The squeezed middle

The sale of Fuller’s brewing interests to Asahi has underlined the highly exposed position in which many of the established, medium-sized firms find themselves. As a mid-sized brewer, Fuller’s said, it was being squeezed between the global brewers and the 2,000 smaller brewers across the UK. They went on to say that tax breaks given to microbrewers and the power of the big global drinks firms have left little space at the bar for those in the middle.

Progressive Beer Duty was introduced in 2002 by Gordon Brown with the aim of stimulating the number of small breweries in the UK. And it has certainly succeeded in this objective, with over 2,000 now in operation. However, as with many such well-intentioned measures, it has had unintended consequences. It allows a 50% discount on beer duty for breweries with an annual production under 5,000 hectolitres (3,055 barrels). That’s 59 barrels a week. Above this figure, the duty relief is steadily clawed back, until it entirely disappears at 60,000 hl (36,661 barrels). Many of the established family brewers are above this figure, or only just below it. Fuller’s, who were one of the biggest, were producing about 200,000 barrels a year.

In practice, many of the new small brewers have used the duty relief not to bolster the finances of their business, but to sell beer more cheaply, which is helped by the fact that many are in effect “hobby businesses” that aren’t expected to provide anyone with a full-time living. The result is that the established brewers are put at a severe price disadvantage when competing in the free trade, and also pubs taking beer at these lower prices are able to undercut their tied houses. The overall market share of these small brewers is relatively small, and to the likes of AB InBev they are no more than a pinprick on an elephant’s backside. But they have a much higher share of the market for cask beer in the free trade, and if you go in any pub that is able to buy beer on the open market it is likely that most of its cask lines are from microbreweries. Some of these beers are very good, but the main reason many of them are there is that they are cheap to buy.

The business model under which the family brewers developed was one of building up tied estates that would take the majority of the production from their brewery. For many years, this worked well enough, but trends in the industry have combined to undermine it. First, there has been a dramatic decline in the amount of beer sold in the on-trade, which has fallen by two-thirds over the past forty years. This in itself has had a severe impact on breweries producing beer for pubs. Added to this, there was the long-term switch from ale to lager, which now accounts for two-thirds of beer sold in pubs. Some breweries initially attempted to develop their own lager brands to keep their mash tuns busy – anyone remember Amboss and Einhorn? – but eventually found that these brews commanded little customer loyalty compared with nationally-advertised brands, and had often become a specific reason for people avoiding their pubs.

So they ended up dropping their own lager production and buying in brands such as Carling from outside, thus further reducing the throughput of their own breweries. Being left with tied estates where beer sales had fallen to the extent that many of the pubs were no longer viable, combined with large brewing plants not doing remotely the volume that they once did, it is hardly surprising that many family brewers decided that the best course of action was to sell up. The general outcome was to sell to a larger competitor, who would within a short time close the brewery and absorb the production to bolster the viability of their own plant.

However, all was not doom and gloom. Some of the family brewers had a number of attractive suburban and rural pubs that were ideally suited to capitalise on the growing trend for eating out in pubs. They were also able to pick up more such properties at knock-down prices from distressed pubcos, an area where, locally, both Robinson’s and Lees have been very active, as indeed were Fuller’s. But what kind of beer you sell has very little relevance to the business of a dining pub, and so they ended up being effectively chains of middle-class eateries with an under-utilised brewery tacked on.

Fuller’s reckoned that 85% of their profits came from their pubs and hotels, and so it is perhaps understandable that they, and previously their local competitors Young’s, decided to concentrate on that part of their business and accept an attractive offer for the brewing side. However, in doing that they are losing their distinctiveness. A brewery produces a unique, identifiable product that is recognisable to customers and may command a great deal of loyalty, but a pubco is, well, just another pubco.

There are very few pub operators that really stand out from the others in terms of how they are run and what they offer. Most identifiable pub “brands” are, in effect, the equivalent of restaurant brands, such as Brewhouse & Kitchen and Brunning & Price, and the only really distinct pub brand that means something to a wider audience is Wetherspoon’s. This makes non-brewing pubcos more vulnerable in the long-term to takeover, and means their management have to constantly ask themselves what it is that they bring to the party that another owner wouldn’t. Just look at what happened to Boddington’s.

It’s also something of a fallacy that you can make such a clear distinction between the brewing and pub sides of the business. Yes, if you own a chain of pubs and a chain of hair salons, they have nothing in common and can each stand on their own feet, but a brewery and a pub chain to some extent support each other. You can work out that one is more profitable than the other, but there’s a large amount of discretion in how you allocate common costs and calculate transfer prices. It’s rather like arguing that, since your right arm does much more work than the left, you can dispense with your left arm and reduce your food intake. If you separate brewing and pubs, both will be diminished and their long-term survival as businesses put at greater risk. Samuel Smith’s have realised this, and make sure that every drop of beer sold in their pubs is their own production.

Fuller’s stood out from the rest of the crowd of family brewers both because its location in the capital gave it a higher profile and because, more than most of the others, it produced special edition and collaboration beers than piqued the interest of enthusiasts. It also stood on a site with perhaps uniquely valuable redevelopment potential. You can’t really imagine a multinational brewer swooping on Arkell’s or Felinfoel, or their brewery sites being worth tens of millions for upmarket housing. But the announcement of this deal will certainly have given many directors of family brewers cause for thought about their long-term future.

It’s often the case that people attract warm tributes when they die while having a much more equivocal reputation during their lives. I can’t help feeling that some of those shedding crocodile tears over the sale of Fuller’s are the same people who a year ago were happy to dismiss London Pride as “boring brown beer”. Maybe if we want to help the prospects of the family brewers, beer enthusiasts should give them a bit more love as upholders of a unique British tradition, rather than spending all their time gushing over the latest pastry stout or enamel-stripping IPA in an industrial-chic tap room.