Friday, 15 January 2021

Vertical disintegration

Just before Christmas came the news that Brains Brewery of Cardiff had signed a 25-year deal with Marston’s to take over the running of their pubs, although they would retain the underlying ownership and continue to supply the pubs with beer. It was rather hard to know what to make of this, as it seemed to go against the usual trend of a company closing or selling off its brewery but continuing to operate its pubs, which typically account for the bulk of the profit.

Initially, it was met with guarded optimism, with CAMRA welcoming it as a means of preserving both the pubs and the brewery. However, it wasn’t long before it all started to unravel, and the announcement came that Brains were unlikely to reopen their new, state-of-the-art brewery, and that the beers could well end up being brewed in England. I’m sure Bedford or Wolverhampton could make a decent fist of them, but this would mean that a once-proud brewery company would be reduced a mere financial husk, with no direct involvement in either brewing or pub operation.

It should not be forgotten that, in the 1970s, Brains were one of the select band of breweries to offer real ale in every single pub they owned. Their flagship beer SA was one of the early standard-bearers of the real ale movement, although it is in a style that is no longer so fashionable. It is still one of my favourites, though, and one I will usually go for if I happen to see it on the bar.

However, they have suffered from the usual problems encountered by every brewery mainly dependent on the on-trade, which has halved over the last couple of decades. And in recent years they have seemed to lack a coherent strategy, introducing a range of craft beers that were well-received, but seemed to fall between two stools in the marketplace, and increasing their estate by expanding into England, only to sell all those pubs again early last year. Plus the lockdowns in Wales have been even longer and more restrictive than those in England, and Brains have now become the first major brewing casualty of the Covid crisis. Tandleman has also blogged very perceptively on the Brains story here.

No doubt this news will give the directors of the remaining family brewers pause for thought as to whether the vertically integrated model combining brewery and pubs is still relevant in today’s business landscape. Going back a couple of generations, this was the default in the industry. Breweries acquired pubs to sell their product, and the number of pubs they owned was a key factor in judging their success and status. Most production went through their own pubs, and most of what the pubs sold came from the owning brewery.

Up and down the country there was a patchwork quilt of independent breweries of various sizes, in general just producing variations on the theme of standard British beer styles. People would, in general, choose a pub based on its location, its atmosphere, where their friends went and what activities took place there rather than specifically which beer it sold. Obviously some beers were better regarded than others, but by the end of the 1960s the wave of big brewery takeovers had eliminated pretty much all of the total clunkers. Perhaps one of the last to go was Swales of Manchester, taken over by Boddingtons in 1970 with 38 pubs and rapidly closed down, whose beer was dismissed as “Swales’s Swill.” But I’m too young to remember it, and I may be unjustly denigrating them.

There were still about 100 independent family brewers remaining at the dawn of the CAMRA era. Some, such as Boddingtons and Young’s, had strong local followings, whereas others weren’t met with such enthusiasm. Locally, I don’t think people would have gone much out of their way to drink Burtonwood or Matthew Brown. But all of them had their own individual character, and there was something to be said for pretty much all of them. The only one that people seemed to struggle to find a good word about seemed to be Gibbs Mew of Salisbury. Often the main determinant of which pub to choose was whether or not they sold real ale – people would choose a real Oldham Brewery pub over a keg Thwaites one.

Over the years, the various pressures on the industry caused many of these companies to be taken over or leave brewing, with the result that less than half are still standing today. It must always be remembered that, with the one exception of Matthew Brown being taken over by Scottish & Newcastle in the late 1980s, all of these were agreed deals. The single biggest factor determining survival or extinction was the continued commitment of the owning family.

In the ensuing years, various changes occurred in the industry to undermine the viability of the integrated model. First was the rise of lager, which by the middle of the 1980s accounted for half of all beer sold in pubs. Many family brewers developed their own brands, some decent, some less so, but they never resonated with customers in the same way as their ales, and the lack of a well-known national brand on the bar was often a reason for drinkers to avoid their pubs.

Then there was the growth of the food trade. Some brewers had attractive suburban and rural pubs in their estates that were well-placed to capitalise on this, but it reduced the overall importance of ale in the sales mix. After the 1990 Beer Orders, there was a growing expectation of seeing a wider range of beers on the bar, whether rotating guest beers or national brands, making brewers’ own ranges look dull and uninspiring.

And the dramatic decline of total beer volumes in pubs, which halved between 1998 and 2019, put further pressure on the brewing side of the business. Typically, the family brewers sold a much higher proportion of their production in the on-trade than the industry as a whole. This trend has particularly affected wet-led pubs without food sales to fall back on, and this was exacerbated by the 2007 smoking ban. This type of pub was over-represented in the estates of many of the family brewers, such as those in the North-West.

The overall effect of these changes has been to greatly erode the synergy between the brewing and pub-operating sides of the business, and diminish the relative importance of brewing. As I’ve said in the past, many of these companies have come to look like a chain of smart dining pubs with an under-utilised ale brewery tacked on as an afterthought. Inevitably, this has caused some of them to question whether it makes sense to carry on this way in the future, and no doubt more will do the same.

But surely, if you are running an integrated business, it makes sense to make a virtue of it rather than seeing it as a problem. There are no magic answers, but several breweries have found ways to address this. For firms varying from Bathams to BrewDog, the fact that you can buy those particular beers in those pubs or bars is a major factor in defining their appeal.

