An artisanally crafted blog curated by Cooking Lager for discerning readers of beer bloggery

Tuesday, 23 August 2011

Cookies Crystal Ball

Holly Valance encourages you to neck a Foster's Gold

Firstly an apology, this is yet another long tedious post where I try to make a thoughtful point rather than glorify binge drinking, mild misogyny or make fun of bearded sandal wearing beer geeks. I’ve not given up on that and if you come back later I’ll try to have some for you. I’m necking some Foster’s Gold tonight after the squeeze bought me a six pack. I shall be necking it whilst watching Seven Dwarves, the best show on telly. I’ll let you know why Foster’s Gold is the beer to finally kill of dark pongy ale for good.

I’ve been pondering the distinct and noticeable alteration in the pub landscape away from drinkers pubs (wet led is I believe the technical term) and dining pubs (I’m not sure whether these are dry led? Are they? Comments below. I must say I don’t much like the idea of dry food. It sounds over cooked).

I’ve been reading a fair few things that lay claim to food being the saviour of pubs and from a business perspective I don’t doubt it, though whether a cheap restaurant is actually still a pub is another discussion altogether. Any business has to give the punter what they want and I want to eat a meal and have a drink with my good lady far more often than I wish to neck beer with my dodgy mates. Even when I used to neck beer with my dodgy mates more often than I do now, had you said to me then “Do you really want to hang around this dump getting pissed with this lot, or would you prefer a nice meal in the company of a pretty lady who will take you home afterwards for a bit of how’s your father?” I’d have abandoned the lads without hesitation. I was in truth hanging out with my dodgy mates because no bird wanted me, and if the current bird decides the rest of female kind is correct in their assessment of my qualities and dumps me I will no doubt find myself drinking in pubs with the lads more frequently until I can con another lass into taking me on by pretending to be clean, charming and sophisticated. I might even join a beer club so I can drink with Tand & Mudge until I pull again. I suspect they could teach me how to bird.

The change of use from wet to food led is though, in my humble opinion far more profound than many realise and its effects will eventually significantly alter the pub and brewing landscape. Do me the honour of reading my argument then feel free to disagree? My opinion is not written in stone, if you disagree you might be right.

Pubs come in 3 basic business models, the single outfit, the horizontally integrated chain and the vertically integrated chain.

The single outfit or free house appears a popular business model with beer geeks because of the freedom to procure products from wherever the owner/manager decides. Hence there may be beers uncommon in the pubs of that area or a quirky popular feature than generates trade. The pub may follow the current trend of offering multiple beer choices from around the world and be a beer geek’s paradise. The pub may or may not have an attached micro brewery but if it does it’ll be an unnecessary vanity of the owner. The pub will undoubtedly thrive on the wide choice available rather than the pong they brew out the back in the shed. Food may or may not be part of the model and once more fit in with the vanities of the owner. It could be a particular style of food or an adherence to snob driven food fads like organic local produce. It can even result in the customers denied their basic human right of Heinz ketchup and HP sauce if the owner decides he doesn’t want that putting on the fine local organic sausages. Whether this drives trade will be observable on an individual basis rather than an industry wide perspective. Success depends on the vanities of the owner finding favour with a sizable niche in the locale. The main trade will be products bought in that customers decide they cannot get elsewhere. Otherwise they would get it elsewhere because it would be cheaper to do so. If you make shed brewed pong, this is your retail outlet and if you want to buy it wade through the beards to get to the bar.

The horizontally integrated chain in operating a number of outlets is going for a wider mainstream customer base. It can be observed the product choices in these establishments favour national brands and lack imagination. Many beer geeks would like to see a legal right to procure beers off the national list. The reason many of these chains prefer national procurement is often stated as obtaining the economies of bulk purchasing but there is another reason entirely and that is one of preventing corruption. A chain of over a thousand operators procuring product individually affords many opportunities for back handers. The operator buys product on the books and the supplier gifts the operator off the books. National procurement with a managed supply chain keeps everything on the books but favours suppliers that supply nationally. The most successful of these chains appears to be Wetherspoons with a managed house model and focus of delivering quality at reasonable prices to the end customer. They are not the only one; Crown Carveries appear to do a roaring trade as do many others you can mention. Those chains that attempt to be actual restaurants rather than pub themed restaurants even make a go of a pricier offering.

