Examination of Witness (Questions 380
WEDNESDAY 17 JANUARY 2001
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
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
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 generallydon't
forget I have been in the industry for 30 yearsthe 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.
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
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
394. Is that below the line advertising?
(Mr Ross) It is below the pocket.
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
companiesthis is not just a plea for Belhavenis
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.
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.