Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



Sir Robert Smith

  240. Just following that point, although the customer may not be price sensitive, that does not stop the intermediary getting the best discount they can, in terms of the wholesale price, it is just that the customer may not see the benefits. My question was on this balance of pub cos. There has been a lot throughout the evidence that "this is different in Scotland". Is it going to stay different or is it just that Scotland is lagging behind? Certainly around Aberdeen there seems to be a lot of new greenfield sites popping up with these pub cos, and I think Mr Stewart mentioned how people, if they see the balance changing, might intervene, but in a sense what can be done to intervene?
  (Mr Stewart) Do I expect pub cos to grow in Scotland? Yes. Do I expect them to get to the balance that we have in England? No, I do not expect that to occur. I think the pub companies in England have grown off the diversity of big groups of pubs, so I do not see that change coming as dramatically in Scotland.
  (Mr Gibb) A large part of what is represented by "the pub companies" are simply traditional, tenanted pubs owned in hundreds or thousands by a single entity. There is no reason why those pub companies should acquire any position in Scotland. The multiple managed retailer who is buying up greenfield sites around Aberdeen will come, but in his case it is a new issue, it is very big capital and it is a lot of capital for relatively small sites. So they will have a material effect but you will not get transition. There is no basis for transition.


  241. Mr Sharp, you did say that trade was consumer driven. How true is this? Would it not be truer to say that it was driven by advertising, especially in relation to young people buying your product? Can a small company compete with the big boys in terms of their advertising budget?
  (Mr Sharp) We do not advertise, really. We have been helped by beer writers and people like that who fell in love with us because we were small. So we have had a lot of articles about the brewery. We have not been able to afford to advertise, but have spent money on marketing of brands and supporting sponsorship of rugby and stuff like that. We have no vast advertising campaign, so people have been attracted to our products by something else, not direct advertising. Obviously, if you are going to make a national brand there comes a point where there is a step-change and you decide you are going to take the product, plough a considerable amount of money into it and hope it is going to work. Whether it has an effect on youngsters, I am not absolutely certain. Advertisers will tell you something different but I am not very certain how successful advertising is.

  242. How would you answer it, Mr Stewart? What effect does advertising have on your product?
  (Mr Stewart) I come back to character. I think you have to look at it in both the on-trade and the off-trade context. In the off-trade you tend to be selling big brands across national markets and, therefore, you are talking about significant brand advertising. Increasingly, I think in the lager market you are seeing the same characteristics right across the UK. On ales it is still very different; there is still very strong association regionally—whether it is with Caledonian in Scotland or us with Courage in the south, or Theakstons in Yorkshire or Newcastle in Newcastle. There are still very strong regional heritage issues and you market those brands differently. In terms of persuading the youth market—ie, the young 20-year olds—I am a very cynical person. I have a great suspicion that they like their counter-culture and it tends to be after they are there that the marketeers come in to capitalise rather than before. I defer again to the marketing man!
  (Mr Gibb) A profession you have just thrown away! In the end we will influence people by different kinds of marketing. I take Russell's point, describing it as advertising is too simple particularly, as Brian says, in the context of the young when endorsement in fashion magazines and whatever else will do far more for you than straightforward TV advertising, but it can be done and we will continue to do it to a significant level.

Mr Tynan

  243. During this investigation other drinks sectors have indicated the pressures on suppliers from supermarkets which now account for the majority of retail sales. The recent investigation by the Competition Commission found that large supermarkets had sufficient buying power to enable them to distort the competition in the supply market. Do you feel the concentration of retail power in the supermarkets has been detrimental to brewers and, if so, what are your major difficulties? Or do you want to take the Fifth Amendment?
  (Mr Stewart) No, is the answer. I think it comes back to the character of operation that is involved. Yes, supermarkets are powerful. They can be powerful in pushing you to be original in packaging design; they can be powerful in pushing you to relate to what their customers are looking for; they can be powerful when negotiating supply terms. They are also powerful in driving down the cost base; powerful in making certain the beer prices through the off-trade are very low. So it is a mixture of advantages and disadvantages for the supplier but, and again I come back to it, it is no different for us from any other FMCG business and, generally speaking, I think the supermarkets have contributed to beer growth in terms of the off-trade because of their efficiency.
  (Mr Gibb) And beer is a category which they see they can grow and, consequently, they are pressing for innovation. As Brian says, that may bring cost to us in terms of innovation, but good retailers are working with us to grow beer consumption. So if we can meet the cost pressures then they are potentially beneficial.

