I am Managing Director of Caledonian Brewery.
  (Mr Hayward) I am Rob Hayward, Chief Executive of the Brewers' and Licensed Retailers' Association.

  207. Thank you. Can I say how nice it is to have a former colleague, Mr Hayward, appear before us on this occasion. Welcome.
  (Mr Hayward) Thank you.

  208. Could I ask if both organisations would like to make a brief opening submission to the Committee, but not a submission that would pre-empt our agenda for this morning?
  (Mr Stewart) We would be delighted to do that. We are very pleased that two Edinburgh breweries are appearing here side-by-side this morning to present to the Scottish Affairs Committee, and we are delighted to contribute to your deliberations. Scottish & Newcastle is part of an industry in Scotland that has gone through a tremendous period of change. In the late-80s/early-90s we were probably a northern regional brewery in the UK expanding south; today we are the number two brewer in Western Europe, so we have seen, in a period of ten years, tremendous change. We are an international business based in Scotland, and that will be the increasing focus of our development, and we hope that your deliberations will make it easier for us to continue to expand in an international capacity, and grow and develop that business. We have got a number of public policy issues which, inevitably, affect us, whether it is as a smaller brewer (as Russell will address) or us as a larger brewer. These involve issues such as duty, regulation and, frankly, the general framework of industry activity. So we are delighted that you are taking a specific interest in the drinks industry. I think it may be easy, at times, to lose track or sight—indeed we do ourselves—of the scale of our business. Scottish & Newcastle has 60,000 employees, we have about 4,000 employees in Scotland and we produce an enormous amount of beer both here and internationally—it is something like 30 million hectolitres, and if we translate that into the mundane subject of pints of beer dispensed, it is about 15 million pints of beer per day every day of the year. So that gives you some idea of the scale of our business in terms of numbers of employees and the extent of our activities, which are now, increasingly, international—predominantly in Europe but also worldwide.

  209. Thank you, Mr Stewart. Mr Sharp?
  (Mr Sharp) I will endorse Brian's remarks and thank you for the opportunity to address you. Our brewery is of a slightly different scale to Brian's. It was built in 1869 and was about to be closed by Vaux Breweries in 1987 but myself and some colleagues purchased it by a management buy-out. We started with no business whatsoever—zero barrels—and we are now up to 80,000 barrels per year. That has come about in a very competitive environment, which goes to show that small brewers can exist in a bigger world. Like Brian, I see the future development of Caledonian as, really, being export driven. We are about to conclude a major export distribution deal in America and that, really, will be the focus of our attention in the years to come. We still consider England as being an export market as well, but increasingly we will be looking to North America as the focus for our business. We employ 40 people directly on site, and interestingly each of these contributes to the Exchequer something like £150,000 a year in excise duties, NIC, VAT and Income Tax. So it is a high revenue raiser for Government. As I say, we are small, but determined to survive in a very competitive world.

  210. Are you ever confused with Tennent Caledonian?
  (Mr Sharp) No. I think they sometimes get confused with us!

  211. Can I thank both of you for your brief statements and for highlighting the importance of this industry to the Scottish economy, which is exactly why the Committee decided to hold this inquiry. Could I begin our questioning by turning to the changes to the Beer Orders of 1989? As you know, on 1 December of last year the Secretary of State for Trade and Industry announced that, acting on advice from the Director General for Fair Trading and following a review of the Beer Orders, there would be a revocation of some of the Order's provisions due to changes in the beer market. The guest beer provision would remain in place, as would the ban on brewers preventing a pub continuing as such when resold. What will be the impact on the brewing industry in Scotland of these proposed changes?
  (Mr Stewart) Russell will have his views and we have ours. My view is minimal. In very simple terms, the Scottish beer market, unlike England, was always a free trade market, so it was never dominated by the extent of the tied trade that you saw throughout the rest of the UK. So even when the Beer Orders were introduced, the impact on Scotland was significantly less than the rest of the UK. I think, in terms of guest beers, all of us recognise the need for excitement in terms of selling beer into the market, but I think guest beers—and Russell, on occasions, will be a guest beer—has added another dimension to that market. I welcome the continued provision for guest beers.
  (Mr Sharp) We were unusual (although it has become not unusual now) in that when we started off there was never an intention to own pubs. The philosophy of the brewery was to brew beer that was of a sufficient quality to end up in other people's pubs. So, in fact, Beer Orders, to some extent, did help us in those early days, as Brian says, as a guest beer. Now we are happy to be on a more permanent basis in a lot of bars, so I would say the changes happening do not affect us. We have always competed in this market purely as a brewer with no tied estate.

