Independent beer producers will need to focus on the basics and keep their options open.
In what now feels like ancient history, in August 2019 I wrote an article on some of the challenges facing the burgeoning UK craft brewery market. In it, I suggested that the experience of American brewers, where the market is more developed, potentially provided some lessons for beer brands in the UK.
Fast forward twelve months, and the landscape has changed more than anyone could have imagined. COVID-19 resulted in the closure of all on-licence premises for over three months, drastically changing consumption patterns and potentially the on-trade market for years to come.
Although the disposal of millions of pints of beer which had gone off in pub cellars during lockdown has seen the most press attention in recent months, the hangover from COVID-19 is likely to last much longer for brewers of all sizes.
COVID-19 transforming the market
Although pubs and restaurants were permitted to reopen from 4 July, many took a cautious approach whilst demand levels were uncertain. The government’s Eat Out to Help Out scheme has been successful in drawing some consumers back to restaurants and pubs during the month of August.
Where pubs have reopened, many have streamlined their offering in order to reduce the wastage on slower-selling lines. Of course, the rapid growth in craft producers in recent years has been driven in part by consumer demand for greater variety. Yet with pubs now only stocking a core selection of ‘bestsellers’, those brewers that fail to make the cut will be negatively impacted.
Brewers that have access to canning or bottling facilities have fared better than their competitors, with many having initiated or expanded into direct-to-consumer sales. This sales channel is generally higher margin for the brewers and allows them to maintain engagement and brand connection with the end consumer.
Changes to Small Breweries Relief Scheme
In July 2020, proposed changes to Small Brewer Relief Scheme were announced.
Under the old regime brewers producing less than 5,000 hectolitres a year (roughly 880,000 pints) were the largest beneficiaries, securing the maximum relief of 50 percent, with the relief tapering to zero for brewers producing 60,000 hectolitres or more. This has been a major contributor the growth in the number of small independent breweries and has enabled them to better compete with the global brewers.
The new regime however, will lower the threshold for receiving maximum relief to 2,100 hectolitres, with the taper being removed at a slower rate. The result is that the scheme has the potential become more beneficial to mid-sized brewers, whilst being relatively less supportive of the smaller independent market.
How to react
The market is tough and is likely to remain so for the foreseeable. Brewers of all sizes should consider the following:
- Building operational resilience - With the potential for localised or national lockdowns in the months ahead, brewers will need to consider how to adjust their operations. Increased consumption at home is likely to remain a key focus for the foreseeable future. Whilst further lockdowns are more likely to be localised then national, the flexibility to service different sales channels including, retail, wholesale and direct-to-consumer will be key. This is likely to require additional investment in IT and logistics capabilities.
- Controlling costs – COVID-19 has necessitated both one-off and ongoing costs, including changing operating practices and increased use of PPE. Businesses must factor in these additional costs as part of the financial forecasting.
- Building financial resilience - As with many businesses, cash will be a key focus. Brewers need to make sure they undertake regular short and medium-term cash forecasting, identifying potential pinch points and running multiple upside and downside scenarios. Making changes early on can help avoid more drastic action later, and there is almost always quick win initiatives that can release ‘trapped cash’ and help build additional headroom.
- Consolidation – The recent changes to the Small Breweries Relief Scheme and a slow recovery in the on-trade market are expected to lead to further sector consolidation and likely more distressed brewery sales. Engaging in discussions with potential partners at an early stage could increase the chances of securing an attractive deal.
- Innovation remains critical – In this market, consumers are less likely than ever to settle for middle-of-the-road. Pubs need beer that makes visiting them worthwhile, whilst customers buying online must be sufficiently impressed or brand-aware to seek out delivery and pay a premium. Innovation in new products and marketing creativity will be critical, but not at the expense of retaining a tight focus on operational and financial controls.
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