Examination of Witnesses (Questions 240
WEDNESDAY 10 JANUARY 2001
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
regionallywhether 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 marketie, the young 20-year oldsI 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.
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
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
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 standardswe accept that in the on-tradethat
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
thingsbrands 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 relishand
quite a lot of young people toothen 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
Chairman: Two members want to return to the
question about supermarkets, which may well include cash-and-carries!
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.
249. Really for information, what effect has
the rise in wine consumption through supermarkets had on beer
(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
buyerwe 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
(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
(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
(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.