  212. Are you saying there is no difference in the impact of these Orders on small, independent brewers as against the very large brewers?
  (Mr Stewart) I think we would have to distinguish between Scotland and England in those circumstances. I come back to it: in Scotland there was not the tied estate base that there was in England. I would think there are less than 700 brewery-owned outlets in Scotland, whereas when you move to the south you are seeing thousands of pubs that were owned by the brewers. Therefore, the guest beer provisions were more relevant in that market. So I think for small English brewers the guest beer provisions were really important.

  213. What percentage of Scottish pubs would that 700 represent?
  (Mr Gibb) Slightly more than 10 per cent.

  214. The memorandum from Tennent Caledonian Brewery argued that "the strength of the UK brewing industry has weakened appreciably in recent years, resulting in the decisions of both Bass and Whitbread to forsake their heritage and exit the brewing industry". Which competitive pressures—for example, global competition, branding and the need to improve productivity—have had the most impact on UK brewing over the last five to ten years?
  (Mr Stewart) I think the Beer Orders had an effect in terms of the breakdown in vertical integration, because historically—if you looked at it—people, I think, took a longer-term perspective when you were a vertically integrated brewer; you had the capacity to rely on your tied distribution network to, probably, take longer-term decisions. The market itself has evolved dramatically over that period of time, with changes in retail offers and the investment that has gone into retailing, including a tremendous degree of investment in retail in Scotland—the quality of the pub market in Scotland has risen dramatically over the past ten years—and the offers that are made have improved significantly. So I think it has been consumer-driven change coupled with statutory regulations that came in in 1988, 1989 and 1990.

  215. Are you aware of any competitive pressures which have had an undue impact on Scottish brewers? Has Scotland's share of the UK brewing industry decline over the last five to ten years, or has it gone up?
  (Mr Sharp) I am not aware, from our point of view, because increasingly we have been exporting beer to England, and we see that as quite a vibrant market for us. We trade with other brewers in England and also pub groups. We set our stall out as a unique product which is Scottish. We are very unashamedly Scottish and Caledonian is a name which brands itself very well, not only in England but throughout the rest of the world. We have not seen these pressures so much as the larger breweries.
  (Mr Stewart) I think we would have to highlight the growth of the off-trade market as being an area where you would see increasing pressures. The growth of the off-trade market means that you have to buy more cans, more bottles, and package them through high-speed production facilities, so it is not just a question of producing and brewing, it is the issue of logistics: the logistics of delivery of packaging materials into your site and then the logistics of the withdrawal of that product into the market. I think logistics are a key issue for Scotland in terms of a bulk producer such as ourselves. So I would have to say that I suspect—and we can provide you with information on this—that our share of that manufactured in Scotland has probably declined over the past ten years. Part of that is to do with the growth of lager brands as well, but the issue of logistics is inevitably with us.
  (Mr Gibb) The other point I would like to add is that notwithstanding the success of people like Russell and our own commitment to McEwans and Tennents, the proportion of beers sold in Scotland which are international brands is rising, and that applies to beer markets the world over. So there are a number of large brands taking an increasing amount of sale in any market, and Scotland is not immune to that process, though there are still very strong local brands.

Sir Robert Smith

  216. Just a point about the 10 per cent end of the Scottish market being tied, I was wondering if there was a gradation for the other 90 per cent, between how much they related to one brewer and how much they related to the whole market?
  (Mr Gibb) Not that we can give you off the top of our heads. The character of the market now and the character of the Beer Orders, again in respect of the tie, has reduced the issue of sole supply. So the ability of those customers to have a multiple choice portfolio is there, and in general the reasons they do not will relate to convenience in respect of logistics of distribution. It may suit, particularly, a relatively small outlet to only take supplies from one brewery, but there are not market competitive structural reasons for that to be the case. That will tend to be logistical.
  (Mr Stewart) Even where we use the term "tied" through our owned outlets we will sell some of Russell's beer. We will sell beer from other regional brewers in England because it is to increase the offer to the consumer and to get the excitement of the retail outlet. So it is not the idea that it is totally constrained to Scottish & Newcastle products.


  217. When did this all come about? It was not always the case. Were you forced to do it?
  (Mr Stewart) We were forced by consumers to do that as well as by government. I think sometimes people imagine that it is the guest beer orders that drove the promulgation of Russell's brand. Russell's brand is strong in its own right and we are here to service consumers with our own brands as well as others. So it is, I think, enlightened self-interest to offer the consumer what he wants, even if it looks marginally at the edge as if you are giving away some of your own sales.
  (Mr Sharp) As far back as 1987 when we started, we sold beer to Scottish & Newcastle houses. It was useful for us in the very beginning, just to become established. There is that camaraderie, if you want to call it that, amongst brewers. There is support. We will compete against each other but we have helping hands.

