Examination of Witnesses (Questions 220
WEDNESDAY 10 JANUARY 2001
220. I have another two questions. Will the
industry lose employment as companies increasingly concentrate
their production and other facilities in order to reduce costs?
Do you think Scotland will suffer unduly from this process?
(Mr Stewart) Yes and no. Yes, employment will reduce
because there is a strive for efficiency in order to supply the
product at the lowest cost and as efficiently as we possibly can.
So, inevitably, there will be a decline in employment in our industry,
certainly in the industry sectors in which we are predominant.
Will Scotland be particularly adversely affected in that? I do
not believe so, but I come back to my point that if the off-trade
market grows very significantly then it is key to us to have the
appropriate packaging configuration and packing suppliers in Scotland
or having the logistic systems that allows us to acquire that
packaging at appropriate cost.
(Mr Sharp) I would like to think that we will probably
grow but not hugely. I would get back to investment; if we had
not invested when we did we would probably employ another 20 people,
but by doing so we might not have survived. So continuous investment
is the key thing.
221. What will be the likely impact on the brewing
industry in Scotland of the failure by Interbrew to acquire the
brewing interests of Bass? Do you consider the decision by the
Secretary of State for Trade and Industry announced on 3 January
to be appropriate?
(Mr Stewart) I do not know how to answer this. I actually
regard Tennents as a very strong competitor in Scotland. It is
a very good business that has been built over a number of years.
Provided the transfer of ownership was achieved in a reasonable
manner, I do not think we would have seen a significant effect
in Scotland if that business had been transferred to Interbrew.
I think there was an issue about brand strength in Scotland, because
you were effectively merging Whitbread with Bass in Scotland,
which would have increased their total market share. So there
were competitive issues associated with it, which I think it is
fair to recognise. However, in terms of the operation of the business
I do not believe it would have had a disruptive impact on the
business in Scotland. You ask us as regards the Bass/Interbrew
merger. I have to say I think it was consistent with other decisions
that have taken place within the brewing industry in the past.
I do not see any inconsistency with regard to the decision. I
think, to a degree, we were surprised by it becausein an
odd waywe thought there had to be some dimension to this
to which we were not privy. In other words, that it was an inconsistency
with previous decisions. So, I think, yes, we were slightly surprised
by it but, no, we did not find it inconsistent with previous decisions
that had been taken.
(Mr Sharp) I think the problem, as Brian says, is
now the uncertainty of Tennents and, I guess, brewers in England
as to what is the next step. As real industry insiders, we think
we know quite a lot about the industry but -and we were talking
about this last nightit is hard to second-guess what is
the next step. There are not a lot of people out there ready to
purchase breweries, and whatever way it is going to shake out
I think that might have a bigger effect and the pain is going
to be greater than whatever might have been the problems.
222. We have had a great deal of correspondence
from people with a vested interest on the retail side, saying
that there was a cutting off of choice and that there would be
a monopoly situation. This is their opinion. I do not know if
this applies to all MPs, but many of them have had three or four
letters from major companies saying this. I think they would welcome
an inquiry by the Secretary of State.
(Mr Stewart) I have been reading the report, and quite
clearly you are correct in that a number of retail businesses
were greatly concerned about the degree of consolidation that
this might lead to.
223. The worry we have got is, obviously, we
do not have a united brewery here and we might have some outside
organisation on the continent or elsewhereworldwide. It
would certainly be bigger than UK-wide but it will not be big
continental-wide, I do not suppose.
(Mr Stewart) I would refute that slightly, in that
just to come back to the scale of our own business, we have to
remember that the scale that we now occupy, as one of the leading
brewers in the UK and certainly one of the leading brewers in
France, Portugal and Belgium, means that, inevitably, we will
be in a position, on the obverse of that coin, if you look forward,
in terms of the perception in mainland Europe. I come back to
the point that this is a European businessindeed, a worldwide
businessbased in Scotland.
224. When we spoke to the breweries late last
year, it was clear from the discussions with the management and
workers that they were all in support of this merger and they
were of the view that this would bring stability and certainty
to jobs in the brewing industry. Can you tell us, is there any
danger of potential job losses because this merger did not go
(Mr Stewart) I really do not think it is appropriate
for me to comment on somebody else's business. I come back to
my view, and that is the limit of what I can say to you, which
is that I regard Tennent's business in Scotland as a good business,
a well-managed business and a doughty competitor. I cannot believe
that whoever the owner of that business is will not respect that
performance and that capacity. Beyond that I think it would be
quite inappropriate for me to comment.