The tenanted model of Punch and Enterprise appears flawed for any number of reasons though the high leverage adopted isn’t really the issue that many think. All capital costs money, whether it is debt or equity. The business has to service both with either interest or dividends. Leverage requires interest payments where equity can halt dividend payments making an equity capital structure more resilient to a temporary downturn. Neither capital structure is resilient to a permanent downturn in trading conditions as who really wants to own equity that eats itself rather than offers a return?

The struggle of the tenanted model comes from the inability to offer value to the end customer. Customers quite rightly baulk at the prospect of the eye watering prices charged in pubs maintaining a 50%GP on kegs of lager bought from the internal supply chain at double the rate the kegs are sold to the free trade because the pubco makes its money by charging wholesale more than you or me can buy retail. You don’t have to have an MBA to figure that ain’t gonna work. Oh and the answer isn’t to fix the retail market with minimum pricing, as that fails in the core issue of offering value to the end customer

Horizontally integrated pubs are naturally going to focus on an efficient national procurement policy and offer the same brands throughout the chain. Whether the pubs focus on food or drink is all to do with what drives trade and where the profits and margins lie. The beer choice will always cater for the mainstream and it is futile to moan about the lack of interesting pong. Enjoy a Carlsberg with your panini.

The vertically integrated model is by far the most interesting when it comes to the food led operation. These businesses exist through no more than historical legacy. From a market where brewers sought to secure a retail outlet for their product via a chain of pubs because otherwise no one else would sell it for them. They exist regionally rather than nationally, due to competition law, though that competition law has never been sophisticated enough to recognise a monopoly can exist regionally and not just nationally. A wet led business model ensures the brewery is both a profit and cost centre within the business. That is a brewery absorbs costs but provides the main source of profit as the main products sold. In a food led business the brewery is no more than a cost centre, and an unnecessary one at that. As wet led pubs diminish and food leads the business, the profit being made is on things bought in rather than produced. The company does not own farms or food processing units nor vineyards or wineries. The brewery is an historical legacy, a significant source of costs and minimal contributor to profits. The business case for owning a brewery is slight and is either an expensive vanity or white elephant depending on the state of the company’s books.

When you factor in the ownership of many regional brewers as family businesses, the future brewing operation looks even more bleak. It is no longer the done thing to hand over the business to the eldest male, heterosexual, stable, married, male child producing child. The shareholding is split between all children, then between all their children and so on. Each generation dilutes the shareholding and introduces shareholders with no interest in the business. Some may have an interest in joining the family business, others may wish to sell up, mortgage their shareholding for the capital to go do their own thing or simply secure a liveable level of dividends for a cushy life. As one generation passes to another the chances increase of a none family member taking the helm. Somebody that knows how to run a business rather than somebody that contains some of the DNA of the dead guy that started it, someone with an MBA and a CV, someone whose job it is to deliver dividends from the current business and seek new business rather than maintain what used to be the business but is now only an historical legacy of the founders. Someone who asks “why the hell are we running an expensive brewery when we make all our money out of a regional chain of restaurant pubs flogging hot diners and bottles of Pinot Grigio?”

At this point the regional beer brand may live on in the form of contract brewing, or die as better marketed and more recognisable brands fill the pubs. The beer geeks may even be happy if micro brewed pong appears in an outlet or two.

As a separate brewing entity do most regional breweries make something as niche as micro brewed pong or even as respected by regular drinkers as a national brand? Not really, without the pubs the brewery hasn’t got a business. The brand value of many UK regional brewers isn’t really that great. Those that are, are arguably no longer regional. You wouldn’t describe Fuller’s as a regional brand; London Pride is national if not to a degree global. You may very point out that many German bars seem to be food led and that hasn’t closed down Paulaner or Hofbrau. The brand value of those beers is pretty good and exists beyond Bavaria. You can find a Hofbrau & Paulaner pub/restaurant in many cities. Most UK regional brewers have failed to build intrinsic brand value over a number of years through running low end tatty pubs where there core product isn’t that great. Warm vinegary piss isn't that great unless you have a beard. They have failed to build a lager brand, the most popular beer style in the country and world, and now sell more third party beer brands than their own. They may have the odd pub where the own brand beer is pretty decent and a few bearded guys give them an award and put them in a book but the regular experience of the regular customer tells a different story and that story is the brand lacks value.

In conclusion then, my crystal ball says that national brands are here to stay, micro brewed pong may indeed prosper so long as the fad is maintained and enough people grow beards and wear sandals but the decline of the wet led pub and its replacement by food led pubs is the death knell of the regional brewer as a brewer. The vertically integrated business model makes little sense if the retail outlets don’t really need a brewery. As the regional brewers divest themselves of underperforming low end wet led pubs and invest in smarter higher end dining pubs the brewery becomes ever more a vanity to the business rather than an integral element of the business. The pubs may live on, the business may live on and the names may live on, the brewery will not.

