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Morning Briefing Strap Line
Fri 25th Oct 2013 - Friday Opinion
Subjects: The beer sector, tax avoidance, outstanding experiences and seeing opportunities in the downturn
Authors: Nick Miller, Martyn Cornell, Ann Elliott and Steve Kenee

A modern craft beer definition? Yes – but for the right reasons by Nick Miller

I have watched this debate unfold (and had it with customers and within my company Meantime itself) both here and in the USA and I cannot help but feel that it has become both circular and somewhat self-serving. I am also well aware that when you ‘enter’ this debate you leave yourself open to accusations of self-promotion and pompous claims. So I will endeavour to give a perspective that focuses on the most important influencer on this ‘issue’ – the drinker.

What do drinkers want? At Meantime we talk daily with our drinkers and their feedback is crucial to us – they say they want beers with taste, flavour and aroma. In addition, they like to drink beers with a provenance and authenticity. They often want a story about their beer: who made it, what ingredients are used, how it is made, when, where, how long, what’s the genre, why they originate from a certain area, why we have taken a certain slant on a style. In short, they want to feel included and know about their beer of choice. Above all, they want a beer that tastes great consistently. Surely this should be the whole beer industry’s aim and ‘reason for being’. Self-serving categorisation debates do not matter to the majority of drinkers. However, categorisation for the benefit of the beer category itself does have a place for the industry when driving consumer awareness and value (both monetary and category) This is something (in conjunction with our retailers) that we need to agree upon as they do have a place when re-building the beer category, which has been in decline year-on-year for over three decades.

Who is stealing beers ‘share of throat’? The beer industry in the UK has declined by over 50% during the last three decades. Coffee, wine, cider, spirits have all stolen from the category. The ‘coffee’ category alone shows what can be achieved – 14,000 outlets selling numerous styles of coffee, it is dispensed in several ways (walk into Currys and see what you can buy to serve your coffee at home), the supermarket’s aisles are full of information about roasts, countries of origin.

So what have these categories done that beer hasn’t? They have celebrated the intrinsics of the product – where it comes from, how it’s made, how it’s served and why it’s a high-quality option for the drinker. The beer market, for as long as I can remember, has marketed itself in an emotionally ‘laddish’ way focussing on ‘herd mentality’ messages that have not promoted the diversity and complexity of the beers on offer. The beer industry has been generally negligent – it has cut corners in production, it has stifled choice, it has not focussed on quality, it has under-talked the diversity of beer, it has lacked innovation and has homogenised itself. This hasn’t been helped by successive governments and the spiralling tax on beer. Price-led promotions in the off trade which have seen beer traded as a commodity rather than a product of quality have also not helped the image of beer. This is a harsh reality and consumers have voted with their feet. However, denigrating individual companies and brews is destructive for the overall beer category and must be avoided if we are to kick-start a beer revival.

The ‘craft beer’ movement and the companies within it are bucking this trend and are starting to change the way people think about beer. 

How is the ‘modern craft beer’ revolution doing this?

•  Celebrating styles and varieties of beers (and there are well over 100 recognised styles).
•  Innovation! 
•  Not just about ‘talking up’ one genre and stereotyping one style of liquid.
•  Challenging the boundaries on taste and flavour; it doesn’t pasteurise its beer. (Pasteurisation flattens the character of a beer.)
•  Investing heavily in quality production processes and equipment to increase maturation times and enhance product quality
•  Implementing quality-led improvements to the dispense and distribution of its beers
•  Taking traditional recipes and making them more relevant for today’s drinker – it is not stuck in the past.
•  Using brewing ingredients from around the world to replicate and create new styles of beers.
•  Offering products with a point-of-difference and giving drinkers a reason to re-engage with the beer category.

Craft brewers are creating consumer interest in a long-term declining drinks category. This is good for the drinker and retailer alike.

Does size and ownership of the brewer matter? This argument is largely irrelevant to the drinker. What really matters is knowing that the producer has a relevant ethos in production and how it takes its brand to market. And above all is it giving them what they want – high quality, consistent beers full of taste and flavour? Of course, there are some key emotional connection points with a brewer in the eyes of the drinker – does the organisation have a local provenance, does it care about the drinker and its beer, does it have a personality with resonance and connection with them?

