Examination of Witnesses (Questions 206
WEDNESDAY 10 JANUARY 2001
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
(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 sightindeed we do ourselvesof 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 internationallyit 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,
internationalpredominantly 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
whatsoeverzero barrelsand 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
210. Are you ever confused with Tennent Caledonian?
(Mr Sharp) No. I think they sometimes get confused
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
(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 beersand Russell, on occasions,
will be a guest beerhas 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
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 pressuresfor
example, global competition, branding and the need to improve
productivityhave 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 historicallyif
you looked at itpeople, 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 Scotlandthe quality of the pub
market in Scotland has risen dramatically over the past ten yearsand
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 suspectand we can provide you with information
on thisthat 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
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
(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.
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 breweryand you have been thereit
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 processthe 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
4 See evidence, p 103. Back