Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witness (Questions 380 - 399)



Mr Sarwar

  380. You have made a few remarks about competition and the strength of the retail supermarket. You said that the corner shops are disappearing and supermarkets are becoming more popular. I can tell you that 15 years ago I warned the industry that they were helping to diminish the independent retail trade. But they did not listen at that time and now they realise that when they are dictating the terms to manufacturers. What is the solution in your view to strike the balance and stop the deterioration of the corner shop?
  (Mr Ross) That is a good question and there are two answers. I think in terms of competition the Government should be looking closely at the amount of control in a few retail hands. On the other side, I mean I know that a lot of these issues are for the Scottish Parliament to deal with but they are crucial and if you do not mind I will go into them. Proliferation of licences is something that concerns me very much because there has been in the past few years, with certain licensing boards and the handing out of new licences, licences being granted like confetti. That cannot be good for the existing players in the industry. There has to be a balance. I know that this question came up last week with S&N and BLRAS which Belhaven is a member of. I would not fully support the BLRAS view on this. Yes, there has to be the granting of a few new licences each year in order to allow innovation. But one of the big problems that the independent trade face is the fact that so many new licences are being granted that the value of an existing licence has deteriorated or can be prone to quite significant deterioration. That will eventually put a lot of people out of business. My personal view and Belhaven's view is that there should be a much more controlled and better articulated policy on the part of each licensing board as to the granting of new licences. That is a very crucial issue if we are going to try to avoid duplication in the on-trade of what we have seen in the supermarket trade.

  381. The memorandum from the Brewers' and Licensed Retailers' Association of Scotland suggested that pub operators in Scotland invest £125 million per year on improving amenities for customers. During its visit to Glasgow the Committee was told that brewing is a very efficient, highly capital intensive industry. Evidence submitted by Tennent Caledonian argued that pressure from the specialist pub-owning companies (so-called "Pub Cos") had caused the price paid to manufacturers to fall. Belhaven noted "The threat of the super pub". During oral evidence on 10 January both the Brewers' and Licensed Retailers' Association and Scottish & Newcastle played down any undue negative impact of Pub Cos. Do you think that pressure by specialised pub-owning companies to reduce prices paid to manufacturers reflects the fact that these companies have unfair advantages over brewers?
  (Mr Ross) I am surprised that S&N and the BLRAS would say that the impact of national Pub Cos was not unduly negative. I would agree that the growth of the big Pub Cos has reduced the price of beer for manufacturers. There is absolutely no doubt about that.

  382. If so, what are those? Or would it be fairer to say that the Pub Cos are simply better at satisfying consumer wants and are successful because of this?
  (Mr Ross) I think what has happened, if you look at the industry since the supply of Beer Orders is that because there was an artificial change in the market, what happened was that companies which had to split between brewing and retailing tended to sell their pubs in huge chunks rather thank individual units of twos and threes. So we have seen the introduction of a lot of new money coming into Britain through Japanese venture capital and American venture capital. The way these companies make their money is either by retailing their units or taking a rent from the tenant of these pubs and keeping the discount or barrellage allowances they get from the brewers. To make their figures stack up and to repay their debt, they must get as much discount as possible. So it is just this change in balance. The balance has swung away from the integrated national brewers, who were pre-1989 if you like, to this new breed of retail groups which are in some ways quite unwelcome really. They are not adding much value to anything. They are just groups of multi-pub owners who are not much more than property companies of a certain type.

  383. What has been the impact on small breweries of the ability by large brewers to offer heavy discounts?
  (Mr Ross) I think I have really answered that in saying that Belhaven or companies of our size are unlikely to be able to compete on price in selling into either the major players in the take-home market or in the on-trade. Therefore to a certain extent that market is closed to us. We have obviously tried to improve our costs and increase our volume so we get closer to competing. But as I said earlier, that is just life and that is our problem. The impact really on the growth of retailers in terms of the balance of power is that we must focus clearly on what is left of the independent trade and that independent trade is reducing. So we have to get a larger share of the independent trade if we are going to grow our business. If we do not succeed in doing that, we will not be here.

