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Morning Briefing Strap Line
Fri 4th Sep 2015 - Friday Opinion
Subjects: Europe’s verdict on minimum pricing, beer provenance and sunny uplands of economic recovery
Authors: Paul Chase, Glynn Davis and Paul Charity

Europe’s verdict on minimum pricing by Paul Chase

Like an interminable series of the X Factor, the issue of minimum unit pricing (MUP) has dragged on and on. And I’m getting bored now! Yesterday (Thursday, 3 September), saw the publication of the opinion of the Advocate General of the European Court of Justice (ECJ) on the legality of MUP under EU law. This was billed as a definitive opinion on whether MUP could lawfully proceed or not. And it didn’t quite live up to the pre-publication hype. It was a wordy, 41 page judgment written in deep legal-speak and it took me quite some time to understand whether it was saying “yes MUP is legal” or “oh no, it’s not”!

On reflection I think it is pretty clear that the Advocate General was not a fan of Nicola Sturgeon’s pet project and that his opinion struck a potentially fatal blow to the whole ill-conceived measure. Amongst other things he found that fixing a minimum price for a unit of alcohol could only be justified if the Scottish government could prove that alternative means of curbing excessive consumption, such as increasing taxation, would not deliver the same, or substantially the same benefits – but without restricting trade and the free movement of goods. He concluded it was “difficult to justify” minimum pricing as it appeared “less consistent and effective” than increasing taxes and “may even be perceived as being discriminatory”. Ouch! Take that!

But let’s take a step back and consider the legal issues: one of the fundamental principles of the EU is free movement of goods. Anything that impedes that is likely to be ruled unlawful. So, put yourself in the position of a Spanish wine maker. Your operation is efficient and your costs are low. You pass this onto the consumer and your wine is inexpensive to buy so you can sell lots of it. Up pops the Scottish government and imposes a minimum unit price that makes your wine more expensive. The outcome is that you can no longer reap the competitive advantage that arises out of your efficiency, so your volumes will fall. Both sides in this case agreed that this amounted to a “quantitative restriction” – an impediment to free movement of goods – and therefore, on the face of it, illegal.

Ah, but there’s a get-out clause that says such restrictions may be lawful if they are necessary to protect public health. However, any such measure would have to pass the “proportionality test”. This means that the measure (MUP) must not be disproportionate to the desired goal (improving public health), and if there is an alternative measure that would protect public health and not impede or restrict the free movement of goods then you must choose that instead. And it was this point that greatly exercised the Advocate General when he pointed out that the Scottish government had provided no evidence to show that taxation wasn’t at least as effective, if not more so, as a means of reducing excessive alcohol consumption.

Now the issue of “proportionality” did not fall from the sky; the Scottish government wasn’t ambushed by this proposition. Both sides knew this would be the crux of the matter. So when Sturgeon commented yesterday that “the policy (MUP) can be implemented if it is shown to be the most effective public health measure available”; and that “it will be for the domestic courts to take the final decision”, she sounds like a drowning person clinging to a life ring with a puncture in it, who nevertheless maintains: “I’m still optimistic!”

Firstly, it was always going to be up to the domestic court and its judges to decide – but with the ruling of the ECJ ringing in their ears. Secondly, it’s not just about establishing that MUP is the most effective measure; it’s about explaining to the court’s satisfaction why you didn’t choose a measure that could achieve substantially the same objective, but without discriminating against efficient producers with low costs and low prices. The Scottish government had ample notice that this would be the crucial test, but failed to provide any evidence with regard to why it was insisting that only MUP could achieve its objectives.

I think that one of the things the Advocate General picked up on is that the Scottish government was confused about what the objectives of MUP actually are. Is it intended to deter heavy drinkers and reduce their consumption? Well, many heavy drinkers are quite well-heeled so it is unlikely that you could successfully argue that price rises would deter them. Was it to reduce alcohol consumption across the whole population? Well, clearly alcohol duty is a much better mechanism for doing that, and in any event why should ordinary, moderate drinkers be penalised in this way? Or could it just be that they want to reduce the alcohol consumption of poor people with a regressive sin tax? I think the Advocate General’s opinion blows MUP out of the water. Get over it Nicola, and move on.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

Beer provenance by Glynn Davis

You don’t really expect to see Gordon Ramsay or Jamie Oliver slaving away in the kitchens of any of their many restaurants, or really believe that Damien Hirst has actually painted every single one of those multi-coloured circles on his thousands of famous spot paintings. But it seems drinkers do expect beer to be produced at the actual location of the main brewery to which the drink is linked and is referenced on its labels and marketing blurb. The reality is that in the world of larger scale brewing there are agreements between brewers to produce each other’s products when they are experiencing high demand and find themselves short on brewing capacity.

Nobody in the industry likes to talk about it though, but it happens and it undoubtedly smoothes out the peaks and troughs of demand thereby ensuring thirsty customers have all-year-round supplies of their favourite beers. Some years back I was writing a piece for the Financial Times about how brewers deal with winning a major beer industry award or a supermarket bottled beer competition – when they inevitably receive a massive spike in demand for the victorious beer. For many brewers the solution is to have another brewer produce some batches – based very strictly on the original winning recipe.

But could I get anybody to admit to such outsourcing of production to another brewery? No, I could not. But what I did get from every single brewer I spoke to was a quiet whisper in my ear telling me that while they were innocent of such an act they did know of another brewer who was guilty and that they would reveal their name as long as I did not reference them as my source in any conversations. Nobody wanted to admit to this state of affairs because the customer does not like the idea that some other third-party is brewing the beer. They want it to be made in the actual brewery itself. As such, brewers keep very quiet about such practices.