Chairman: I think we appreciate that, and we
are grateful for the answers you have already given.
225. Mr Sharp, obviously you seem to have had
some success as regards continuing in business, and one of the
questions Eric did ask was regarding smaller brewers. Obviously,
your blueprint for success seems to be investment and the fact
that you are marketing well and managing well. Would you see that
as being beneficial? Would you think it is better to be on your
own or part of a larger group. Would there be an advantage in
being part of a larger group?
(Mr Sharp) I think yes and no to that. There was a
credibility about being independent and we are slightly idiosyncratic
in our behaviour, and whether that would work within a larger
group would be something that would have to be tested. I think
there is a charm about what we do, but you have to be realistic
and the beer market, in a sense, is shrinking, which means there
will be fewer and fewer players. I think, rather than being part
of a large group, you have to form strategic alliances, and to
me that is the way ahead. We already have, in a sense, an alliance
with Carlsberg Tetley because we have a contract to brew beer
for them for five years, which we won in the face of competition
from other smaller brewers in Scotland. That comes to an end some
day, so continuously we have to seek out other alliances. That
is the practical viewpoint. There is a charm, as I say, about
existing on your own but you have to be practical and sensible.
226. Following on from Mr Tynan's point, every
companyno matter how large or how smallhas its price
and can be subject to a takeover. How long, realistically, can
you hope to remain as an independent in this ever-increasing competitive
(Mr Sharp) It is hard to look ahead to that extent.
Frankly, and I have said this on a number of occasions, I look
on myself as a custodian of Caledonian Brewery because I do not
think anybody really can own a brewery. I think it is something
we are given the privilege, at some point, of looking after. So
we inherited something or took something over that was being closed
down and which was in pretty bad shape. It is in better shape
now, and I think as a legacy that is what we have tried to achieve
with the brewery. However, you have to be realistic and say "Well,
what is the next step for us?" That will develop over the
next few years. I am not unrealistic. I think if the correct series
of circumstances were there who would not consider offers? However,
it is not really part of our consideration. I think alliances
are the key to our philosophy.
227. The memorandum from Tennent Caledonian
Breweries mentioned that the acquisition of Bass by Interbrew
would have ensured "greater access to resources for investment
in brands, new product development and customer services".
How important are brands as a competitive weapon? Does brand identification
cause particular problems for brewers based in Scotland? What
type of Scottish company suffers most from the need to build brands?
(Mr Sharp) I can take part of that. We have been strongly
determined to build brands because to me brands are all. Beer
is not just a liquid, I think there is something credible about
it and we have tried to achieve brand building. With the name
"Caledonian", the brewery itself I see as a brand, and
beer products have emanated from that. A considerable part of
our endeavour is to continue to build brands. An absolutely positive
part of our endeavour is the fact that we are based in Scotland,
as far as I can make out, because in England we can differentiate
ourselves instantly from other beers which may be every bit as
good as us as regards quality and price, but the fact that we
are Scottish gives us an extradare I sayadvantage,
or another element in our marketing, which I think makes us stand
out from other beers which are on the bar. I have found it a positive
advantage being in Scotland. If I had done the same thing in England
with the brewery it might have been tougher.
(Mr Stewart) Russell is right to identify that his
unique strength is to be Scottish. I think the challenge for us
is that we have to run international brands from Edinburgh. So,
frankly, recruiting top line marketing people into Scotland is
a major challenge. In spite of all that people say about lifestylewhich
I relish and which I am sure my colleagues dobeing perceived
as slightly out of the swim, in terms of international marketing,
is a major challenge for us to recruit people into Scotland. That
is an issue for us in terms of brand building. I do not think
we suffer from a lack of resources, I do not think we suffer in
any way from a lack of commitment; I think the issue is about
recruitment of people of good quality in Scotland. Richard, as
a former marketing director, might add to that.
(Mr Gibb) I think we can only look at it from our
international perspective. Kronenberg is the second best-selling
brand in Europe, so we are certainly into the development of large
scale brands. However, we do need to have the people to do that,
and it is a challenge.
Sir Robert Smith
228. A quick question on brands, in terms of
overseas. Is there any advantage to being a Scottish based brand,
as other products have taken advantage of?