Sam Smith’s beers may not be such a compelling attraction, but their overall offer is a highly distinctive one on the pub market, and they make a point of promoting the fact that as much as possible of what they sell is made in-house. That, incidentally, as also something that the supermarket chain Morrisons use in their publicity. And Holt’s of Manchester, while a lot less out on a limb than Sam’s, do brew their own range of lagers and stouts which are the standard beers in those categories in their pubs. If you own a brewery, you might as well try to make the best use of it.

Too many pubs now have beer ranges that are hard to distinguish from one another. Promoting the fact that Bloggs’ pubs are the best place to find Bloggs’ beers has the potential to create a unique selling proposition. It also must be noted that the integrated approach has been adopted by newer breweries such as Joule’s and Wye Valley who have built up significant tied estates that heavily feature their own beers. Clearly there is life in that model yet.

11 comments:

  1. Just a few asides. Are there any family brewers out there still serving cask everywhere? I note Holts try hard,but not in all,Okells similarly (caveat all traditional pubs). Anyone know? I note also in line with your Joules comment that Thwaites now supposedly only supply their cask to their own pubs,which has been as a selling point been drawing me to their pubs when I spot one,knowing I won't get their cask elsewhere.

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    1. Batham's and Holden's certainly do. I'd guess quite a few others such as Hook Norton and Donnington do as well. Robinson's perhaps have one or two pubs such as the Star & Garter in Stockport that currently serve no cask but aren't part of their long term plans. Sam Smith's certainly don't. Most breweries have probably now disposed of their tail of what some might dismiss as "keg-type pubs".

      Hall & Woodhouse also now only supply their cask beers to their own pubs.

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    2. To what extent, and probably only available anecdotally, might these 'supply issues' be down to perceived quality control questions?

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  2. "they would retain the underlying ownership"

    This can't be downplayed. Like it or not, owning property is a far better route to long-term wealth than brewing and supplying beer these days.

    In the time that on-trade volumes have halved, what has happened to property prices? Doubled? Trebled? Commercial priorities - and almost all breweries are commercial businesses - have consequently shifted to follow the money.

    It's entirely understandable, if not good news for the drinker and pub-goer.

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    1. A cynic might suggest that the family have protected their own wealth at the expense of that awkward pub running business and that pesky brewing.

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  3. I hope someone with relatively deep pockets and either a vision for a new brewery or expansion will buy the brand new state of the art Dragon brewery, although it seems likely that the hot side will be sold alongside some but not all of the fermenters, and the packaging equipment.

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  4. Harvey's certainly serve cask in all their tied houses, and their Best Bitter is still a common sight in many local free-houses - or should that be was?

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  5. " The overall effect of these changes has been to greatly erode the synergy between the brewing and pub-operating sides of the business, and diminish the relative importance of brewing............. Inevitably, this has caused some of them to question whether it makes sense to carry on this way in the future, and no doubt more will do the same."

    "But surely, if you are running an integrated business, it makes sense to make a virtue of it rather than seeing it as a problem"

    Key points in an excellent analysis. I still reckon that vertical integration has its place and will retain one for years to come, but the road ahead is rocky. Whatever underlying problems Brains had, does not take away that they clearly believed in an integrated future until somehow events overwhelmed them. Surely the new 45,000 barrel brewery is evidence of that?

    Making a virtue of a vertical integration is surely a key necessity for the future for remaining vertically integrated businesses - and there are still quite a few around - see my remarks while reviewing Roger Protz's Family Brewers of Britain who still, between them own over 4000 pubs.

    Your points about Joules and Wye Valley are well-made. The model isn't bust but needs those involved in it to keep the faith. Brains beer won't be Brains beer if brewed by someone else, any more than Batemans, Lees, Robinsons, Harveys or any of the others would be. Most, if not all, vertically integrated brewers know that.

    The future of beer and brewing isn't just cans at home and drinking at freezing cold brewery yards with a clique of pals - though that has its place - but also in local pubs owned by local breweries with a more inclusive model. Yes amongst the mix - in fact the majority - will be big chains, but that as in small single venue outlets, all adds to choice.

    The Brains story serves as a warning to others. Yes keep the faith, but above all, keep your hand on your halfpenny.

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    1. I think the trick, so to speak, in a vertical brewing business remaining so, is not to become a publicly traded company, or to stop being one. This will usually (not always as we've seen in the past) prevent shareholders and unfriendly or even friendly predators from forcing or otherwise causing the splitting off of attractive property estates.

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    2. Sorry, don't understand. You don't just 'become' a publicly traded company, the process has to be initiated with the consent of the shareholders and involves extensive due diligence by professional advisers and approval of the Stock Exchange. There is a lot of work (and cost) involved but the benefit is access to capital (i.e. without relying on the banks) and the ability of investors to buy (and sell) shares. You also cannot 'prevent' shareholders from selling assets (obviously with majority approval) because they own them and can do what they like within the law. The directors also have a legal duty to act in the interest of shareholders, which includes selling assets if the price offered is more than the future value that could be achieved by the company itself.

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    3. Remaining privately held doesn't stop the owning family wanting to cash in, or engage in internecine squabbles, as we saw with Bateman's. And remember that the only hostile takeover of an independent family brewer since the birth of CAMRA was that of Matthew Brown. All the rest were agreed.

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