Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witness (Questions 366 - 379)




  366. Good morning, Mr Ross. For the purposes of the record can I ask you to introduce yourself to the Committee?

  (Mr Ross) I am Stuart Ross. I am the Chief Executive of Belhaven. I have been in the industry for 28 years and have held my present position for 12 years. Belhaven is Scotland's leading regional brewer and we operate an integrated range of the following activities. We brew beer and develop our Belhaven brands. We distribute a range of beers, including our own and also cider and soft drinks to the Scottish licensed trade, both the on-trade and take-home trade. We operate 120 pubs of our own. About half of those are run as managed retail under our own operations as licensed holders and the other half are leased to third parties who hold the licence. In Scotland there are approximately 5 million people. We employ about 700 people, about 150 of those on what we call the drinks side of the business and the balance in retail.

  367. Thank you for those remarks. Can I ask you, who actually owns Belhaven at the moment?
  (Mr Ross) Belhaven was the subject of a management buy-out in 1993 and was floated on the London Stock Exchange in 1996, so the answer is that we are owned by about 40 funds and the fundholders are split evenly between Scotland and London.

  368. Can I begin by asking about changes to the Beer Orders in 1989. As you know on 1st December 2000 the Secretary of State for Trade and Industry announced that, acting on the advice from the Director-General of Fair Trading following a review of the Beer Orders governing competition in the brewing industry, 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 re-sold. Witnesses from the Brewers' and Licensed Retailers' Association and Scottish & Newcastle plc considered that the effect in Scotland of the new arrangements would be minimal. Those are perhaps the big boys. How do you, as perhaps one of the smaller players in the business, consider that the proposed changes to the Beer Orders 1989 will impact on the brewing industry in Scotland?
  (Mr Ross) I suppose the first response to that is that there is not much brewing industry left in Scotland. We have Scottish & Newcastle and Bass, who dominate the production of beer to the extent of about 80 per cent, and then such as Belhaven and Caledonian who were represented last Wednesday. After that we are down to micro-breweries. So in terms of the production of beer, I do not think the changes in the Beer Orders will make a great deal of difference. I think it is quite a bizarre decision, I have to say, on the part of that particular inquiry or the outcome of that inquiry, because I believe that the capping of the number of pubs in 1989 was quite an artificial process. Following on from that you can talk for an hour on the changes and the evolution in the brewing industry in the UK between 1989 and the year 2000. But I would have thought that having made the artificial changes and imposed that limit, it is confusing to lift it again. There does not seem to me to be any apparent reason for lifting it and it does leave the brewing industry exposed to some of the national and international players coming in and buying not only the largest brewery concerns, but also building up a huge retail estate and therefore controlling and monopolising the brewing of beer, the distribution of beer and ancillary products and the retail end of it. So it takes us back to where we were in 1989 and, frankly, I do not understand it.

  Chairman: Thank you for being so frank. We move on to ownership.

Mr Welsh

  369. There is evidence from the British Soft Drinks Association which suggested that many of the smaller Scottish soft drinks companies have been forced to close since World War II because they are no longer able to compete with the industry majors. At a European level, there has been extensive consolidation in the brewing industry. It could be argued that the process of consolidation occurring in the UK brewing industry appears to be driven by the need to seek economies of scale, in both production and marketing. The recent unsuccessful attempt by Interbrew to acquire the brewing interests of Bass plc is a further example of this. Legislation protects Scotland's production of whisky, but the same does not apply to beer, which can be manufactured anywhere. Therefore can I ask you: has a process of closure caused by inability to compete against industry majors occurred in the brewing industry in Scotland and is that the main reason for it? Do you think smaller Scottish-owned companies are finding it increasingly difficult to compete given the rise of these multinational brewers?
  (Mr Ross) Yes. Most definitely. The problem for the soft drink boys is exactly the same as the problem faced by niche players like Belhaven. The concentration of power is in the hands of the retailers at the moment. Again, I would have to say that I was disappointed at the outcome of the investigation into Interbrew and Bass because Stephen Byers seemed to take the view that beer prices might rise if that merger was allowed. The fact of the matter is that, as someone who works in the industry day in and day out, the balance of power has swung hugely in favour of retailers. We first saw this in the take-home market in the 1970s, 1980s and 1990s. The power of take-home now lies in the hands of five major players, five grocers—Asda, Safeway, Sainsbury, Tesco and the Co-op chain. We are now in the on-trade, in the pub trade or the licensed retail trade, pubs, hotels, restaurants and so on, seeing the same trend. There are now some very large multi-ownership retailers in the UK following the Supply of Beer Orders. The supply of Beer Orders in 1989 were well intentioned but got the wrong result. What has really happened since 1989 is that we have lost a plethora of beer players in the UK. I can just name you a few names which I jotted down idly while I was waiting. We have lost Vaux, we have lost Whitbread, we almost lost Bass; we have lost Marstons, Morlands, Allied Brewers, Morrell's of Oxford, Ushers of Trowbridge, Mansfield. In Scotland we have seen the closure of Carlsberg and Tetley's brewing operation Alloa. We have seen the closure of Maclay and prior to that we had the closure of Drybrough in Craigmiller. Why are we getting all these beer closures and why is beer such a difficult industry in which to make money? The answer is the power and balance of power in terms of purchasing is heavily in favour of the retailers. The growth of the multi-pub is the biggest threat, but the growth of multi-retailers is the biggest threat to companies such as Belhaven. That allied to the point I was going to make—