Sir Robert Smith

  384. My impression from the evidence last week was that the history of brewing and pubs in Scotland was different from that in England. The message we were being given was that the pub companies were an English phenomenon and were not likely to make great inroads into the Scottish market because of the whole history and the different nature between the brewers and the pubs in Scotland. That was the impression I got. You said your main business is in Scotland.
  (Mr Ross) I disagree with that statement. That is an historic statement. I think what is happening in Scotland is evident if you go round every town and city centre. You have a major range of multi-national retailers now operating in Scotland. I mean Bass are a retailer; Whitbread are a retailer; JD Wetherspoon are a retailer; Punch Taverns are retailers; Pubmaster are retailers. They are all looking heavily at Scotland. That is an area of growth that they see, so I would contradict that evidence very strongly. I think we will see quite a change in the dynamics of retailing in Scotland.

Mr Sarwar

  385. I just want to clarify that. You see these pub companies. You think they will have a major impact on the smaller brewers because they have greater buying power.
  (Mr Ross) Yes.

  386. You disagree then with the evidence that was given to us earlier. During oral evidence on 10 January both the Brewers' and Licensed Retailers' Association and Scottish & Newcastle played down any undue negative impact.
  (Mr Ross) I disagree strongly about that. Absolutely totally. That is one of the reasons why I did not want to be on the same platform.


  387. Sometimes it makes for an interesting meeting when there is division among the witnesses. Do these pub companies not provide something that the public want? I have only ever been in one of them but I thought it was perhaps an improvement on some of the others.
  (Mr Ross) I think there are probably two types of pub company we are talking about here. I am sorry, I did not clarify that. There is a new breed in the UK of pub companies which are quasi property companies where they just bought large groups of houses which are tenanted to third parties and they take a rent from the third party and take the barrellage discount: tenanted estate operators. There is another group who are retailers; they retail their own houses such as JD Wetherspoon, Slug and Lettuce, Hogs Heads; there is a whole plethora of them. They are adding value into the retail market. I would not dispute that. Some of them have very good operations, excellent operations. The likes of JD Wetherspoon has built his business from zero to about 350 big units in a short space of time and credit to them for spotting a niche in the market. They do bring something to the trade. But our concern is that they are so powerful in terms of buying that we are unlikely to be a supplier to them. We are unlikely to be a supplier to them at a profit to Belhaven. That is our concern. I am not denigrating that type of retailer at all. I actually admire what many of those companies have done. I think generally—don't forget I have been in the industry for 30 years—the standards of pub retailing now are so much higher than they were even 10 years ago. I am quite proud of the improvements even we have made at Belhaven as retailers. Where we are now to 15 years ago is vastly different, a huge improvement.

Mr Sarwar

  388. This is a sensitive issue and I have a lot of sympathy with you. It is the case that pub companies are property owners because many of the people just buy the pub and then hand it over to third parties and they run the pub, get all the expenses and the pub companies get huge profits. But what can be done? I mean, obviously it is quite wrong.
  (Mr Ross) All that can be done, as I said earlier, in terms of regulation is that the Government should be looking closely at the retailing industry. That is the point we made in our submission to the Competition Commission on Bass Interbrew. As I said earlier, I was a bit disappointed at the outcome of that because I felt that Interbrew coming into the market would perhaps harden beer prices and our industry needs that.

Sir Robert Smith

  389. You are moving on to the supermarket side, which you have touched on already. You say that 40 per cent of beer is now sold through supermarkets and the Competition Commission found that, while supermarkets have sufficient buying powers to enable them to distort competition, do you feel that the concentration of retail power in the supermarkets has been detrimental to brewers?
  (Mr Ross) Yes.