  244. You have said there has been a growth in home consumption from 1990 from 20 per cent to 30 per cent, would you attribute that to supermarket sales? If so, would you see that developing further?
  (Mr Stewart) Yes, it predominantly comes from supermarkets, but I come back to some other issues. I do not know where your terms of reference begin and end but there have been enormous pressures on the on-trade, and the costs for the on-trade have gone up disproportionately during that period of time. I would like to say as a brewer that those retailers were not justified in putting the retail prices up because it has adversely affected the volume that we have been able to sell into the on-trade, but I cannot do that because the retailers in the on-trade market have faced a tremendous number of challenges in terms of the cost of delivery to the consumer. So you have seen two issues at play. One is the power of the supermarkets to be very efficient and deliver off-trade, and that has grown volume sales, but equally the pressure on the on-trade and the cost structures of that has inevitably driven, in my view, to some extent the market into the off-trade.

  245. Would you say the growth of the on-trade depends on the cost and supply to the customer? Or would you say it is on the basis of the attraction of the pub itself?
  (Mr Stewart) I think the two things are inextricably linked. A good quality pub costs you in terms of investment, so there is a cost associated with enhancing a retail outlet in terms of the investment which goes into it. But if you look at the utility costs, labour costs, the legislation which has been put in to improve standards—we accept that in the on-trade—that has put a real burden on on-trade publicans in the market over the last ten years. So you have seen a negative pressure on the on, and a positive pressure on the off.
  (Mr Gibb) To clarify one point, there is a clear divergence between the retail price of beer in the on-trade and the suppliers. The wholesale price over the last ten years of beer to the on-trade has fallen, while the retail price has risen. So that difference is expressed. So the supply price is not the driver of the retail price in the on-trade, but it clearly is much more closely linked in the off-trade. The driver of price in the on-trade is other things—brands covered and so on.

  246. Could I move on to regional competition? Despite the encroachment of premium foreign beers, Scottish drinkers still appear to have the same preference for local beers. For example, Bass Brewers, through Tennent Caledonian, has a 38 per cent share of the beer market in Scotland. To what extent do you see the need for a separate Scottish market for beer? Does this confer any advantages on Scottish brewers? Is this changing because of, for example, the changing preferences of younger drinkers?
  (Mr Gibb) In the end we can take whatever view we like, the consumer will move. There is still a significant volume of Scottish product, whether it is Tennents, McEwans, Caledonian, but international media, international culture, and all of those issues, in terms of young people will lead to some shift, and certainly nothing we can do and nothing you can do will alter that process. As long as we remain committed to promoting beers which particularly the older consumers do still relish—and quite a lot of young people too—then there will remain a part of the Scottish market which continues to be Scottish in character, but it will erode over time and that I think is inevitable.

  247. There is a trend among young drinkers for designer beers, which Anne Begg mentioned, and obviously there is a change there. Do you respond to that and offer to supply what the consumer requires?
  (Mr Gibb) We certainly try, yes. Advertising, marketing, whatever you like, can only push the thing so far, we must respond to what the consumer is looking for, and the fact they are looking for different kinds of beers, in some cases different kinds of drinks, is something we have to recognise. To do anything else is a finger in the dark.
  (Mr Stewart) The corollary, or the opposite, is that both Russell and ourselves have to sell more internationally. There is no closed market around Scotland, equally there is no closed market in Italy, where we are selling cask beer today, or other international markets. So we have opportunities to export more but the logistics and ease-to-market are critical issues for us.

  Chairman: Two members want to return to the question about supermarkets, which may well include cash-and-carries!

Mr Sarwar

  248. You have said supermarkets are now very, very powerful and their buying power is very huge and they are in a position to dictate the terms to the industry and to the suppliers, but independent retailers are not in a position to compete with these pressures. I have personally witnessed these independent shopkeepers and retailers going to the supermarkets to buy their beer rather than going to the cash-and-carries. How do you support the independent trade in Scotland and in Britain?
  (Mr Gibb) A tough one. I hope the instances of them going to the retailers are not that often, but I suspect that it comes back to what the independent retailers are largely going to have to trade on which is, as in any other sector, on service, on location, on hours and on specialist service. In certain respects they are in no better position to compete with the multiple grocer on a cost basis than to compete with us, but Russell is able to compete with us because he provides a distinctive service and a distinctive quality of product. The degree to which we can encourage that is clearly in our favour. That actually generates interest in the market particularly in terms of specialist off-licences who are into a wider range of product providing specialist beers, they provide a distinctive excitement in the market that we can and will support. It is the general purpose retailer who has more difficulty finding a distinctive position, and there is only so much we can do to help them.

