Courtroom drama will mark the end of Interbrew's run-in with the government. But it will take more than legal minds to ease the pain in the UK brewing industry says Tim Palmer
Interbrew has little chance of overturning the government's decision to block its £2.3bn purchase of Bass Brewers. Yet next week the Belgian giant's lawyers go into battle, signalling the opening of the latest chapter in the carve up of the British brewing industry. Sector insiders suggest the best Interbrew can hope for is more time for a sale and, at the outside, the chance to keep some of its best assets and recoup some of its losses.
Whatever the outcome the case could drag on until July the tide of consolidation sweeping through the UK industry will not be stopped. So, in what shape are UK brewers looking as they prepare to face a future dominated by ever larger companies with hugely funded brands.
Guinness and Scottish and Newcastle are now the only major home owned UK brewers. Independent to the core, they show every sign of remaining so. Following recent restructuring within the organisation, Guinness parent Diageo has been keen to scotch rumours it plans to sell its famous stout and concentrate solely on spirits and wines.
S&N supports a raft of major brands and is number one in the UK beer market. It would lose that position if Interbrew won the right to proceed with its amalgamation of Bass with the Whitbread businesses it already owns. S&N has also vastly increased its presence in Europe through the acquisition of Kronenbourg from Danone giving it critical mass to compete with world players Heineken, Carlsberg, South African Breweries and Anheuser-Busch.
Helen Matheson, head of competition law at UK law firm McGrigor Donald, believes Interbrew's chances at the judicial review are slim a government decision on a merger case has never before been overturned but that doesn't mean there is no chance, she says.
"Judicial reviews are being used more. Recently Camelot was successful with theirs. Interbrew took quite a big risk taking on this deal unconditionally. It does create a duopoly and gives the combined operation a share well in excess of 25% of the market which usually triggers an inquiry.
"The Competition Commission's powers are very wide. People know they are there and they have been used in the past. The courts find it very hard to tinker with the remedies that parliament has allowed the Commission to have."
Even so, there remains the threat of a challenge from the Belgian government. But such a move would require recourse to the Treaty of Rome and the European Court has no power over national governments.
Anthony Fuller, chairman of the London brewery that bears his name and the Independent Family Brewers of Britain, is not so certain the outcome of the judicial review is a foregone conclusion. Nor does he believe the Office of Fair Trading should have the power to nominate a list of acceptable buyers.
"It is right to stop monopolies building, but should the Office of Fair Trading have the right to say who Interbrew should sell Bass to. I am not sure what will happen and this leaves the industry in a state of flux," he says.
Further sector uncertainty is the last thing the struggling regionals need. The battle for survival is already tough. Greene King is looking robust, but rival Wolverhampton and Dudley has only just managed to maintain its independence and has been the subject of takeover speculation and activity for a year.
If independence is the aim, the last decade's casualty list of smaller regionals makes depressing reading. Boddingtons, Camerons, Devenish, Greenall Whitley, King and Barnes, Mansfield, Marston's, Morrells, Ushers and Vaux have all left brewing or been taken over.
Fuller believes the key for the remaining regionals lies in strong brand ownership. "Strong brand status for our beers leaves us in a strong position and has changed some of the threats into opportunities.
"But some of the smaller family companies will have an increasingly difficult time as the power of the on-trade retailers gets bigger and they demand larger and larger discounts. I would expect to see more of these players go. They have not been helped by the government bombarding the sector with legislation."
Neither are the larger regionals immune to the pressures. "Wolverhampton and Dudley overstretched themselves and have not been able to take advantage of what they had taken on. Greene King has not been quite as adventurous and is going from strength to strength. Both Shepherd Neame and Hall and Woodhouse have shown they are keen to expand."
But this is a market where only the fittest will survive. It has been in gradual decline for the last 20 years and the demand for beer is being continually eroded by the influx of new products. The market for premium packaged spirits and the growth in wine sales show no signs of slowing.
Robin Alexander, managing director of Scottish Courage Brands (S&N's take home division), says: "The survival of the regional brewers will depend on how fleet of foot they are in terms of cost structure and marketing."
They will have to be able to contend with the marketing power of the nationals. S&N has a raft of international brands, while Interbrew UK maintains a single minded focus on Stella Artois. Alexander says: "We are well positioned with a portfolio of premium products for every drinking occasion. We have developed a strategy of choice and we have been doing that for the past 10 years."
The Kronenbourg acquisition has reinforced that proposition. "We wanted to move ourselves on to an international footing in beer and this makes us the leading brewer in France and number two in Belgium. It has also given us a new range of brands and packaging capabilities."
Such willingness by the expansionist giants to put weight behind fewer brands is giving them a larger share of sales and squeezing out the competition. But Stewart Gilliland, new md at Interbrew UK, believes there is still room for the brand conscious smaller brewer.
"The regionals that are performing well have brands consumers want, such as Greene King's Abbot Ale and Old Speckled Hen, and Fuller's London Pride. Where the regionals have a discount offering and a brand proposition they can survive," he predicts.
Bass has shown it remains committed to its brands despite the uncertainty. This year it is spending over £80m supporting them, £43m of which will go on Carling. If Interbrew is forced to sell it needs to have a product in good shape in order to recoup as much of its losses as possible.
Marketing director Mark Hunter, the man who pulled the plug on the FA premiership deal, says: "This was not a retrograde step. Nothing is on hold in this organisation. We write the business plans and Interbrew is not involved in the day to day running of the company."
He maintains Bass is focused on boosting its business and says the rest of the industry needs to get its act together to improve its fortunes. "We are fighting for more share of a smaller cake and the wine sector is now putting forward a much more coordinated approach.
"If you walk down a beer aisle it is not enthralling. The manufacturers and brand owners have the responsibility to change the rules and make it more value added and we are working on a number of things to change perceptions."
Big brands like Carling, Stella and Tennent's cannot do it all, he says. "We need other brands putting in an effort as well. It is the sum of the parts. Brand owners should step back from the category and look at it in terms of total alcoholic drinks. Since 1989 the on-trade has been redefined. On-trade visits are now much more planned as big occasions and the off-trade has a much larger role to play. This is where the market is going in the next 20 years."
Once the Judicial Review is complete, Interbrew will almost certainly still be looking for a buyer for Bass. To date few appear to have come forward the smart money is on Heineken and South African Breweries. If Interbrew beats the odds they may just get to keep profitable parts of Bass such as Tennent Caledonian and Tennent's Ireland.
Whatever the result of the courtroom wrangling, consolidation in the industry on a global and national scale will continue apace. Times are only going to be more challenging for the smaller, independent brewers that have survived the turmoil of recent years.
Volume share of total UK beer market:
Scottish & Newcastle 28%
Bass 24%
Interbrew UK (Whitbread) 17.7%
Carlsberg-Tetley 11.7%
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