Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 220 - 239)



  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 because—in an odd way—we 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 night—it 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 elsewhere—worldwide. 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 business—indeed, a worldwide business—based in Scotland.

Mr Sarwar

  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 through?
  (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.

Mr Tynan

  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 company—no matter how large or how small—has 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 environment?
  (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.

Mr Sarwar

  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 extra—dare I say—advantage, 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 lifestyle—which I relish and which I am sure my colleagues do—being 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 about—there 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.

Mr Sarwar

  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.

Miss Begg

  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. However—and I come back to it—that 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 outlets.
  (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 retailer—would 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 branded—Chef & Brewer in our case or Brewers Fayre—but 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 Scotland—not necessarily pub groups—which 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 environment—whether 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[5].

  Chairman: The Committee would be grateful for that, thank you.

Miss Begg

  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 groups—I should not really be talking about this—that 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 it—much 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

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