The Bitter End

News that Bass may sell its brewing arm due to underperformance does not bode well for the UK industry. If Bass, one of the three major brewers and the one with the product development record, is bailing out, what chance do the others have of making it to the end of the next decade?

The beer business is not what it used to be. A few years ago the idea of a company such as Bass or Whitbread selling its brewing interests to concentrate on hotels and leisure would have been unthinkable.

Now many observers believe it is only a matter of time. As one analyst explains: “The big beer companies would love to sell their brewing interests but no one would be stupid enough to buy them.

“Profits are not increasing and prices are under pressure. Things won’t improve until Whitbread, Bass or Carlsberg-Tetley quits the sector. But they won’t do it, because it will cost them too much. The market won’t change until one of them dies.”

So what has gone wrong? Why has brewing, once the safest of safe bets, become such a deeply unfashionable sector on the stock market?

And if, as many suspect, the big brewers eventually pull out of the market, who will take their place?

Beer pressure

The basic problem is that people are drinking less beer and there is huge over-capacity in the market.

To make matters worse, the supermarkets are putting the squeeze on prices and the Government has begun an investigation into alleged rip-off prices in pubs.

The big three UK brewers, Bass, Whitbread and Scottish & Newcastle, have responded by trying to reinvent themselves as “leisure” companies, buying chains of hotels, restaurants and health clubs. But the City remains distinctly unimpressed.

The UK’s second biggest brewer, Bass, has found that it can make more profit from its Holiday Inn and Inter-Continental hotels than it can from beer, despite making the UK’s best-selling lager, Carling.

Its Inter-Continental chain saw profits leap by 23 per cent this year, compared with a 6.7 per cent increase in brewing profits. Brewing provides 39 per cent of turnover but less than 20 per cent of profit.

Chairman Sir Ian Prosser last week hinted that the company would be willing to offload its brewing arm, saying he would be “prepared to examine all options” to maximise shareholder returns.

This was, no doubt, designed to impress the City, which has long suspected that the brewers are held back by the tradition and sentimentality surrounding their product.

Bass media relations manager Mark Rigby says: “All we are saying is that we are not emotionally attached to any of our divisions, bearing in mind that our business is generating value for our shareholders.”

Commenting on the prospect of a Bass sell-off, one analyst says: “The good thing about Bass is that it has a strategy and a strength of management. It will get rid of assets that are under-performing, and that includes brewing.

“But it also has its own brands, while Whitbread and Scottish & Newcastle, on the whole, don’t. If you are a Bass shareholder every time a can of Carling is sold it benefits you directly and that cannot be underestimated.”

Brand strength

The undoubted strength of Bass’ brands has not stopped its share price falling 40 per cent in the past 18 months. The company is clearly prepared to think the unthinkable – but what about the rest of the industry?

Officially, Whitbread remains committed to its beer and lager brands, which include the number one premium lager, Stella Artois, which it brews under licence from Belgium brewer Interbrew. But it has made no secret in the past of its eagerness to get out of brewing.

If its attempt to take over the Allied Domecq pub estate earlier this year had not fallen flat, it would already have stopped brewing.

Mergers

Carlsberg-Tetley, the UK’s fourth biggest brewer, is still recovering from 1997’s attempted merger with Bass, which was controversially blocked by, then President of the Board of Trade, Margaret Beckett.

C-T insists it is in brewing for the long run and some observers believe its Dutch parent group Carlsberg is preparing to go on a buying spree to strengthen its position.

The UK’s biggest brewer, Scottish & Newcastle, with 30 per cent of the market, is also looking to expand its beer portfolio, while at the same time trying to offload its underperforming Center Parcs leisure interests. Like Whitbread, S&N suffers from a low stock-market rating and is in danger of losing its FTSE 100 status.

It has expanded rapidly over the past six years and earlier this year swallowed up smaller rival Greenalls, but brewing still accounts for just 40 per cent of its profits.

The Greenalls deal capped an unprecedented year of consolidation in the industry, which saw the six big regionals shrink to two: Wolverhampton & Dudley and Greene King.

Small players

This climate – coupled with the collapse in demand for cask ale – has fuelled speculation about the long-term future of Britain’s small, family-owned brewers, which hold about five per cent of the market.

Bedford-based Charles Wells has 250 pubs, and brews Red Stripe and Kirin lager under licence alongside its own Bombardier bitter. Managing director Paul Wells says: “It has been a difficult year, but I think family brewers like ours will survive.

“We are a private company so we are protected from being buffeted by the markets. The downside is that we can’t go to the market to raise capital.”

Wells believes the tie system, which guarantees a captive market for a brewer’s products, is crucial to the survival of the 32 remaining family brewers.

But how long the system can survive, in an era of tighter employment and competition laws, is questionable.

One analyst says: “The brewers have no bargaining power with the supermarkets or the pub companies. With their own estates they can pass on increased costs through the value chain, into their own pubs.”

He adds: “There will be a shake-out. Some of the weaker players will fall away. The industry likes to think there is room for everybody, but there isn’t.

“The number of exits from the brewing industry has been remarkably low, partly because of the family element, but it has to change.”

The traditional link between breweries and pubs, which has served the industry well for centuries, is coming under increasing pressure. However, the prospects for a demerged beer company, on the scale likely to be allowed under current competition laws, would not be good. More likely, would be a buyer from abroad.

South African Breweries has been on the acquisition trail globally and now has a listing on the London Stock Exchange. And Interbrew was this week reported to be hunting acquisitions.

Foreign buyers

Heineken, the Dutch group which is the second largest brewer in the world, is another possibility. Its franchise agreement with Whitbread is due for renewal in 2002 and it may be tempted to take over the supply of its own products.

But so far the foreign breweries have yet to make a move, perhaps scared off by a declining market and the Government’s taste for meddling in the market.

The other way forward for the industry is more consolidation, and some observers predict the formation of one or two super-breweries, with a streamlined portfolio of top-selling beers and lagers. But this may be blocked by the Government.

The gap in the market left by the disappearance of the regionals would be taken by single-pub micro-breweries, catering for those with a taste for more distinctive brews.

Whatever happens, the market for beer and lager shows little sign of reversing its long-term decline. Making beer is still a profitable business but real growth opportunities lie elsewhere.

It will be interesting to see which of the big three brewers, for so long a cornerstone of British business life, will still be making beer at the end of the next decade.

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