UK: Rise of craft beer hasn’t changed broad trend on Britain’s struggling beer market

For two hundred years Burton upon Trent in Staffordshire was synonymous with the best of British beer making and at the cutting edge of UK industry.

A century ago the town was home to as many as 30 breweries including Bass, maker of the UK’s best-selling pale ale and the first company to register its trademark. Beer and Marmite, the yeast spread made from a byproduct of brewing, came to embody the breakfast-eating, pint-quaffing, pub-going British culture of the 1900s.

Now Marmite, owned by Unilever, is less popular on British breakfast tables than peanut butter. And the biggest beer company left in Burton is regional beer maker Marston’s, which claims to be the world’s largest brewer of cask ales. One of them is draught Bass under licence from Anheuser-Busch InBev of the US, the Financial Times reported on May 20.

Beer drinking has been in decline for decades with sales falling a quarter from 140 mln barrels in 2000. Less than half of Brits drink regularly. Those who frequent ale houses often go to eat rather than down pints of bitter. The rise of micro-breweries and craft ales has not changed the broad trend. Half of supermarkets’ total beer and cider sales are accounted for by lager.

And as beer drinking has waned, so have the vast drinks groups such as Bass that once dominated the UK stock market. Greene King, the UK’s largest listed brewer with about 2,900 pubs and restaurants, is valued at £1.7 bln. Mitchells & Butlers, which does not brew beer but operates about 1,750 taverns and owns the old Bass pub estate, is worth just over £1 bln.

Marston’s, which runs about 1,500 pubs and employs 14,500 staff, is valued at just £800 mln. A year ago its shares were 157p. Last week, the Burton brewer’s shares fell to 100.5p on the back of its half-year report.

M&B’s shares also dropped last week after it reported continued cost pressures, minimal revenue growth and a decline in first-half operating profits from £145 mln to £137 mln. By comparison, Marston’s underlying operating profits were up 4.6 per cent to £74 mln. Its revenues from brewing and distributing draught Bass, Estrella Damm and the rest rose 80 per cent. Total revenues rose 17 per cent. It was just that costs rose faster.

And the market expected more from Marston’s. Ralph Findlay, the group’s long-serving boss, has a name as a trend spotter. Marston’s was quicker than most to turn its drinking holes into eateries offering fresh food, decent coffee and beds.

Mr Findlay also began franchising pubs even as peers continued to rely on the centuries-old beer tie to contract tenants to buying in-house beers and paying rent. And rather than giving up brewing and acquiring indigestible chains of pubs, as rivals did, he embraced craft beers and premium ales.

Nonetheless, three-quarters of Marston’s profits still come from its pub estate. It could not escape the bitter weather that kept its customers indoors and thinned profitability this winter, any more than M&B could.

More worryingly, Marston’s reined in plans to open new pubs, highlighting concerns about over-supply in the eating-out sector.

Analysts promptly shaved growth expectations back to about £107m in pre-tax profits for 2018. The group, which trades on a 7 per cent yield, underlined the market’s misgivings by not raising its half-year dividend for the first time since 2011.

It was an uncomfortable echo of M&B’s decision months ago to hold its next dividend, citing continuing economic uncertainty.

And like M&B and Greene King, Marston’s is still burdened by the debt that it took on a decade ago. Marston’s borrowings are £1.39 bln, including sale-and-leasebacked property arrangements.

At more than six times earnings before interest, tax, depreciation and amortisation, that is downright alarming in a smallish business being squeezed from all sides.

The phlegmatic Mr Findlay, whose is now in his late 50s and spent his early career as a geologist looking at ancient rocks, takes the long view.

He says the group’s debt is long-term and secured against pubs of which 90-plus per cent are freehold. Rent and interest are well covered by operating profits. The group’s cost of capital is about 6 per cent. Its return on capital is about 10 per cent.

Nonetheless, Marston’s is not going anywhere until it starts reducing its debt. And no amount of gazing in to the distance will propel it back to the forefront of British industry.

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