Smoking ban begins to bite into brewers' profits

Feb 26 2008 Alistair Houghton

THE UK’S brewing sector has had little to cheer of late, as it battles an economic “perfect storm” of performance-sapping conditions.

A shrinking market and dismal summer, a pub smoking ban that has lured drinkers to cut-price offers in supermarkets, and spiralling ingredient costs have combined to take the fizz out of brewers’ results like never before.

Figures out in recent days from some of the country’s biggest players have underlined the problems.

But cask ale sales are holding up despite the smoking ban – and smaller brewers such as Liverpool’s Cains, with strong ale ranges, remain optimistic about their future.

Britain’s largest brewer Scottish & Newcastle, whose brands include Foster’s, John Smith’s, Kronenbourg 1664 and San Miguel, said the UK beer market declined 3.9% last year. The pub and bar trade was down 6.5%, with off-trade down 0.1%.

European heavyweights have also warned of UK market troubles. Stella Artois, Becks and Tennant’s owner InBev said its UK volumes dropped 8.3% during the nine months to September 30 last year, following on from a drop the year before.

Dutch giant Grolsch also posted a 10% sales fall in 2007, saying the premium beer market was under “severe pressure”. And Danish brewer Carlsberg said the UK market shrank last year, only managing to grow its share through canny advertising and more supermarket sales.

It is little wonder that the industry has consolidated as big players look to target new markets and boost efficiency levels. S&N agreed a £7.8bn takeover by Carlsberg and Heineken last month which is planned to provide up to £120m of savings, while US giants SABMiller and Molson Coors combined their huge US operations last year in move that will save an estimated $500m a year (£255m).

But Trevor Stirling, beverage analyst at Sanford Bernstein, said 2007 was one of the UK beer industry’s worst-ever years.

A general trend of lower alcohol consumption due to weaker consumer spending and shifting social patterns accelerated markedly during last year’s washout summer and the England and Wales smoking ban, he said.

Supermarkets have also been waiting in the wings to pounce on cash-strapped drinkers with discounted beer, he added, eating into brewers’ under-pressure profit margins.

Mr Stirling said: “Over the last two years, alcohol consumption across the country has been dropping in the UK. In the alcohol market, the share for beer has been falling, while spirits and wine has been gaining.

“Women drink significantly more alcohol than they did 20 years ago, but they are more likely to drink spirits and mixers than beer. And younger men’s drinking habits are changing – now they could be having a cider.

“Over the last six to eight months, the smoking ban has accelerated many of these trends.”

He added: “The UK is undoubtedly the toughest beer market in the world.

“From 2001 to 2005, the average price of beer in supermarkets fell year-on-year. That was coming straight off the manufacturers.”

Adam Withrington, drinks editor at pub and bar industry title the Publican, said the smoking ban caused the biggest impact on the trade last year – with lager sales worst hit.

It drove occasional drinkers into supermarkets and away from pubs where beer is on average three times more expensive.

Mr Withrington said: “When it comes to lager, the biggest impact has been the smoking ban.

“Sales of cask ales have stood up, because the only place you can get them is in a pub – smokers and non-smokers have kept going in. But the occasional lager drinker is going home.” What’s the point of going down the pub if you can’t smoke?”

WALKABOUT and Jongleurs owner Regent Inns issued a profit warning in December and said like-for-like sales continued their descent in January.

And Britain’s biggest pub company Punch Taverns reported a “subdued” Christmas and New Year, like-for-like sales across its managed pubs down more than 2% since August.

But the group said it retained underlying confidence in the sector.

There were signs of better news for the industry this week, with Tesco announcing it wanted to explore ways of raising prices of alcohol. Amid growing concerns that cut-price booze is fuelling binge-drinking, the retail giant said it wanted to work with the Government to ensure “responsible pricing”. Brewers have also been turning to new markets such as cider, which is growing at nearly 19% per year, and speciality beers as tastes have changed.

S&N said it expected markets in western Europe to improve this year, but forecast a rise of 8.5% in input costs as ingredient inflation continued.

The group warned consumers of “substantial” price hikes, with drinkers thought to be facing average price rises in the region of 2% to 3%. The price of a pint could be even worse if the Government targets alcohol for duty rises in next month’s budget.

To counter the UK challenges, the brewing giants have turned to markets in developing economies, such as Eastern Europe and India.

Carlsberg’s total sales of beer in Eastern Europe grew by 11% to 14.8m hectolitres last year, while Europe’s biggest brewer Heineken saw earnings from Eastern Europe grow 22%, with a 41% rise in Africa and the Middle East.

In its pre-close trading update last month Cains said the smoking ban, commodity price rises and the downturn in consumer spending meant trading had been “difficult” so far this financial year.

But chief executive Sudarghara Dusanj said: “The current trading climate for our industry is difficult but not unforeseen and the business is well placed to build a sustainable and profitable future under a strong brand with an experienced team.”

Last month Greene King and Fullers, which both brew beer and own pub estates, said sales growth waned thanks to the smoking ban affecting pub trade and the general decline in consumer spending.

But both said profits would meet expectations and reported increased sales of the brands they brew.

Ian Lowe, research and information manager at the Campaign for Real Ale, monitors the performance of smaller brewing and pub companies such as Cains, Fullers and Greene King – and says those firms are better-placed than the industry’s giants to ride out the slowing market.

“I think there’s a real market opportunity there for the smaller brewers that promote cask-conditioned beer,” he said.

“The big four who produce 80% of the beer in the country have almost abandoned cask conditioned ale entirely.

“A recent report from the Society of Independent Brewers showed sales among their members had gone up by 11%.

“Also, the larger brewers in this sector such as Greene King, Marstons, Cains and Fullers are still being pretty confident about the future.

“These are brewers that also have pub estates, unlike the global brewers. They’re fairly confident going forward – as long as these brewers stick with what they do best, which is making cask-conditioned beer and selling it in their pubs.

“Since the acquisition of Honeycombe, Cains have more than 100 pubs in their estate to sell beer to. They’re building up sales of cask ale.”