Meantime Brewing Company has found itself in an uncomfortable position this past couple of weeks after the Beer Insider website revealed the brewer’s flagship brew London Lager sometimes contains beer produced at the Grolsch brewery in The Netherlands. The brewery stipulated that this is only done when there is a need for extra capacity and that any beer produced by the Dutch brewer’s is to the exact same recipe as that made at the Meantime brewery.

This wasn’t good enough for the media and drinkers alike. A beer called London Lager simply has to be produced in London. However sympathetic you might be towards Meantime, there is no way that resorting to having such a named beer being produced in another country is ever going to sit well with drinkers. When they pay significant premiums for a pint of craft beer (and Meantime regards itself firmly in this category) then they expect everything to stack up – high quality ingredients, distinguished taste, provenance, interesting back-story, etc. What they don’t want is to feel cheated on any of these fronts. They want the real, authentic product with all the components present and correct.

Nobody really expects brews like Fosters to come out of Australia or Kingfisher to come all the way from India. But when a beer comes from a craft brewer producing small quantities out of a railway arch or even on a rather soulless industrial estate I think they still want to know that it did actually come out of brewing vessels in these locations. As craft brewers become larger the issues of dealing with capacity constraints and expansion will become very real and the opportunity to outsource production will be an option. But care has to be taken when taking such action. This is not because to do so would be the wrong thing; it is more a case of it being handled with care. It is clearly more suited to some beers than others.

For Meantime to have had its Yakima Red or Wheat Beer produced in the Netherlands would have been much less of an issue than for London Lager. But whatever course of action the craft brewers ultimately choose to take as they grow up there is one overriding factor that they must adhere to – transparency. I am a great fan of the so-called “gypsy brewers” around the world like Mikkeller, To Øl, Evil Twin, Omnipollo and Almanac who do not even have their own breweries but instead use other people’s brewing equipment. They produce some fabulously unusual beers on various brewery sites around the world, which is absolutely fine because they are open about this and the brewery of origin is clearly marked on the labels.

In a world where the provenance of food and drink means everything to a growing army of people, producers and manufacturers have got to be totally honest, open and transparent with their customers otherwise they could find their most valuable asset – their credibility – being seriously questioned.
Glynn Davis is a leading commentator on retail trends

The sunny uplands of economic recovery by Paul Charity

The economic recovery has now blossomed into what can only be called benign economic conditions with relatively low unemployment, low inflation, rising disposable income and a much more confident consumer. Some commentators have wondered why these conditions are not producing stronger like-for-like sales growth.

These comments refer to the Coffer Peach Tracker which tends to show 2-3% like-for-like growth among the 20-odd largest companies. But the Coffer Peach Tracker doesn’t cover the swathes of smaller and emerging operators for whom like-for-likes are outstripping the largest quoted companies by a factor of two or three. In many ways, this is a golden era for smaller companies who have the ideas, the people, the offer and the following economic wind – it’s just a case now of finding properties in a market that’s hotting up. It’s a golden era, too, in terms of the sheer numbers of new branded concepts being launched into the marketplace – one estimate is that a remarkable 800 new brands launched in the UK in the last year, an astonishing 16 a week.

In fact, the emergence of so many high quality multi-site operators may be why larger operators are, broadly, struggling to post meaningful like-for-like sales growth. Greene King is earning broadly favourable coverage from the analyst community at the moment, but it is based very largely on the possibilities of synergy capture offered by the acquisition of Spirit Pub Company than the inherent growth potential of its brands.

In this respect, the UK market is starting to resemble the US market where older legacy brands are, broadly, being outflanked by smaller, newer brands. Every rule has its exception and each market provides examples of older brands that are successfully bucking the dangers of sales stagnation. In the UK, Wagamama, for example, posted an extraordinary 10% rise in like-for-like sales last year thanks to a keen focus on service standards and an ever-improving menu. In the US, Starbucks is achieving meaningful out-performance through product innovation and aligning itself with broader issues like race, education and social out-reach.

One key thing making life a lot easier for the sector’s phalanx of emerging companies is that investment has become easier to find. The major banks might be as awkward as ever but other investment routes have opened up. There’s investment funds like Downing, private equity investors, angel investors, crowdfunding possibilities and funders like the Business Growth Fund. If you are a craft brewer with a growth story, you can name your own valuation on your own crowdfunding platform – ten times turnover in the case of BrewDog. Over at Camden Town Brewery, things are a little more sensible. It’s valuing itself at ten times turnover –  £50m, revised down from the even more eye-watering sum of £75m. A sense check should have been available with SABMiller’s acquisition in May of Meantime brewery.

However, no sale price was disclosed, but the rumour was that it was significantly north of £30m – more than twice the £16.6m turnover or 15 times Ebitda. Some of the craft brewers might provide more extreme examples of the trend towards self-valuation but the democratisation of funding, via crowdfunding, is to be welcomed – although this avenue is bound to throw up clattering failures and investment disappointments over the medium term.

Two new areas are emerging as key business practice differentiators in these uniquely competitive times. Marketing has become a multi-dimensional tool where share-of-voice is no longer linked to budget size. Imagination and creativity in the era of social media have never been so important – and BrewDog is an example of what’s possible when it comes to shaping a public persona. Similarly, emerging technologies of all sorts create a unique range of possibilities for operators. Discovering and harnessing the most useful technologies is one key to success – and will only become more important as the National Living Wage turns labour into a substantially more expensive commodity.
Paul Charity is managing director of Propel Info
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