Select Committee on Scottish Affairs First Report


3. The beer industry

31. Scotland is home to 33 of the UK's 478 breweries.[30] In the financial year 2000-2001 they contributed £407 million in excise duty, which forms about 14 per cent of total UK beer receipts.[31] Many of the same issues we have considered in connection with Scottish spirits production also exercised the beer companies.

32. Globalisation of markets creates challenges for the smaller Scottish brewers. Globalisation is also related to a more general change in tastes, particularly to a broader increase in consumer sophistication. Rising incomes and increased foreign travel also support greater experimentation by consumers. Advertising leads to increased penetration of global brands. People are now less parochial in their eating and drinking habits, and are more exposed to new products. Scottish and Newcastle plc, for example, said that international brands are now taking a greater share of beer markets the world over, and Scotland was not immune to this process.[32] One witness was frank about the pressures this can create for small companies. Referring to advertising, he said that:

    "In beer, if you do not have a brand that ... can command its price, then you are out of business".[33]

33. Small companies also found it expensive to implement the large-scale logistics systems necessary to service volume customers. A shift towards drinking at home, as opposed to in pubs or clubs, has also created further pressure for the smaller brewer.[34] It was said that, as in the whisky industry, even the large companies feel pressure to drop smaller brands.[35] Both large and small companies believed that competition was likely to cause employment to decline further in the future.[36]

34. We were pleased that the 2001 Budget statement proposed to cut tax rates for smaller brewers, leading to a progressive system of excise duty based on annual output. This idea had been suggested in evidence from the Belhaven Brewery Company Limited.[37]

35. Evidence from Scottish and Newcastle plc showed that Scotland has the capacity to sustain the headquarters of a major global drinks company. Scottish and Newcastle is now the second-largest European brewer, employing 4,700 people in Scotland and around 60,000 worldwide. It has recently made several large foreign acquisitions, including the French and Belgian beer interests of the French company Danone. The example of Scottish and Newcastle appears to suggest that there is no reason why Scotland could not support the headquarters of global drinks companies, the reverse of the situation in the whisky industry where the ownership of the large companies has largely been lost to Scotland. We were disappointed that we did not see more evidence of big Scottish companies acting in this fashion.

36. While the overall advantage may have shifted in favour of large companies, several of those who gave evidence pointed out that small Scottish companies can flourish. This issue was discussed directly with two of Scotland's most successful small brewers, Belhaven and Caledonian. Both emphasised that small companies can continue to thrive if they are able to produce high quality "niche" products. Mr Ross of Belhaven noted that, while companies like his could not achieve market dominance, they could successfully "play to niches where we have an opportunity to compete on price and add value in other ways".[38] The increase in consumer sophistication noted earlier will, in part, also create opportunities for smaller companies.[39]

37. Mr Sharp of Caledonian said that one way in which his company emphasised its distinctiveness was by stressing that it was produced in Scotland.[40] Scottish and Newcastle also felt that competitive advantages could be gained from being a Scottish company. In connection with both whisky and bottled water, Scotland has unique image advantages, which can be used to support the sales of high value products in foreign markets. While it may be fanciful to suggest that Scottish beer could ever achieve the unique status of Scotch whisky, or, indeed, Scottish water, we believe that more policy support could be given to assist the efforts of small Scottish brewers who wish to use Scotland's reputation for quality as a catalyst to increase foreign sales. We comment on this further below, when we discuss the evidence presented by Scottish Enterprise.

38. Small brewers differed on the impact of the growth in Scotland of the so-called super pubs, whose commercial clout was forcing discounted prices beyond the reach of the smaller producers. While we recognise that there has been notable growth in the market penetration of super-pubs, which tend to be located in the more profitable city-centre areas, this is not yet sufficient to create substantial concern. Figures supplied by the Brewers' and Licensed Retailers' Association of Scotland (BLRAS) showed that these accounted for only 500 or so of the 18,500 licensed premises in Scotland.


39. Neither we nor our predecessors included in our remit a detailed review of the circumstances surrounding the proposed acquisition by Interbrew of Bass Brewers. But some reference is necessary. Following the purchase of Bass Brewers by the Belgium-based company Interbrew, the then Secretary of State for Trade and Industry considered that the consequence would be the creation of an effective duopoly in the UK beer market involving Interbrew and Scottish and Newcastle. He therefore instructed Interbrew to dispose of Bass Brewers, including that company's Tennent Caledonian operation with a large brewery in Glasgow. Interbrew successfully appealed against the decision. The Office of Fair Trading reopened its investigation into the sale, eventually outlining four options which would allow matters to proceed. A consultation exercise was undertaken.

40. In its response to the consultation the Belhaven Brewery Company Limited said it preferred that the original order for Interbrew to dispense with Bass Brewers should stand. Belhaven was particularly concerned that one of the proposed options seemed to suggest that Scotland could be identified as a separate beer market.[41] It believed that such an assessment would create a marked difference between the approach in Scotland and that pertaining in England and Wales. Belhaven said:

    "The Consultation Document and the proposed remedy are therefore quite hot political topics and could effectively set a precedent for the future regulation of other industries in Scotland".[42]

Similarly, Tennent Caledonian Breweries said that "The supply of beer in Scotland should be viewed as part of the overall UK market".[43]

41. In oral evidence the Director of Mergers at the Office of Fair Trading denied that a separate market had been identified during the Interbrew saga. The matter had been avoided. Furthermore any designation concerning markets would need to be re-examined whenever relevant mergers are proposed. As the Director said: "These things are fluid and can change".[44] However, we acknowledge the reservations expressed by Belhaven, and would caution against any improper, pragmatic or idiosyncratic discrimination between markets in the various parts of the UK. This issue is likely to arise in future mergers involving Scottish-based companies, and may have to be looked at again.

42. In September 2001, the Department of Trade and Industry ordered Interbrew to sell either its holding of Carling Brewers or Bass Brewers. Interbrew opted to dispose of Carling Brewers. This would allow Interbrew to retain an important part of the Bass Brewers business, including the Scottish operation.

43. We welcome the latest development with regard to Interbrew. Tennent Caledonian had said that its future "would be more certain as part of Interbrew, which is a major international brewing group totally committed to brewing as its core activity".[45] We feel that allowing Interbrew to retain Bass Brewers is the outcome most likely to secure employment at Tennent Caledonian, and the one which offers the best long-term prospects for the Scottish beer industry.

30  HC 324-i, Session 2001-2002, p.294, para 16. Back

31  Ibid. Back

32  HC 114-i, Session 2000-01, pp.78-79, Q.215. Back

33  HC 114-ii, Session 2000-01, Q.376. Back

34  HC 114-i, Session 2000-01, pp.78-79. Scottish and Newcastle estimated that around 30 per cent of their sales are now of beer consumed at home, compared to about 20 per cent in 1990. Back

35  HC 114-i, Session 2000-01, p.80. Back

36  IbidBack

37  HC 114-ii, Session 2000-01, Q.395. Back

38  HC 114-ii, Session 2000-01, Q.371. Back

39  HC 114-i, Session 2000-01, p.79. Back

40  HC 114-i, Q.215 and pp.81-82. Back

41  Not printed. Available from the Department of Trade and Industry. Back

42  Ibid. Back

43  HC 114-v, Session 2000-01, p.234, para 3. Back

44  HC 324-i, Session 2001-2002, Q.729. See Qq.724 to 731. Back

45  HC 114-v, Session 2000-01, p.235, para 5. Back

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Prepared 28 November 2001