  370. We will be coming back to retailing.
  (Mr Ross) OK. I do not want to try and cover everything in one sentence. That is the situation generally. It is very difficult to make money out of beer and the way you make money out of beer is by finding niches where multi-national, principally lager brand operators are not strong. But it is increasingly difficult to find those niches because the retail market is blocking you out.

Mr Tynan

  371. You are painting a picture of even bigger battalions. How do the smaller Scottish companies deal with those? I am bound to ask, what kind of advantages result from being part of a larger company and how do smaller companies cope with that whole situation?
  (Mr Ross) I think basically large companies are able to operate under economies of scale under which smaller companies cannot operate. They are able therefore to meet the pricing and marketing support demands of the leading take-home players and now on trade players such as JD Wetherspoon, Bass, Whitbread which are now big retailing companies having dropped their brewing interests. I mean, Belhaven produces an excellent beer, Belhaven Best, which won the Scottish Marketing Millennium Award last month. It is a great boost for the "old economy" that it was not a company which won, so we are very proud of that. But how do you get a beer like Belhaven Best distributed? Effectively what the Beer Orders were saying was let us try and free up the vertical integration a bit. But what that has done is spawned the growth of these very large companies which own 5,000 or 6,000 pubs. At that level their pricing demands and their support demands—it is just commercial life—take you out of that. We cannot really attack that market successfully and therefore we are never going to grow even a popular beer like Belhaven Best into a market dominant position. But we can focus our business very much on the independent trade and play to niches where we have an opportunity to compete on price and add value in other ways. The commercialism of our business is reasonably complex because to get in there is not as simple as it sounds. But we have to try to achieve ways of adding value into the independent trade because the independent trade has to compete against the multi-retailers. So in essence our business at the moment is going through a sort of metamorphosis of change. If you take the take-home as an example again, you had the rise of the grocers and the demise of the corner shop. What we may be seeing in this current century is the demise of the independent publican at the expense of the multi-retailer. We certainly hope not, but I think we may see that as one of the most noticeable trends in the next 10 or 20 years. That worries us as a company and should worry anybody who is interested in the licensed trade generally as a wider issue.

Mr Welsh

  372. But you seem to be succeeding against that overall trend and in spite of those trends. Can I ask you, given all those trends, will Scotland overall lose employment and do you think Scotland will suffer given all those major trends you hare talking about?
  (Mr Ross) I do not think employment is a huge issue because I do not think the brewing industry is a major employer in Scotland. I think you may see some gains in the employment of staff at the retail level because of the number of new licences. But eventually there will be a balancing out because the market is stagnating and for every new licence that is granted, eventually one or two will drop away. So it is hard to say what overall impact there would be on employment in the future of the licensed trade but I do not think it will be huge. Hospitality is a big employer in Scotland. I sat on the Pathfinder Committee for the hospitality industry, reporting to Gus McDonald when the Scottish Parliament was being set up. We employ up to 177,000 people in the hospitality industry in Scotland, including hotels, pubs, restaurants and the entire gamut of hospitality. It is by far the biggest employer and I cannot really see it dropping to any great extent. But you have got to remember that so many of these numbers are in fact part-timers and one of the big industry issues in running a retail business in licensing is the fact that your staff turn over so often. I mean, the average length of employment for an ordinary member of staff in a pub is four and a half months. So the training and induction issues and constant turnover is something that we have to look carefully to in terms of improving standards. But employment in our industry tends to be connected a lot to part-timers and a lot in city centres are students because this is the way students really get through their education.