(Mr Stewart) I think there is a culture link. We were
having a debate last night aboutthere is an opportunity
in not being English. There are a lot of historical ties in the
markets in which we trade, particularly in mainland Europe. If
you look at the French, the code name for our Kronenberg transaction
was "The Old Alliance", which the French found hugely
amusing and greatly rewarding. I think in Scotland we forget about
some of those cultural, historical links. Even in Germany, in
Bremen, they highlight the traditions of sailing into Leith as
seafarers. The historical association of Scotland is extremely
strong, so Scotland as a brand is something which Russell uses
in one context through Caledonian and which we use in another.
229. You have the best of both worlds, being
Scottish & Newcastle.
(Mr Stewart) Newcastle is particularly strong in North
America. Very strong.
230. On your point about attracting marketing
people, where is Mr Gibb based, may I ask?
(Mr Gibb) I am based in Edinburgh. Though I may not
sound it, I am a Scotsman.
231. I just wondered if you were working in
Edinburgh rather than London.
(Mr Stewart) To clarify, our marketing team and our
corporate head office is based in Edinburgh.
232. The memorandum from the Brewers' and Licensed
Retailers' Association of Scotland suggested that pub operators
in Scotland invest £125 million per year on improving amenities
for customers. During its visit to Glasgow, the Committee was
told that brewing is a very efficient, highly capital intensive
industry. Evidence submitted by Tennent Caledonian argued that
pressure from the specialist pub-owning companies had caused the
price paid to manufacturers to fall. How does the need to invest
in improving customer services and to increase productivity affect
the ability of Scottish companies to compete against the industry
majors? Are these increasing burdens for Scottish brewers?
(Mr Stewart) I do not think that Scottish brewers
are faced with any other different pressures from anybody else
in the industry. I do not think we are different, in the sense
that other producers in other consumer goods sectors face exactly
the same degree of challenges. I think there are some legislative
interventions which make our role as brewers more difficult than
some of the FMCG businesses, but I do not see us facing any other
challenges that are different from other people in the industry.
(Mr Gibb) It is probably worth referring, in the Scottish
context, to the fact that the history of the Scottish on-trade
remains different and actually remains more accessible; there
is a different balance between the supplier and the retailer,
but pressure experienced is greater in England where the pub-cos
are more prevalent.
233. I have just had an occurrence, when you
were talking about branding, that if you cannot get people to
come and live and work in Scotland, maybe we should be working
on Scotland's branding a bit more, to let people know how good
a place it is. It is not on the periphery or outside the mainstream.
Do you think that pressure by specialised pub-owning companies
to reduce prices paid to manufacturers reflects the fact that
these companies have unfair advantages over brewers? If that is
the case, what are they?
(Mr Stewart) I think the pressures that pub companies
are able to exert is because of their sheer volume of scale. Brewing
is a marginal cost business. We have big units of production in
breweries, so if you lose 20 or 30 per cent of the output of a
brewery it has dramatic impact on you in terms of the financial
operation of the business. Whereas, the retailer has a number
of smaller outlets, and he is aggregating these, so if he loses
10 per cent of his outputs he can adjust his retailing balance
much more readily than the production side of the business can.
Howeverand I come back to itthat is no different
from most other producing organisations, so I do not regard it
as an unfair advantage of the retailer, I just regard it as a
fact of life.
234. Do you think that pub cos are better at
satisfying consumer wants, and that is why they are becoming successful?
(Mr Stewart) I have to defend the free trade business,
particularly in Scotland. I am sure some of you visited Glasgow,
and you would have found as innovative retailing in Glasgow as
in any city in the UK. I do not accept the idea that pub cos are
the only route for innovation for customer services. There are
very, very many good individual outlets that we can certainly
compete with as, indeed, we can with the best of our own managed
(Mr Sharp) I think the danger of the pub cos is that
the discount they do command actually would lead to difficulty
for smaller producers.
235. Is part of the desire for uniformity the
fact that you now get Brewers' Fayres everywhere, and you get
Burger Kings and McDonalds because people know what they are going
for? Is it that side of the market that pub cos are catering for,
rather than people interested in the culture of going to a pub?
(Mr Sharp) There is a far wider range of products
in pubs than there used to be, although there are regional brewers
and stuff like that. I think the range of products on offer is
far wider. I think there is a healthy situation, probably, and
that comes back to brands. There are going to be fewer and fewer
products but those are, presumably, what the customer wants to
consume. All these things are consumer driven.