Mr Brown

  218. Can I come back to the point you made, Mr Stewart, about the impact of the trend for people to be drinking within their homes. Are you able to say, at this stage, just how much impact that has had in percentage terms on your market? Obviously, there have been difficulties of packaging that for people, but what percentage of your business has now gone into that?
  (Mr Stewart) About 30 per cent of our business is consumed in the home. It has roughly swung at 1 per cent per annum. So if you went back to 1990 it would have been 20 per cent. That is a major transformation.
  (Mr Gibb) That is within the context of a total industry which has shrunk, so the degree of decline in the on-premise is even greater.
  (Mr Stewart) This is being volunteered just for illustration. I think sometimes people forget the cost structures that are associated with on-trade premises that have come through over that ten years; whether it is the demand for higher level facilities, certainly, but regulation has come into that area in terms of a whole raft of issues that we have had to deal with. We have currently got the environmental legislation coming through which will put pressure on on-trade outlets in Scotland. So you are seeing a lot of cost pressures in the on-trade that are not necessarily replicated in the off-trade[4].

Mr Clarke

  219. Welcome here. It is getting nostalgic for me because I was born next to your brewery. We had a brewery at the back of us called Bernards Brewery. We have had evidence from the Soft Drinks' Association that small companies are being forced to close because of competition. At the European level, they say, there has been extensive consolidation of the brewery industry. Of course, there is the situation where it could be argued that the process of consolidation of the UK brewing industry appears to be driven by the need to seek economies of scale in both production and marketing. I will not mention the rest of it because it goes on to talk about Bass and Interbrew, and I do not think that is the thing to bring up at this stage, because of what has happened. Has the process of closure caused by inability to compete against industry majors occurred in the brewing industry in Scotland? Do you think smaller Scottish-owned companies are finding it increasingly difficult to compete, given the rise of multinational brewers? What kind of advantages result from being part of a larger company, and how does it affect small companies to deal with this?
  (Mr Sharp) I can speak being a small export brewer, because we started off with nothing, from no barrels to over 80,000 barrels a year, and we have a brewing capacity of about 100,000 barrels a year and full employment for 40 people. So we have managed to survive, but I recognise that in that time smaller breweries have closed in Scotland. Since we started we have run a policy of not owning managed houses, so we are able to compete in the marketplace, which is a good focus, otherwise we would not survive. I think that was, really, the driving force behind it all. We have not cut any corners as regards quality, we have an idiosyncratic appeal and I guess we have marketed ourselves well. I am not certain why other breweries have closed, other than that we have perhaps focused better. We have also continuously reinvested in our brewery, because as a Victorian brewery—and you have been there—it has got a unique charm, but being built in 1869 it has certain inefficiencies, so you are never going to get the efficiency of scale that Scottish Courage are going to get. However, we have striven to put in plant which is, as I see it, a crucial part of the process—the brewing of the beer. We have put in a state-of-the-art malt handling system and we have just installed a keg plant a couple of years ago, which cost us over £2 million. We have continuously reinvested in the brewery, which is the only way. We have taken a long view of this, that we are here for a number of years yet. Really, the future is possibly export markets, but for us it is being in a position where we can compete to some extent with the larger brewers with economies of scale and efficiencies. I would say whilst overhead efficiency is not on a par with Scotco it would certainly be ahead of some of the large regional brewers. I think that is possibly because we have not invested in our own managed house estate. We have had the luxury of affording to invest in the brewery.
  (Mr Stewart) To reinforce Russell's point, I think what you have seen is weaker brands expiring. Caledonian have a very strong brand and are dedicated and successful with that. Even in our own establishments you see the weaker brands diminishing, in terms of appeal. If your business did not have a dedication to its brand and its quality then you tended to lose out. If you come back to the point that was made earlier, you have seen a dramatic switch from on-trade to off-trade, and in the off-trade, frankly, you have to be big to compete. You need the logistic systems to work, you are selling big brands through big retailers, and that decline in the on-trade, inevitably, has put pressure on a lot of smaller brewers because they were able to compete with the on-trade but it is very difficult for them to compete with the off-trade.
  (Mr Gibb) I would add one thing, which is recognising Russell's point about properly focusing business in the middle of the scale. In fact, in Scotland, at the micro-level, there has actually been an increase in the number of producers. So at the small, boutique brewery scale there are now 15 in Scotland, which is a significant increase on where it was. So, within the marketplace, there is an opportunity for those kind of start-up companies.

4   See evidence, p 103. Back

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