SUMMER SECTOR FOCUS: Alcoholic Beverages

Whatever your views on the morality or health implications, there’s no denying that alcohol equals big business the world over. This summer, TM’s editorial team took on the heavy burden of investigating the challenges and opportunities for alcoholic beverage manufacturers in the UK – someone had to do it.

If you enjoy a pint, like unwinding with a cab sav or have secret scrumping tendencies it will warm the cockles of your heart, like a fine single malt, to know that the alcoholic beverage industry generates almost £38bn annually for the UK economy and employs two million people. The global industry will reach a value of $1 trillion in 2014, according to MarketLine research, equating to 210 billion litres of all your, and more esoteric, tipples.

If you’re more inclined to point out the immense cost to the NHS of alcohol abuse and

Fermentation tanks at Shepherd Neame's brewery in Kent

the burden on police time caused by drunken behaviour then it might cheer you rather more to know that the industry faces considerable regulatory and market challenges.

End of the bottle

Taking the challenges first, the global financial meltdown, instability in the Eurozone, government austerity and the generally doom-laden economic outlook have taken their toll on consumer spending confidence across the world’s largest single beer consuming market – the EU. While we celebrated news of manufacturing growth in July and August, we should remember that wages across the EU, and especially in the UK, are declining, Discretionary spending on luxuries like alcohol, particularly if consumed in pubs, bars and restaurants, remains limited.

With on-trade retail of alcohol taking a particularly hard hit, winning space on the supermarket or off licence shelf has become more competitive. Furthermore, whichever outlet you focus on, it helps to be able to pay your way and booze production is dominated by big brands and conglomerates. Three leading companies hold 40% of the global alcohol market with top dog Anheuser-Busch InBev holding 20% alone.

Big Beer

There’s been lots of complimentary press coverage of Britain’s burgeoning micro-brewing industry, but let’s not forget the big hitters which make significant individual contributions to GDP.

In 2011 Molson Coors committed to investing £15m a year to 2015 in its Burton brewery, already the largest in the UK, to increase productivity and modernise the site.

This year, the earmarked £15m is being spent on a new energy centre for the plant which will be operational in 2014. A new, more efficient and versatile bottling line has also been introduced.

Investment in technologies to reduce the environmental impact of beer production is a priority. Like all large brewers, Molson Coors faces big challenges in the need to reduce energy consumption, carbon emissions and water usage.

Across its UK facilities Molson Coors has targeted reductions of: 25% in energy intensity, 15% in greenhouse gas emissions and 20% in water per unit of production by the year 2020.

Despite a growing fashion for craft manufactured drinks, establishing a brand remains a real challenge for new or smaller players in the alco-bev industry. Even in the micro-brewery-rich beer industry, four manufacturers account for almost half of all beer consumed in the UK, with Molson Coors being the largest.

James Watt, MD of award winning Brewdog, based in Aberdeenshire, says that the stranglehold these companies have on the market was compounded by the UK Government’s U-turn on minimum unit pricing and the ban of multi-buy offers in July. It allows the big players to go on heavily discounting their drinks in a way smaller firms can’t he says.

Speaking for the niche spirits manufacturing industry, William Chase, founder of Hereford-based Chase Distillery which makes vodka – Britain’s best-selling spirit – as well as gin and liqueurs, told that “Companies like Diageo have so much cash to throw at marketing to the consumer and, often more importantly, distributors and bar owners. We can’t compete with that, so where they pay hordes of brand ambassadors £100,000 a year to mix cocktails for buyers, we try to be different by bringing them here, and showing them the whole story from field to glass. But that means having a factory you’re not afraid to show people around.” Not to mention investing in an in-house bar and visitor facilities all of which are financial hurdles for newcomers looking to make their mark.

Having a good ‘brand story’ is often paramount to small producers, allowing them to

Herefordshire-based Chase Distillery's bespoke rectifying column

offer chain pubs and supermarkets a way of ‘uninstitutionalising’ their own image as well as appealing to the growing consumer interest in provenance.

But even within this marketing niche,frustrations are fermenting. Chase says “fakes” are attempting to exploit a craft beverage craze with essentially mass produced products. “This is a particular challenge for our gin segment,” says Mr Chase. “Gin has grown in popularity at home and abroad recently and lots of new names have come onto the market, trying to sell a cosy story. But the fact is that a lot of these are just buying in cheap grain spirit and adding a few flavours, then outsourcing bottling and sticking a pretty label on. They don’t understand the process. They haven’t really made anything, and what they are selling is based on mass produced petrol.”

Chase admits that this problem may be particularly acute in the spirits industry where consumers tend to be very vague about how drinks like gin, whisky and vodka are made and what from (see box).

