The world of regional brewing is entering a period of contraction. Observers and industry executives believe the sector is about to embark on a round of restructuring, sell-offs, mergers and acquisitions. Several prominent regional brewers are expected to disappear and with them some well-loved beer brands.
The news this week that Sunderland-based Vaux is to sell off its brewing and pubs arm, is thought to be the tip of the iceberg. It follows confirmation last week that Staffordshire brewer Marston Thompson & Evershed is in talks with Japanese bank Nomura to raise capital on its tenanted estate. Next month the sale of Oxford-based Morrells is anticipated.
The stakes are rising in regional brewing. But then they have been for a while. The sector has a problematic history but now there is a mounting urgency for change.
Last month Marketing Week reported that business in pub restaurants dropped by 7.4 per cent in the quarter to July, compared with the same period last year, according to a survey by Taylor Nelson Sofres Meal Trak (MW August 20).
The World Cup and bad weather were blamed for keeping people at home. But some analysts wonder whether it is also evidence of a wider down-turn in the fortunes of the pub sector. Brewing and leisure giant Whitbread has just cancelled all expansion plans for its pub and restaurants arm, citing – among other reasons – recessionary pressures.
If a downturn is on the way, a new and ominous bell is tolling for regional brewers. As a result of a trend towards vertical integration some years ago, many regionals are now owners of substantial pub estates. It is widely thought that these pubs – particularly branded ones – have been propping up the brewing side of some companies. Heightening competition within pub retailing has already made this a tenuous position. If sector wide business starts to slip, the impetus for change will grow.
This new problem comes on top of an array of others for the sector. The beer market in the UK has been declining for years and there is now an oversupply of products and excess brewing capacity. The effects of this have been felt most in the heartland of regional brewers – ale country. In 1987 ale and stout accounted for 53 per cent of the beer drunk in the UK, while lager accounted for 47 per cent. The Brewers & Licensed Retailers Association reports that by 1997, this situation had reversed and lagers held 59 per cent of the market and ale and stout 41 per cent. Unfortunately for regional brewers, the strongest brands in the lager market are held by the four national brewers: Scottish Courage, Bass, Whitbread and Carslberg-Tetley. It is difficult for the regionals to compete with the nationals’ lager superbrands as they lack the resources and scale.
In addition to a slump in ale consumption, regional brewers are having to contend with the growing encroachments of European beer brands brought into the UK through cross-channel trade. Charles Wells’ marketing director Nigel McNally estimates that these now constitute about five per cent of the UK off-trade and it won’t be long before they enter the on-trade. It’s a problem which has been particularly acute this year because of the World Cup. One analyst says the quantity of Euro-beer jumping the border grew by 32 per cent in the months prior to the tournament.
In business terms, it is harder for regional brewers to sell enough beer to satisfy the capacity of their breweries. If their operation is at the larger end of the scale, it is likely they are going to be worse hit unless they have the resources and marketing strategies to maintain sales in the face of stiff competition. Burtonwood is a good example. Its brewery at Bold Lane was operating at only 50 per cent capacity prior to its merger with Thomas Hardy. Morrells is another. Chief executive and chairman Ken Hodgson said at the time he announced its sale: “The decision to sell was not an easy one. We had to face facts, the brewery was not profitable. It cost over 1m a year to keep open. Morrells is a family business. We cannot afford such losses.”
Thus far Morrells has received 20 odd bids from interested buyers, among them are believed to be a number of regional brewers.
City investors love takeover talk as it keeps share prices buoyant. In a brewing sector where the major companies have already been through a round of mergers, investors are looking for excitement. The sector has been dull, especially since last year’s blocking of Bass’s takeover of Carlsberg-Tetley. Analysts are keen to raise the prospect of further activity among some of the publicly-listed regionals – Marston, Wolverhampton & Dudley, Greene King, Morland, Vaux, Youngs, Ushers, Mansfield, Jennings, Fuller Smith & Turner, Burtonwood and Belhaven.
McNally comments: “It’s inevitable that there is going to be continual shake-up in the industry. It is more likely that the larger regionals will find it difficult to continue as they are. The pressure is on them as publicly quoted companies to satisfy the City. The only way out is to merge or buyout someone else….You are talking about at least one regional brewery going, possibly two.”
In the case of Marston, speculation is rife. In March the company announced its results for the last financial year. Pre-tax profits rose by 3.7 per cent to 30.3m. Brewing and wholesaling profits were 63 per cent higher at 6.5m, on a total increase in volume of 1.5 per cent. Sales of its foremost brand Pedigree were up 1.8 percent. Its branded pubs chain Pitcher & Piano, which it bought two years ago for 20m, performed well, but the company was held back by a poor performance from its tenanted estate. For the City the news wasn’t encouraging, and Marston’s shares at the time dropped 7.5p to 297.5p.
The brewer’s management has been vocal about its plans to expand the Pitcher & Piano chain, a move supported by those in the City who believe branded pubs are likely to survive a downturn better than the average village local. To expand Pitcher & Piano, Marston needs capital, hence talks to securitise its 631 tenanted pubs. If the move goes ahead, it will mean investors will be invited to buy bonds based on the future income and value of those pubs. It has been reported that this could raise 100m for the company.
However, some analysts believe Marston may need to merge with another regional brewer or pub company before securitisation can go ahead. For the moment the company is keeping quiet about its plans, but it is thought a tie-up with Greene King is a possibility. The two companies’ estates would be a neat geographic fit and Greene King is perceived as cash rich. Neither Marston nor Greene King would comment on the situation.
Given the state of the market, consolidation among regional brewers looks inevitable. It is likely to be an emotional and difficult time for some. It may mean choosing between a much-loved family brewery and the more lucrative attractions of retailing. But the free market leaves little room for sentimentality. As Campaign for Real Ale spokesman Ben Wardle says: “Unless [regional] brewers are able to change and adapt, there is no future for them.”