Small often leads to this being achieved more easily than a large faceless global entity. This does not mean that big brewers cannot produce craft beers, it is just harder to convince the drinker that they can. Equally, there are a number of smaller brewers who are trying to ape the modern craft movement without the investment in equipment and processes that enable craft beer to be produced. Again, this is dangerous for the category as sub-standard product can and will dissuade category re-engagement.

The bottom line is that quality styles and company ethos count and if we are to define the category we should use drinker choice drivers as the flag for them to find the beer they want. Yes, create a modern craft category but ensure that truly authentic craft brews are included.

At Meantime our mantra is simple:

•  We celebrate beer through the diversity of styles we offer (we will develop our own as well).
•  We invest heavily in equipment and processes to ensure consistency of our beers.
•  We will mature for longer and will not pasteurise our beer.
•  We will take inspiration from our past and adapt for the future.
•  We will innovate to ensure that the drinker gets education, choice and the best quality pint available.

We care passionately about the beer we brew and serve to the drinker. We want everyone in the value chain to enjoy a potential revival of beer as a category. Arguing amongst ourselves at a trade level is no way to enhance a momentum of positive change in the beer category’s performance. Brewers have a responsibility to beer itself. I would like retailers to help us define the sub categories to ensure that the consumer gets and understands their choices based on the products qualities, ingredients and methods of production. That, in itself, would end the debate of whether there is a craft category or not and therefore lead to a more positive drinking future led by beer.

If indeed there is a need for a sub-category definition for modern craft beers and the brewers within it, then this is how we believe it should be framed.

1)  They follow the highest quality assurance methods
2)  They produce and celebrate several styles and genres of beer.
3)  They innovate.
4)  Their beers follow taste and aroma-enhancing production methods and use the best ingredients from around the world – they remain unpasteurised, longer matured, in keg (no air), and contain no additives.
5)  They have a local provenance and story.
6)  Their companies are passionate about beer and the category in general.

Category definitions can help educate and support quality, which is a good thing for producers, retailers and drinkers alike. The debate of whether to define or not will continue to rage. In reality, the drinker will decide what to drink using quality, consistency, taste and flavour and brand appeal as their guide. One of the many things I have learned over the years is that emotional marketing messages will not alone sustain a beer industry. Extrinsic messaging does have a place but will increasingly become secondary. Product quality and whether it appeals to individuals taste is and will be the key driver in beer consumption again. Is it not time for an industry to wake up and show that we can truly supply our customers and drinkers with what they want when they want?
Nick Miller is managing director of Meantime Brewery and former chief executive of Miller Brands UK

‘Avoiding millions in tax’ – you say that like it’s a bad thing by Martyn Cornell

According to The Independent newspaper this week, doing the best by your shareholders and investors is a scandal. Making sure you have enough money to expand your business and create jobs is a scandal. Arranging your business affairs so as to minimise unnecessary outgoings is a scandal. That is: it’s a scandal when all the above can be represented as “avoiding millions in tax”.

To read the hectares of newspaper coverage of the tax affairs of big companies operating in Britain, from Starbucks to Amazon, one might suppose that there was a law in existence under which every company had a duty to maximise its exposure to tax. In fact, of course, one of the prime duties – perhaps THE prime duty, right after “not breaking any laws” – of every company is to maximise returns to its investors, the risk-takers who provide the capital without which no company can operate, and who stand to lose that capital if the company fails.

As part of that duty to see it has the maximum available to reward the risk-taking investors who provided it with capital, a company also has a duty to ensure it minimises its outgoings. That means paying as little as possible, commensurate with obtaining the quality required, for raw materials, for workers, for premises, for everything else required to enable the company to supply its customers – and also, commensurate with staying inside the law, paying as little tax as possible.

Indeed, if I were an investor and I discovered a company I had invested in had failed to take advantage of a scheme to minimise its tax bill, I’d be asking questions of the management – and looking around for somewhere else to move my money to. If the company’s accountants and advisers are too dim to take advantage of every wrinkle going to cut outgoings, including tax, they’re obviously too dim to give me the best possible return on my investment.

