Brewing up a storm

THE three businessmen sitting in a quiet corner of the Sheraton Hotel bar, Edinburgh, on a damp day in late January excited little interest. A casual observer might have noticed they were all drinking pints of Caledonian 80 Shilling, but they were not only there to enjoy the local ale. They were thrashing out the most significant deal in recent Scottish brewing history.

The drinkers were Stephen Crawley and Denis Critchley-Salmonson, managing director and chairman of the Caledonian Brewing Company, and John Dunsmore, managing director of Scottish & Newcastle’s UK brewing arm, Scottish Courage.

The deal they concocted - which allowed S&N to maintain a brewing presence in Scotland and gave the Caledonian Brewery a more certain future - was signed in the more formal setting of law firm Shepherd & Wedderburn’s Edinburgh offices at midnight last Monday.

Crawley, an affable Merseysider, was forced to cancel a family holiday last week in order to see the deal through, inform his workforce and talk to reporters. He was in triumphant mood. "Some of our shareholders wanted to realise their investments. There is always an issue in a private company about how you get your money out. This is a win-win-win situation - our shareholders are happy, we are happy and Scottish Courage is happy." The media were more interested in the closure of S&N’s Fountain Brewery, a landmark in Edinburgh and the biggest beer plant in Scotland. As a result, the minutiae of the Caley deal went almost unnoticed.

For the record, S&N will buy the plant and equipment of the Caledonian Brewery and take a 30% stake in the brewery’s former owner, the Caledonian Brewing Company. CBC will retain its own brands, including the award-winning Deuchar’s IPA, which it will brew along with S&N’s range of McEwan’s ales at the Caledonian site.

Behind the scenes, a major part was played by corporate financiers Sandy Orr and Donald MacDonald, who raised their stake in the Caledonian Brewing Company from 24% to 51%. The remaining 19% of shares are held by Crawley and Critchley-Salmonson.

The deal provided a way for earlier investors - including the former chairman Bill Crerar, former managing director Russell Sharp and former Chistian Salvesen managing director and Lothian University Hospitals NHS Trust chairman Barry Sealey - to recoup their investments. According to one source, they had been looking to sell up for some time.

Orr, who celebrated the landmark agreement with a half pint of Deuchar’s, said: "We all live in the village that is Edinburgh, and there have been discussions between the Caledonian and S&N about this kind of thing for the past two years. We had been talking about exports and off-sales, and it started to crystallise.

"When we decided the time was right it was done very quickly because it was the natural thing to do."

Orr - who was instrumental in last year’s management buyout at Macdonald Hotels - sees the deal as a way of helping Caledonian to break out of its regional heartland to become a UK-wide ale producer exporting to markets such as Canada, the US, Sweden and Italy.

S&N’s Fountain Brewery is commonly referred to as "historic", but that is a sentimental rather than an architectural description. The original brewery, on the north side of Fountainbridge, was bulldozed decades ago. The current building - which resembles a chemical works - sits on what was the North British Rubber factory, where Sean Connery’s father once worked.

The contrast with the Caledonian Brewery, a mile further west on Slateford Road, could not be greater. There, a cobbled entrance leads down to a 135-year-old brick building where beer is still made the traditional way while hop-scented steam wreaths the old pagoda roof.

According to Dunsmore, this will be S&N’s new spiritual home, a place to take visiting customers, partners and beer connoisseurs. He said: "It is very important that S&N has a brewing presence in Scotland, for our roots and for our international patrons. The integrity of the McEwan’s brand is essential."

As well as acting as a shop window for McEwan’s, the Caledonian Brewery will have to earn its keep as a production plant. The S&N deal will increase the amount of beer made there by up to 300%, bringing it close to its theoretical capacity of 150,000 hectolitres or 26 million pints a year. Crawley said: "With our forecast for growth and the heritage ales coming from McEwan’s, there will have to be investment. It is easier to justify adding capacity with S&N as partners than it would have been as a private company."

