From Inside Track in M&C Report by John Harrington
It's a strange paradox that while cask ale brewers have undergone a renaissance, the size of Britain's pub stock has been in freefall.
The Campaign for Real Ale's Good Beer Guide from last September reported that 99 breweries opened over the past year, up from 78 over the previous 12-month period; 840 real ale brewers were listed in total. Meanwhile, despite slowing to 25 from 52 per week in the first half of 2009, the rapid closure rate left Britain with 50,811 pubs as of July 2011. That's a decline of c.1,000 in one year - in 2006 the figure stood at 58,200 (figures: CGA).
Does something have to give? There's been little in the way of brewer consolidation or partnership in recent years, last February's £20m acquisition of Cornish brewer Sharp's by Molson's Coors' aside. But some well-known brewing industry figures are now saying that consolidation in the sector is not only likely in 2012, but almost inevitable.
Arguably, the process started last month with Manchester brewer Hydes' announcement that it's to sell its freetrade business to local rival Daniel Thwaites, and scale down its brewing operations by closing the Moss Side site and moving to a new facility.
David Grant, managing director of Lancashire brewer Moorhouse's, believes consolidation is on the cards this year. "We've got breweries opening quicker than we've got pubs opening. A lot of small brewers are opening because they see opportunities in the market and they only pay limited duty [due to Progressive Beer Duty, PBD].
"The market is becoming awash with brewers now, which is great for consumers because they have a huge choice, but it's going to get to a stage where there are too many brewers for the demand in the market place."
As well as the decline in pub numbers, there's an increasing feeling that medium-sized brewers are becoming, to borrow a popular phrase, the squeezed middle. Too big to gain major advantages of the tax breaks offered under PBD - these are applied on a sliding scale, so microbrewers benefit the most - and too small to benefit from true economies of scale like their national counterparts, they're finding it increasingly difficult to grow profits, despite the steady growth in cask ale sales in recent years.
Take Hydes, which recently reported a 9% fall in pre-tax profits to £1.2m despite achieving a 2.2% rise in turnover (£23.8m) in the year to 3 April 2011.
"The larger brewers that are paying full duty are now suffering more than they ever have done because of competition with brewers that are paying half the duty," said Grant, who revealed that his duty bill has risen by £300k this year by virtue of increased sales last year. Short-term factors could also add to the pressure; Grant points out that barley costs have gone "through the roof" this past year due to a bad harvest, with prices up 30%-50%.
James Arkell, chairman of Wiltshire brewer Arkell's, which saw profits decline for the fourth year running in its most recent results, is also acutely aware of the difficulties in translating sales to profits. "Making that extra money (or regaining our past profits) seems to elude us, however much effort we put in and it is harder now than ever before," he wrote in the company's most recent accounts.
"Higher utility costs and taxation combined with lower gross margins have stripped away profits. New legislation continues to add cost to the business. Tax rises in the form of VAT, duty and National Insurance have all happened since January - the list is never ending!"
It's little wonder, then, that last week the Independent Family Brewers of Britain pledged £240k towards the campaign to reduce VAT to 5% for pubs and restaurants on drink, food and accommodation.
But a more onerous burden is beer duty, which has risen by a mouth-watering 35% since March 2008 thanks to the duty escalator. To put the burden in context, Yorkshire-based Black Sheep - which is solely a brewer, with no pub estate - last year paid £7.5m in duty, or 41% of its entire annual turnover.
Even those brewers that are reporting rising profits emphasise the burden they are under. Charles Wells last week reported a 2.1% increase in pre-tax profit for the year to 1 October, but highlighted that its total tax bill was £70m - 38% of revenue.
Everyone in the industry, from drinks producers to pub operators and restaurant companies, has good reason to complain about rising costs, but perhaps brewers are experiencing it more than most; all the more likely, then, that consolidations could be imminent.
Stephen Gould, managing director of Leicestershire brewer Everards, is another trade figure predicting such an outcome. This could be via takeover or some kind of partnership, he suggests, mirroring the agreement between Charles Wells and Young's to combine their brewing operations back in 2006.
"If we look at any other industry that's effectively manufacturing where there's limited growth for what they manufacture, then I think inevitably they will get to saturation point in terms of the number of brewers. And in any industry when you get saturation point, you get some degree of consolidation. That usually comes through strategic alliances or outright acquisition."
Are there opportunities here, also, for well-funded and strong-performing pub and bar operators to add a brewery to their assets? As private equity eyes opportunities to invest in fast-growing multiples, it stands to reason that the number of desirable sites currently on the market will eventually dry up. Perhaps a move into brewery ownership could be the natural next stage.
Certainly, stranger things have happened. Who would have thought six months ago that a regional brewer/pub operator would buy a small coffee bar chain, as SA Brain managed with its takeover of Coffee#1 in October?
Gould certainly sees the logic in this. "I think vertical integration is still a very credible part of anybody's business plan. If one looks out of our sector at Morrisons, they would argue they have vertically integrated structure because they manufacture and retail. I could see pub operators of all sizes seeing brewing as the future of their business."