(Mr Stewart) I think it is also about balance. Any
extreme position -whether from a producer or from a retailerwould
be disadvantageous in the market. If we did not have the vibrancy
of free trade outlets in their own right coming through then I
would be greatly concerned about the shape of our industry, but
that is not the case just now. You have got a balance between
the pub companies and their individual outlets and brewers. I
am sure people will watch that balance very carefully because
it is so immediate for consumers; they see it on a day-to-day
basis. If I could pick up just one point about branding, customers
do not like to see their pub institutionalised. It is fine for
food-led outlets, in particular, to be brandedChef &
Brewer in our case or Brewers Fayrebut I think there is
still the desire to have an individuality of outlet as far as
the pub is concerned. That is evident from our own experience.
236. The Chief Executive of the Belhaven Brewery
Company drew our attention to what he perceives as the over-provision
of new licence grants which has placed under threat the value
of existing licences. Would you agree that this has happened?
(Mr Gibb) I think the number of licences in Scotland
has risen and I think there is an issue here which is the balance
to be struck between the pressure that creates in the marketplace
and the need to modernise the retail industry. I think the pub
retail industry business in Scotland 20 years ago was, I suppose,
by modern standards, a rather uncivilised thing. There has to
be some freedom to access new licences to achieve the kind of
modernisation towards, frankly, the more civilised premises that
we would all like to see. That requires access to new licences.
Clearly there are issues to do with over-provision in high street
areas where it can give rise to problems, but I think we would
be very concerned if any restriction on that slowed the modernisation
of the retail industry.
(Mr Stewart) It also comes back to the point you were
making earlier about offers to individuals for opportunity to
innovate and develop, which might otherwise be constrained. There
are innumerable examples of high-quality outlets that have been
produced on that basis.
237. Basically, you do not think the new licences
are to the detriment of the old licences?
(Mr Sharp) I think progress as a part of natural wastage,
in a sense, is a good thing because, as Brian said, there are
a number of free trade operators in Scotlandnot necessarily
pub groupswhich have got another dimension to things, different
style, different quality, and whereas we strive to make the highest
quality beer these people build the highest quality of environmentwhether
it is the design and decor or the products and services. The battleground
is to attract customers on to your premises. I think it is constantly
raising standards that is far more exciting than just saying "Well,
we have got to limit licences and we will all enjoy a share of
the cake". That cake is still there, but you have to fight
harder for it.
(Mr Hayward) Can I make an observation? We are actually
in a position to provide statistics, both in relation to the detail
of on and off sales, if you wanted it, Mr Chairman, and, also,
in relation to the breakdown of licences as they relate in Scotland.
We have the details as to the licensed hotels, restaurants, pubs
etc. We can give you those figures.
Chairman: The Committee would be grateful for
that, thank you.
238. I think this question is probably more
for Mr Sharp. What has been the impact on small breweries of the
ability by large brewers to offer heavy discounts?
(Mr Sharp) That is the marketplace. We all disagree
with it. We cannot offer as high discounts, and actually there
is an understanding within the pub groupsI should not really
be talking about thisthat they accept we are just a poor
little Scottish brewery. We have to be realistic. You are not
going to compete in that market unless you are going to take it
head-on. There is no point in looking for any special favours
here. We have to strive to make ourselves as efficient as we can.
In other words, we may not be able to pay the absolute top discount
as the larger brewers do but we have got to be in that ballpark,
otherwise we will not survive. We have to be realistic about itmuch
as we all dislike it, it is a fact of life.
239. Is there another dimension, with the designer
beers and things like that, where they are very expensive? Price
does not seem to be the only driver. Take, particularly, the young:
if they are drinking the stuff in bottles they are probably paying
more for that small bottle than they would for a pint.
(Mr Sharp) That is right. There is a pub we sell to
in Edinburgh where he will sell a pint of our beer for £2.80,
but that does not seem to deter people, whereas Wetherspoons will
sell that same beer for £1.70, and, again, sell vast volumes
of it. So, in a sense, there is not a price sensitivity in certain
bars; because we are a slightly specialist product we probably
can charge more, and that will compensate for the smaller discount.
(Mr Stewart) I can assure you that Russell is not
getting 50 per cent of that £1.10p differential.
(Mr Sharp) Absolutely not.
Chairman: I just hope that not too many of your
customers are listening to what you are saying!
5 See evidence, pp 92-94. Back