Examination of Witness (Questions 366
WEDNESDAY 17 JANUARY 2001
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
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.
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 grocersAsda, 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.
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
(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 dot.com 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 demandsit
is just commercial lifetake 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.
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.
373. I can say that Belhaven Best is a very
good beer. There are two clubs that I go to and it sells like
(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
(Mr Ross) I had one or two bad experiences with Polish
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
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.