Mr Welsh

  249. Really for information, what effect has the rise in wine consumption through supermarkets had on beer sales?
  (Mr Gibb) Rob may be able to help on this. We do not have very detailed information at an industry level on the interaction between different drinks categories. At the supermarket level, beer sales have continued to rise notwithstanding the more rapid rise of wine sales. At a UK alcohol consumption level, wine is clearly taking a greater share and, consequently, we would have to believe there is some depression of beer sales as a result.
  (Mr Stewart) We should also declare an interest because we are the biggest on-trade wine and spirits supplier in the UK!


  250. Again you have a foot in both camps.
  (Mr Stewart) Yes.

  251. Mr Sharp, it is sometimes claimed that small producers have difficulty in getting into supermarkets and getting in to sell their product. Have you experienced any difficulties, or are the supermarkets all quite happy to stock Caledonian?
  (Mr Sharp) We sell to all the major supermarket groups. We had difficulty in the early days because nobody knew us. It was Sir Alistair Grant who gave us our first opportunity in Safeway. We made an organic beer and proudly went to an organic fair and Sir Alistair came past with his entourage and saw our organic beer, was particularly happy it was Scottish and said to his chief buyer—we didn't have to try too hard to persuade him to try the beer—"Perry, we must have this in store", and that was the break-through. Perry Mills, the buyer, took it on, and on the back of that they took other products. Supermarkets are a very competitive group. Sainsbury's see our products in other stores, Tesco's see them in other stores, and they want to have the same thing, because they go and measure what their competitors are up to. We have a very good relationship with the supermarkets, I must say, they have focused our attention as to what we can do. We do not have a bottling plant, we transport our beer to England and it is bottled by Marston's at Burton-on-Trent. About 10 per cent of our production is bottled beer. We have a good relationship with them. They are hard people to deal with but that is business. They can offer fairly considerable volumes when they decide to.

  Chairman: Thank you for that. I am conscious of the time and we do have other witnesses to hear this morning, so we need to move on. Can we move on to exporting next.

Sir Robert Smith

  252. We have been talking about exports already and the importance of that as a way of growth for the sector. The Brewers' and Licensed Retailers' Association memorandum noted that British beer exports have quadrupled in ten years to 1998. First of all, a technical question, what is the definition of a beer export? Is it containerised in the final marketing container, or is it in bulk in tankers? Does it count as an export if it is brewed abroad under licence?
  (Mr Sharp) I suppose it could be. We actually export in keg, bottle and can. We also export beer in bulk to Sweden, where the brewer over there cans it for us under our label. There are a number of categories. We would classify England as an export market, I have to say. There can be a number of containers but it has to be brewed in Scotland, as far as I am concerned, by us to be an export.
  (Mr Stewart) We do not include brews under licence as exports.
  (Mr Gibb) It is physical beer—

  253. It is physical beer leaving Scotland?
  (Mr Gibb) Yes.

  254. Would it mainly be in bulk and bottled abroad?
  (Mr Stewart) In our case it is already packaged.

  255. So all the value is added here?
  (Mr Stewart) Yes. Either in keg, bottles or cans.

  256. Have Scottish brewers been able to increase their share along the lines of the British increase? I think you said earlier there are no figures to show that.
  (Mr Stewart) Yes.
  (Mr Gibb) The majority of our export is English beer from Newcastle.
  (Mr Stewart) We sell more Newcastle abroad than we do in the UK.

  257. Are there any barriers preventing Scottish companies taking advantage of greater access to foreign markets?
  (Mr Sharp) It is quite a costly business. It is a long-term commitment. It seems an easy thing to do, to export, because you think, "America is a big place, they will drink a lot of beer", well, it is a big place and you can get into the market, but once you get there it is quite a hard task to keep in that market. That is where the commitment comes in. You have to have a very long-term view of exports. I used to be in the whisky industry and I think by nature I am an exporter anyway, but you really do have to have a long-term commitment.
  (Mr Gibb) There is also the practical on-cost from travelling from Scotland. We are a very large company and people travel all around the place, but you have to consider the on-costs of an export operation of access to international markets. The price of a return fare from Edinburgh to Brussels does not bear thinking about, as an example.

  258. No other structural barriers? Does the currency make much difference to you?
  (Mr Stewart) Not particularly. It does affect us, it will affect the logistics of production within the European context, but I do not see the currency being the primary issue. As Russell has said, it is about commitment and long-term commitment.

  259. That would apply to any country?
  (Mr Stewart) Yes. Also the diversity of legislation puts small producers at a disadvantage. If you are exporting to the States, you have to recognise that every state has different legislation, potentially you have different labelling requirements, so your on-costs associated with that could be very considerable.
  (Mr Gibb) Alcohol is a more regulated product in almost every market in the world than biscuits or whatever.

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