  390. If so, what have been the major difficulties?
  (Mr Ross) The major difficulty as a supplier to supermarkets are the demands, the commercial demands. If they have got 200 potential suppliers and a huge amount of volume under their control, they are able to negotiate hard. I would not come here to whine, that is just a fact of life. You are either in that market or you are not. I believe at our level of beer production, we produce about 70,000 barrels of beer a year in a total UK market of approximately 33 million barrels. So we are tiny when it comes to potential supermarket business. What we would have to do to compete successfully in the supermarkets is to find a beer product which is not price sensitive and gives us sufficient point of differentiation of stand-out so that the supermarket has to sell it. That is difficult. But that is where we have to try and be. We have to try and get a niche in there. I mean if you go back 20 years ago, we were the first company to put beer in glass bottles, in the late 1970s. That snowballed and now if you go into Oddbins you will see 500 glass bottled beers. So commercially we have to be looking to find niches in whichever market whether it is as beer owners versus drinks distributors or as retailers because retailing is just as difficult as beer production in many ways.

  391. Do you find that if you can find a product with a defined niche, the supermarkets have routes through which you can still reach customers?
  (Mr Ross) Yes, but it is harder with supermarkets because of the type of packaging basically in which beer is presently sold.

  392. What do you mean?
  (Mr Ross) It is just harder to get points of difference between bottles and cans. There are beers from all over the world available in shops and to find that niche where there is a point of difference is not easy.


  393. Does where it is placed on the shelves make a difference?
  (Mr Ross) It does, but it will cost you to get it there.

  394. Is that below the line advertising?
  (Mr Ross) It is below the pocket.

Mrs Adams

  395. I am sure that you and everybody else in the industry is concerned about the level of tax. We understand that the UK Government impose the highest tax in Europe apart from Finland and Ireland. How do the high rates of excise duty affect the industry? Do they have any particular impacts on its ability to compete against foreign companies?
  (Mr Ross) I think you discussed that this morning so I will not bore you all. Basically I agree with the points made about boot-legging and cross-border trading, which does impact on pricing. Take-home trade pricing has come down a bit and that puts pressure back on suppliers. That filters through the industry in the sense that if take-home prices come down, it is harder for the pub trade to compete. So duty is a big issue for us. BLRAS were here last week and Rob Hayward of BLRAS gave evidence on that. He is far more able in that regard than I am so I would rather leave that to him. Suffice to say that I think it is a pipe dream for beer companies like Belhaven to expect our duty to be suddenly harmonised with the French duty because the French pay one-seventh of what we pay at the moment. So we would obviously be a bit stupid if we thought the Chancellor was going to take a knock for that amount of money. But what would help the smaller companies—this is not just a plea for Belhaven—is to encourage niche brewers. There should be a ratcheting arrangement of excise duty up to a certain level of, say, 200,000 hectolitres. It takes 200,000 hectolitres to get into the bigger players. I think all brewers would benefit from some ratcheting on the first 200,000 hectolitres but it would particularly help the smaller players. That would be a good step forward towards helping the industry. It is the best move the Chancellor could make without costing him too much.

  396. If you could design a fair tax regime as you saw it, it would be progressive on what is manufactured?
  (Mr Ross) Yes, on the volume manufactured up to a certain point, which is obviously up for negotiation.


  397. How many barrels is 200,000 hectolitres?
  (Mr Ross) It is about 120,000 barrels in volume roughly.

  398. So it is above your production of 70,000?
  (Mr Ross) Handily, yes.

  Chairman: We move on to smuggling and again we have had this debate before but Bill Tynan wants to ask you something on smuggling.

Mr Tynan

  399. Several of the memoranda note the increase in spirits smuggling since the advent of the Single European Market. The memorandum by Customs and Excise appears to accept that more could be done. How has the increased ease with which duty can be evaded affected the beer industry?
  (Mr Ross) Again, I would rather leave that to Rob Hayward and the experts to answer because they have got all the national statistics at their finger tips and I am heavily involved in running a smaller company have no more than an adequate perspective. I could answer that anecdotally. It impacts because we see the white vans coming in to all the places where we trade and it has an impact but how much I do not know. The suggestion to have differential labelling has got a bit of merit in it and we could do more there.

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