And yet, while it’s a virtue, we are told, to hunt around for the cheapest bank to shift our accounts to, and the best deal from an electricity supplier, it seems that for The Independent, hunting around to find the cheapest way of arranging your tax affairs, if you are a well-known High Street food operator, may not be illegal but is certainly immoral. “Eurobonds scandal”, The Independent’s headline said, following this with: “The high street giants avoiding millions in tax”. Almost visibly frothing at the mouth, the newspaper declared that companies including Gondola (owner of the Ask, PizzaExpress and Zizzi’s chains), Nando’s, Pret A Manger and Tragus, owner of Strada and Cafe Rouge, among others, “cut their taxable profits” by borrowing from their owners through the Channel Islands Stock Exchange. Such a strategy is more tax-efficient, because interest payments can be added to the debt, reducing taxable profits, rather than paid out. “Cut their taxable profits” is thus another way of saying: “Gave their investors more of the money the companies earned, rather than handing it to HMRC”.

The Independent quotes a man from War on Want with the appropriate name of Mr Worth as saying that “people” are “angry” about “the ease with which these companies can avoid paying their fair share” of tax. But the only possible definition of “fair share” must be “all that amount of tax the law requires you to pay, no more nor less”, and nobody is disputing that Gondola, Tragus and the rest are indeed paying all the tax they are required to pay. Does The Independent really expect company directors to say to shareholders and investors: “There are ways we could have ensured we paid less tax than we did this year, but we decided not to use them because, well, you know, War on Want might say it wasn’t fair. And we’re sure you wouldn’t wish for that to happen.”

The companies The Independent is attacking for not paying more tax than they need to are all successful operators employing large numbers of people – who all themselves pay tax on their incomes – and contributing substantial sums via VAT on all or most of the goods and services they supply. So their contribution to the tax take in the UK, directly and indirectly, is already considerable. They are also, most of them substantial investors, expanding their businesses and contributing to the growth of the UK economy as they build new outlets, hire workers to fit those new premises out – even pay newspapers like The Independent to advertise their services in. If HMRC believed they were doing something wrong in the way they arranged their tax affairs, it would prosecute them. Clearly it believes no such thing. If the government did not like the effect on the tax take from these companies of the rules it introduced surrounding the treatment of loans, it would change the rules. It may do that. Meanwhile, you can bet that the journalists who wrote The Independent’s story – particularly if they are freelances, with greater opportunities to do so – minimise their own tax bills as much as possible, and the Lebedevs, owners of The Independent, do exactly the same. Why attack people for playing by the same rules you do yourselves?
Martyn Cornell is managing editor of Propel Info

Outstanding experiences by Ann Elliott

One of the main issues concerning a lot of our clients at the moment is how they can deliver a really outstanding experience to a customer when they visit their pub or restaurant – and how delivering that experience differs from simply giving great service. The latter has always been important but there is a real sense that it’s not now enough, that customers expect more.

This came home to me a few weekends ago when I went with the family to a local gastro-pub. We walked into the bar to be taken to our (previously booked) table for four. The manager was on the phone taking another booking. He didn’t look up. He didn’t acknowledge us in anyway. I didn’t expect him to interrupt his conversation but it would have been nice to have had some eye contact to say, ‘Don’t worry, I have clocked you and know you are here’. Now I have been to this pub three times before and one occasion even emailed the ops director to congratulate them on how brilliant this pub was – so my expectations were already high. And I had my family with me so I wanted them to have a good time too.

This lack of acknowledgement sounds so tiny an issue but it immediately irritated me and almost automatically I began to be a little more critical than I would otherwise have been. The pub was going to have to work so much harder now for me to walk away with a good impression. The phone went down, the manager looked up and said ‘You okay?’ Not the best way to recover the situation I thought.

Of course from then on it was a bit of a disaster, but then it was going to be, wasn’t it? One of the starters had different ingredients in to the menu description, the main courses were served an hour and twenty minutes after we sat down, the ‘roast chicken’ had grill marks on it, the handle of a dish burnt my daughter, the waiter stood behind my (rather deaf) father auctioning the dishes and then walked off with his dish as my father couldn’t hear it being ‘called out’, we had to keep asking the waiter for more drinks. You know the scenario.

I don’t imagine we will go back as we have so much choice for Sunday lunch. Some of the issues we had were around ops standards not being followed, but a number were just around a lack of emotional intelligence: of someone not reading us; of someone not owning us or our table; of someone following the principles but not really caring about how we felt and how the experience felt to us.