That means a few physical changes, so planning permission will have to be obtained from Edinburgh council. The production week is therefore certain to be extended from its current limit of Monday to Wednesday. There will be more trucks squeezing down the narrow entrance to the brewery, potentially raising problems with local residents - some of whom have been known to object to the parties and festivals hosted at the site.

According to Dunsmore, a marketing campaign for McEwan’s 70/-, 80/- and Export ales will be finalised in the next few months. He said: "There will be more resources to revitalise the McEwan’s brand. We want to get involved in activities that build on our Scottishness and localness. It will not necessarily involve TV advertising."

The campaign will have to work hard to win back drinkers who are already boycotting S&N’s beers in protest at last week’s closure announcement.

With the Caledonian brewery soon to be close to full capacity and Deuchar’s enjoying rapid sales growth south of the border, S&N cannot realistically be planning a surge in sales of McEwan’s. The company appears to have other priorities, anyway - step into a style bar in Edinburgh or Glasgow and you are more likely to be offered S&N’s John Smith’s bitter than a traditional Scottish ale.

Ironically, the reaction of some drinkers against this increasing homogeneity has played a big part in the Caledonian Brewery’s survival.

The brewery was bought by Russell Sharp and Bill Crerar for 150,000 in 1987 after being threatened with closure by its then owner, Vaux of Sunderland. Sales increased steadily, thanks partly to a revival in cask ales which peaked in the mid-1990s. But the company’s crucial moment arguably came in 2002, when Deuchar’s was crowned champion beer of Britain.

At the time, the brand played second fiddle to Caledonian 80/-. Since then, sales of Deuchar’s have leaped ahead, thanks to a high level of uptake in the real ale strongholds of Yorkshire and the south of England. Now sales of Deuchar’s are up to 9m pints a year, making up two-thirds of the Caley’s output.

Unusually for a cask beer, Deuchar’s draws most of its consumers from lager drinkers, a fact which may hold the key to its seemingly unstoppable success.

All this has been achieved without downplaying the company’s Scottish roots. Crawley said: "My ultimate aim has always been to make Caledonian to Edinburgh what Guinness is to Dublin. This deal brings that closer."

Despite the sales success, narrow margins in the beer trade have made it difficult to generate hard cash. The Caley is likely to file a profit of 70,000 for the year to June 2003, scant reward for 15 years of graft. If the S&N deal allows it to share overheads and distribute more effectively, it really will have been worthwhile.

Meanwhile, S&N remains a major Scottish employer with offices at Murrayfield and South Gyle in Edinburgh and a distribution centre in Livingston. Dunsmore said: "We still employ 1,600 people in Scotland. We believe we have commitment with substance, and that substance is sustainability."

With S&N still touted as a possible takeover target for a larger brewing concern, those jobs cannot be regarded as completely secure. Carlsberg-Tetley and Scottish Courage are in the process of setting up a joint technical services company which could lead to bigger things.

All eyes will be on S&N again on Monday, when chief executive Tony Froggatt is expected to reveal pre-tax profits for the eight months to December 2003 and will come under further pressure to explain the company’s plans for going forward.

The company was the worst performer on the FTSE-100 last year after shareholders and analysts demanded cuts in its production costs. The shares have rallied recently.

Australian-born Froggatt succeeded Sir Brian Stewart last June and embarked on a restructuring of the company, immediately backing an existing strategy to sell the company’s 1,450 pubs which were sold in October for 2.5 billion to Spirit. But the plan to close breweries was a surprise when it emerged in a broker’s circular last month.

The Edinburgh closure comes on the heels of that note from Credit Suisse First Boston which said the company could save 25m by closing one of its UK breweries.

There is still no official word about the future of the company’s Tyne brewery, home to the iconic Newcastle Brown Ale. The rumoured plan to outsource production two miles south to the Federation brewery would be similar to what the company has done in Edinburgh, but the company has refused to comment. ‘Newky’ brown is synonymous with the city and even moving the short distance over the Tyne would send shockwaves through the region.