  Chairman: Education in many ways, perhaps. We move on to branding.

Mr Clarke

  373. I can say that Belhaven Best is a very good beer. There are two clubs that I go to and it sells like hot cakes.
  (Mr Ross) It is a lot less potent than Polish vodka.

  374. You learn by your mistakes.
  (Mr Ross) It is the only thing I learnt actually.

  375. All I learnt in touring was to stay off the vodka.
  (Mr Ross) I had one or two bad experiences with Polish vodka myself.

  376. I want to talk about branding. 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 and does brand identification cause particular problems to brewers based in Scotland? What type of Scottish company suffers most from the need to build brands?
  (Mr Ross) Brands are very important. You were talking earlier with the whisky and gin association about the lower end of the market and what they called the premium end of the market. In beer, really if you do not have a brand in the sense of having a beer that is popular, familiar and which can be differentiated at the point of retail and can command its price, then you are out of business. That is why so many breweries have gone out of business. I do not want to name names, but take Vaux of Sunderland and Ushers of Trowbridge in England. Both of those had very very good pub estates. But their beers were never popular and the essence of a brand is not just its point of differentiation and familiarity but also its popularity. So we as beer players have to produce brands that are differentiated, that are relevant, that are popular and familiar with consumers. That is the way the industry has moved and it is much more global than, I dare say, many industries have moved. The globalisation of lager brands is quite apparent. I mean, Interbrew coming into the UK already have in Stella Artois a Belgian product which is fantastically popular, as is Budweiser, which is a world-wide brand. Kronenberg and Scottish Newcastle are keen to make Kronenberg a world-wide brand. So we are moving into a situation where the likes of S&N, who 30 years ago would have had a plethora of local regional beers, which you will be familiar with from the Scottish drinking scene, now they are much more likely to be putting all their money behind Miller, which is an American product, Kronenberg which is a French product or John Smiths Bitter which is an English product. It is the question of maximising the effectiveness of advertising spend. When you get down to the level of Belhaven, with £500,000 per annum marketing spend for everything, including promotions and sponsorships and above and below the line stuff, it is very difficult. You are only in business if you can find the niches, and it is up to us to be there. That is what the management are paid for, to find the niches. You cannot expect any government help or regulation in any way to support you in doing that. That is what life is all about. That is the fact of the matter.

  377. I can remember Jeffreys used to make a lager second to none. The whole system around Edinburgh was all gobbled up by the big boys.
  (Mr Ross) It is an interesting statistic but at the turn of the century there were 86 breweries operating in Scotland, now we have four plus a few minor breweries. I mean how did Tennent Caledonian Breweries and Scottish & Newcastle Breweries come about? It was just through one merger after another with the small companies and names disappearing. That is disappointing but it happened. Where are we now? We are in an age of globalisation. Scottish & Newcastle obviously see their future in a much wider playing field than the UK and good luck to them. They have kept their HQ in Scotland and we need companies like S&N going out as predators and not becoming prey. It is good news for Scotland. But unfortunately too much of it has been the other way around. Too much of our industry has collapsed into foreign hands.

  378. One of the trends seems to be that some beers in this country are a foreign product but are internationally known and they may be rubbish. In my opinion some of the beers have got good brand names, but they are absolute rubbish.
  (Mr Ross) But most of the beer is drunk by 18 to 25 year-olds. I am happy to know you do not drink Bacardi Breezer any more.

  Chairman: Eric is the Committee's drinking expert.

  Mr Clarke: When I come down to London all I drink is Federation or Guiness. I never drink the rubbish they have down here.


  379. Can I ask you to clarify what you meant by above the line and below the line advertising?
  (Mr Ross) Above the line is where you use some form of media, like the TV, press, radio, outdoor; we use taxis. We brand taxis as one of our main advertising media and we have also used bus sites. Anything below the line is support of your brand at the point of sale. So in the case where you get a bus-side campaign for, "Not as smooth as Belhaven Best" or something like that, then you would try and take that campaign into the pubs as well with support material along the same lines. That is the below the line element. I am not a marketing guy so I am not prone to jargon so I apologise for that.

  Chairman: Thank you. You have cleared that up. I said we would return to retailers so we will do that now.

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