When I was marketing director of Beefeater, a customer once wrote in complaining about finding half a dead mouse in her salad and threatened to go to The Sun with her story. We gave the customer £40 in Beefeater vouchers and retained her. Now something as simple as not being acknowledged at the door quickly enough can make a customer think twice about coming back.

Our experience wasn’t really bad enough to complain about so no one will ever know. The manager will continue to train in the service steps from his brand operating manual and his team will continue to deliver them. In this day and age, though, that’s not enough. Today, having a great time and wanting to return to a place is all about having real, sincere and intuitive engagement and to me that’s the difference between great service and a great experience.
Ann Elliott is chief executive of leading sector marketing and public relations firm Elliotts – www.elliottsagency.com

Seeing the up in the downturn by Steve Kenee

As the number of free pennies in our purses fall, the level of satisfaction we seek from each one rises. Operators therefore have two choices: up their game or go out of business. And whilst this means we have to work harder than ever before, it also means we are providing a better quality product and, no matter which way you look at it, a better quality product has to be a good thing.

Just as the last recession provided a catalyst for the do-it yourself culture of the rave music scene, the current one has resulted in an explosion in the vibrant, do-it yourself culture of pop-up bars, restaurants and street food. 

The well-documented rise of craft beer and the increasing popularity of real ales with younger drinkers is another good example of this flight to quality. Consumers are no longer satisfied with the bland consistency of many big brand lagers. They demand quality and, importantly for the on-trade, diversity. It used to be said that it was easier to get a man to change his wife than his beer. Now I see young customers shunning Doombar, not because it’s an old man’s drink, but because it’s seen as too mainstream.

The rise of the better burger is another example. Long gone are the days of micro-waved patties being served in a half stale floury baps. Even high volume, low cost operators are knocking out homemade burgers in semi brioche artesian buns.

Consumers care about what they consume and they want the businesses they use to care too. This has led to an increased level of engagement from customers and, for me, it couldn’t have come too soon. The stale service and bland identikit product that dominated the industry was in danger of resulting in a lost generation who chose to enjoy the same product at home but at a fraction of the cost.

The new generation want to go to safe, warm and welcoming venues where they will be served good quality products by knowledgeable and passionate staff and where they will be surrounded by friendly, like-minded others. This is something that can’t be replicated at home, something that supermarkets can’t compete on and something that should be embraced by the industry. 

The positives of a recession don’t stop with an increase in quality, it also extends to an increase in opportunities. 

Entry prices prior to the start of the credit crunch only made financial sense if they were funded by an unsustainable combination of rising markets and cheap bank debt. Without significant underlying capital appreciation, if you’re paying 12-14x EBITDA for a business you’re simply not making a good return. However, once the banks retrenched, prices started to fall and they are now at much more sensible and attractive levels.

Stockbrokers will be the first to tell you that no one gets rich by investing at the top of the market, the same is true of our industry. 

I’m not going to claim we are at the start of a sustained period of recovery. I’m not even going to call the bottom of the market. However, entry prices do now make sense, great opportunities do now exist and real money can now be made.

A key difference between the rise in quality and the increase in opportunities is that the rise in quality is hopefully here to stay, whilst, once banks renter the market, prices will rise and the number of attractively priced opportunities will fall.

I believe we are in a window of opportunity. However, I also believe that if the trickle of bank debt re-entering the market turns out to be a trend, the window won’t be far from closing. 

Whilst it is true that funds such as those managed at Downing are more expensive than bank debt, we are prepared to enter markets and take risks that the banks aren’t yet willing to. And if you wait until bank debt is more freely available, it will be more freely available to all and, quite frankly, it will already be too late.

Even those operators who are lucky enough to be able to secure bank debt ahead of the curve can gain from partnering with funds such as ours. Whilst a bank might lend 50%/60% of a transaction, we are can go much higher and often invest around 80%/90%.

It doesn’t take a rocket scientist to see this makes your money go further and, if the window of opportunity is indeed closing, the further your money can go before it shuts the better.
Steve Kenee heads up the Licensed Leisure team at Downing LLP. Downing has over £400m under management and seeks to provide total funding packages to businesses with reliable revenue streams and/or significant assets available as security

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