Breaking the charmed circle

I reckon the electricity industry should be nationalised. Or, more accurately, I reckon the electricity industry will nationalise itself.

The early stages of conglomeration have started already, with Southern Electric of Alabama (swing low, sweet share-out) offering some 1bn for South Western Electricity, while Scottish Power puts a similar value on its offer for Manweb. Trafalgar House meanwhile patrols the borders of Northern Electric. Now Hanson has bid 2.5bn for Eastern Group.

What is happening is that, as a result of the Government’s botched privatisation of the power industry and subsequent limp-wristed regulation, a process of natural selection is under way that will eventually deliver us an electricity industry consisting of two or three vertically-integrated power generation and distribution industries.

Since consumer interests would have to be protected from the muscle of these shareholders, the government of the day will be forced to take a more active interest than the post-privatisation policy of throwing the industry to the wolves and appointing a sheep to regulate it.

A central board of directors could be appointed to run the whole British industry. I have an idea as to what it could be called – the Central Electricity Generating Board.

As they say, there are no new ideas under the sun. At the current rate, a Labour government will not have to re-nationalise the electricity utilities. The industry will do so itself.

But – it’s important to have an element of surprise – this column is not to be primarily about the electricity industry. What it addresses is a similar process of conglomeration in a completely different industry and its effects at the consumer end of the market – and the degree to which this process is the result of misguided politics.

I am talking about the big brewers. And the big brewers have never been bigger. Whitbread’s bid for Marriott’s hotels in Britain for some 200m sets the agenda for a series of hotel deals as charges and occupancy rates improve and offer a way forward for those big brewers.

Apart from Whitbread and Bass, which are set to fight it out for Carlsberg-Tetley, there is Scottish & Newcastle, which is poised to complete its 425m takeover of Courage.

There have been others, of course – Grand Metropolitan acquired powerful brands such as Watney and Truman in the Seventies, but flogged them on to Courage when the US and the likes of Pillsbury and Burger King attracted its attentions.

Today, it is Bass, Whitbread and S&N that account for more than 80 per cent of British brewing. Of these, S&N is thought to be likely to emerge as the UK’s largest brewer, with about a third of the market.

But are we really justified in calling any of them big brewers? Yes, they are the biggest we have, but are they big in brewing?

The facts are that S&N earns proportionately the most from brewing, with a 26 per cent contribution from beer production, with the figures being 22 per cent for Bass and only 15 per cent at Whitbread.

So these are not brewers, in the sense of being companies whose principal activity is the production of beer. These are hoteliers and retailers who happen to have residual interests in UK brewing that some of them have expressed an interest in quitting altogether.

Take Bass. It is the world’s largest hotelier through its acquisition of Holiday Inns and is enormous in gambling through Coral and Gala. S&N owns Pontins, Center Parcs and acquired the Chef & Brewer chain from GrandMet in 1993. Whitbread has a variety of interests including the Beefeater and Berni chains and TGI Friday, as well as Thresher off-licences and, as I say, is going for Marriott.

Expanding businesses – and why not? It is, after all, what businesses are meant to do. And there should be no doubt that part of the reason for this explosive diversification is socio demographic.

Falling beer consumption and increasing social demand for family catering on the Continental model has rung a death knell for the traditional British brewery-to-pub “beer chain”.

But there are other causes – or, at least, contributions to the process – without which these conglomerates may not have been quite so obsessed with replacing brewery businesses with hotel and restaurant chains.

It seems a long time since Lord Young, as Secretary of State for Trade & Industry, was “minded” to accept the Monopolies & Mergers Commission proposals to break the brewers’ strangehold on tied-pub brands. But it should not be forgotten – it was only the late Eighties.

Nor should we forget Lord Young’s Beer Orders, which sought to limit the number of freeholds owned by the large brewers. Their response was a replacement of freeholds with punitive leaseholds that, in turn, drove many a tenant from his or her pub.

An irony is that the Government was motivated by its desire to break the complex monopoly of the Beerage – the alleged cartel of major brewers that supposedly controlled the manufacture and retail of UK beers. What has happened is that today British brewing – such as it is – is controlled by fewer giants than ever before and the number of pubs has been rationalised in favour of themed eateries such as Harvester (owned, of course, by Bass).

The big brewers have been replaced by the big leisure industries, which own British brewing. Perhaps we should call it the Leisurage.

The process is underscored by the Stock Exchange letting it be known that it is minded to abolish the “breweries” category in the share listings and replace it with one for “pubs and restaurants”. A telling detail about what has been happening to the industry these past years.

What it also tells us is that misguided regulation of industry, supposedly in the public interest, can lead to conglomeration and a run-down of the very activity that is meant to be protected. It has happened in brewing and it is happening to privatised utilities, such as electricity companies, which now look to foreign earnings, foreign ownership and conglomeration to provide their growth.

Perhaps, when we have two or three leisure conglomerates in Britain, controlling all UK brewing, we can nationalise the industry. The Soviet experience offers some fascinating precedents.

George Pitcher is joint managing director of media consultancy Luther Pendragon.


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