My crystal ball is clouding now; I look at the empty lager cans littering the floor. The squeeze is due back from her mother’s shortly. Better tidy up, brush my teeth and try not to appear pissed or I might get dumped and have to start drinking in pubs again and claim that pint of Carlsberg Mudge once promised to buy me.


Curmudgeon said...

You make a very good point there. Unless a business has some kind of USP, its long-term survival must be questionable. Ironically, the one family brewer that arguably still does have that is the one that has resolutely refused to follow trends, namely Sam Smith's. Holts were once much the same, but have lost much of their distinctiveness in the pursuit of "added value". A Holts pub is no longer what it once was.

Anyway, you know where I can be found, so if you care to introduce yourself that free pint of Carlsberg is yours (an alternative lout may be offered) ;-)

Tandleman said...

I think this is a pretty good analysis in lots of ways, but is probably wrong on a few counts:

I have forgotten how to bird, so can't help you there.

The debt level in pub companies IS a major cause of industry problems. Pubs are securitised way beyond their value in a lot of cases.

Most remaining family brewers have worked out through others that you better not give shares to all. Most are owned in a way that would make it very hard to sell or raise money on their shares. The lesson of Batemans and many before has been learned. They may fail, but probably not through family splits. In most cases anyway.

Economies of bulk purchasing work throughout, unless there is huge debt, then it is used as a stick to beat people with (tenants mainly)

You make excellent points about family brewers buying upmarket pubs to sell bought in food in them. There is something unworkable about that when you think about it.

And Carlsberg with panini? Peroni surely?

Phil said...

The beer choice will always cater for the mainstream and it is futile to moan about the lack of interesting pong.

Something doesn't compute here, because you've included Spoons in this 'horizontally integrated' category. If they can provide a range of interesting pong (which they pretty consistently can), it's clearly not impossible for All Bar One or whoever to do likewise, & therefore not entirely pointless to complain when they don't.

As for the rocky future of 'vertical integration', you're probably right. When I came to Manchester the local breweries were Hyde's, Holt's, JW Lee's, Robbies and Boddington's; one of those didn't last long, and it's amazing that all the other four are still hanging on. (I don't think Holt's will be the next out of the balloon, though - Hyde's look weaker (more uncertain, less distinctive) to me, and I've never knowingly been inside a Lee's pub.)

Curmudgeon said...

You may well be right about Hydes - they have recently done some hard-to-fathom fiddling about with their beer range, and shown a very uncertain touch with pub acquisitions.

However, it would be wrong to write off the regional and family brewers as brewers. The international brewers have largely abandoned the ale sector, and the regionals and family brewers must account for at least 85% of total cask volumes and over 90% of bottled ale volumes. That remains a very firm base for a business.

Cooking Lager said...

Fair points all and I thank you for them.

@Mudge Like any prediction, it’s all pie in the sky, and I suspect as a regular ale drinker your view of the brand value of regional breweries would be quite different from mine. I would ask the following question. As a CAMRA member do you gravitate towards the better cask ale pubs or frequent a wide selection beyond this? I only ask because I would credit CAMRA members with fairly accurately picking the better ale pubs of their area for beer guides and what not but suspect this quite naturally leads to ignoring a wider picture where the beer isn’t that great.

@Tand I bow to your knowledge of the structure of many family brewers and agree bulk purchasing is the prime reason for national procurement. My argument regarding corruption prevention however is a valid part of why national procurement is favoured and why the government will not interfere with a business and give your campaign a legal right for operators to opt out.

@Phil, you are correct to point out that Wetherspoons is in case a poor example. However Wetherspoons is a great example of a business sustaining the vanity of the boss despite being publically listed. Tim Martin is an ale drinker and supporter of CAMRA and wide ale selection is in part a vanity. His CAMRA tokens offer is an example of a scheme which benefits an organisation Tim likes to a far greater degree than his own company. The shareholders do not have a problem with Tim’s vanities because he delivers growth. He would be better off promoting the higher margin £3 pints of lager than the £2 ale, though

Great comments and thanks. Time will tell I guess and we will see. There are many variables. Regional brewers may improve brand value, may retain many wet led pubs but if they don’t I think it is a valid to question the vertically integrated model and the value of a brewery in that model.

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