According to S&N, costs and distance from the big English market played a major part in its decision to close the Fountain brewery. The company claims it pays 10 times more for water and business rates in Edinburgh than at its Berkshire Brewery in the affluent south of England. That has to raise questions about whether it is fair for manufacturers to pay rates based on the theoretical value of a piece of land rather than the actual use to which it is put.

S&N cannot have ignored the fact that the Fountain Brewery sat between the city’s fast-expanding financial district and the prime residential area of Bruntsfield. It would take an incredible degree of commitment to ignore property developers calling up offering to take it off the company’s hands for 50m or more.

That will provide no comfort to the 170 workers at Fountainbridge who have beaten production target after production target, all to no avail.

In this context, the Caledonian deal - which may provide employment for a handful of former S&N workers - looks like the proverbial silver lining. The Caley, one of Scotland’s most dynamic drinks businesses, will gain access to parts of the S&N distribution empire that rival beers cannot reach.

Some will be concerned that S&N now owns the land on which Edinburgh’s last substantial brewery is built. The company has shown little sentiment before, so will it just sell up if there is more pressure from analysts? Not according to Dunsmore, who said: "We have not bought the Slateford Road Brewery in order to close it down."

Apart from the jobs, all that has been lost from Scotland is production of a few international lager brands - Miller, Kronenbourg and Foster’s - that the public believes are made overseas anyway. To paraphrase the advertising campaign: "He who drinks Australian, can hardly complain when a brewery closes in Scotland."

Struggle for survival

LAST week was a tough one for iconic Scottish products. S&N’s decision to close its Edinburgh brewery was followed by a similar announcement concerning the Melrose tea factory in Newcraighall. Two days later, receivers were called in at Caithness Glass, famous for the glass bowl presented to winners of BBC Television’s Mastermind quiz show (pictured).

Among other brands that have come under pressure in recent times, Bank of Scotland branches share their identity with a former building society, the Halifax, and John Menzies, the newsagent’s chain which once covered the country, has been replaced by WH Smith.

Commentators are divided over whether this means an erosion of national identity, or is merely part of the constant process of change. McEwan’s ales and Melrose tea will live on. S&N’s slimmed-down range of Scottish beers will be made just a mile away at a brewery much more in tune with Scottish brewing traditions. Production of Melrose teas will move to England, but few would argue that tea is an indigenous Scottish product.

Edinburgh Crystal has emerged as a possible buyer for Caithness Glass, although it remains to be seen whether the Penicuik-based company will want to buy three glassworks across the north of Scotland.

One Scottish brand expert said: "We see companies coming and going, that is what happens in life. We spend a lot of time focusing on the negative but I really don’t see it as any kind of problem."

The loss of brands would be problematic if new brands were not being created or if they were all smothered by global conglomerates. But new brands have been created. Dozens of Scottish malt whiskies are available throughout the world. Thirty years ago, most of them were unknown outside the ranks of whisky connoisseurs.

The Caledonian Brewery and dozens of other real ale brands have sprung up in recent years to meet consumer demand for products with genuine local identities. Intelligent Finance, Direct Line, Stagecoach and the Macdonald hotel chain are all relatively new brand names with strong Scottish connections. And despite recent knocks, Scottish farmed salmon - a relatively new product - is still held in high regard in France.

Major employers which once seemed invincible have disappeared from Scotland over the past 50 years - including Singer, John Brown and British Leyland. Their modern equivalent, Motorola, which still employs around 1,500 people in Scotland, is about to rename its semiconductor division Freescale.

Some bemoan the homogenising effect of global brands such as Starbucks and McDonald’s, but Scottish companies like the Royal Bank of Scotland and ScottishPower are part of this process, too, and the benefits come back to headquarters in Scotland. Sir Hugh Fraser, one of those implicated in making British high streets look the same, was a Scot.

One of the companies now challenging that homgeneity is Fopp, a record store chain which began as a market stall in Glasgow 22 years ago. Ken Cairnduff’s Internacionale chain has also demonstrated that smaller, nimbler companies can take sales from their larger rivals.

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