Another marketing challenge, for companies of every size, is inherent in the need to strike a balance between product promotion and being seen to advocate irresponsible alcohol consumption.

Making Chase Vodka

Chase Vodka is the UK’s only single estate spirit. It is made only from the Lady Rosetta and Lady Claire potatoes grown on the Chase Estate, varieties which have high starch content – essential for quality vodka production.

Contrary to popular belief, not all vodka is made from potato spirit. The technical definition requires only that vodka be made from a starch spirit base with a 96% ABV. For this reason, many vodka producers opt for cheaper grain spirit as their base product despite its relative lack of depth or flavour.

A 3.5 tonne batch of potatoes makes 770 70cl bottle of vodka at Chase. This equates to 4.6kg of potatoes per bottle, a resource intensive ratio which poses a big challenge to company growth.

The production process flows through:

  • Wash, peel and mash Enzyme treatments – two temperature controlled phases to break down the starch molecules
  • One week fermentation of the potato wine (at this stage the product will be around 9-10% ABV)
  • Stripping – alcohol is removed from the mash in a nine metre tall semiautomated stripping column. The alcohol extracted will be around 85% ABV
  • Rectifying – a second distillation phase in Chase’s unique 70ft rectifying column. After extraneous alcohols such as methanol are removed, the resultant spirit will be 96.6% ABV
  • Carbon treatment and filtration: borehole water from the Chase Estate is added at this point to dilute the alcohol. The final product for Chase’s award winning signature vodka is 40% ABV
  • Bottling – currently managed manually, Chase is due to install an automated bottling line this autumn

Additional production stages are required for Chase’s flavoured vodkas and liqueurs. Its marmalade vodka is boiled in a vacuum-sealed vessel William Chase purchased from L’Oreal where it was previously used for cosmetics production.

The potato wash and peel equipment came from Tyrrells, Mr Chase’s previous crisp making enterprise.

There are plans to install a demethylating column to follow the rectification process. This will increase productivity by 80% according to distiller Alex Davies.

All of the bespoke distilling equipment at Chase Distillery is provided by Christian Karl, a German supplier.

Finally, perhaps the most obvious burden on any manufacturing of alcoholic drinks, tax. To counter the £38bn generated by the UK booze industry each year, the sector pays £16bn in excise duty and VAT.

Micro-brewers have been cut some slack on tax requirements. Progressive Beer Duty, introduced in 2002, exempts manufacturers with volumes under of 5,000-20,000 hectolitres a year from higher tax rates on their products. It has been a significant factor in the proliferation of micro-breweries in the UK. Around 80 new operations emerge every year and envious peers in the wine and spirits industries say it is time to extend the favour to them too.

Bigger firms are not so keen. Many larger brewers, particularly in the cask beer segment, say Progressive Beer Duty is uncompetitive, favouring smaller firms at their expense, without benefitting overall volumes and perpetuating an unsustainable saturation of the market with start-ups.

While the argument on either side matures, duty is an inescapable, margin-hungry reality for all producers of alcoholic drinks and a strain on cash flow since tax is paid to HMRC when orders are dispatched – not when invoices are paid.

A cup of cheer

It’s enough to make UK brewers, vintners and distillers turn to the bottle in despair if it weren’t for the fact that many British producers, seeing silver linings around the industry clouds, are investing in production technologies, increasing capacity and breaking into new markets.

While overall UK alcohol consumption may be falling, producers are targeting increasingly educated drinkers with higher quality, premium products. They are investing in product innovation to launch new drinks that encourage consumers to try different tastes, particularly evident in the cider industry at the moment.

And they are increasingly reaching out to consumers outside the UK, contributing to government’s target of getting 100,000 more firms exporting by 2020.

The biggest UK alcohol export segment by value is for Scotch whisky. In 2012, around £4.3bn worth of whisky left Britain – mainly Scotland – and made its way to customers around the world.

Surprisingly, while China is often noted as a big market for niche spirits and particularly whisky, the biggest global market is still the US, followed by France which, incredibly, consumes more Scotch whisky per month than Cognac in a year.

The Scotch whisky industry, a recognised national treasure, benefits from significant government support at home and abroad – notwithstanding the Scottish government’s best laid plans to take a stance against chronic problems with alcoholism and the allegations of discrimination against imported goods, reported in the national press, in response to plans to introduce minimum alcohol pricing.

Distilleries old and new are receiving capex grants to help boost productivity in the glens. Harris Distillery on the isolated Isle of Harris was awarded £1.9m by government to modernise production, increase capacity and keep the local economy ticking over. And as the popularity of Scotch increases around the world, government and industry agencies are also working hard to hammer out the playing field with international competitors in the spirits markets.

In August the Scotch Whisky Association announced that it had made new free trade agreements for Scotch whisky producers in the promising markets of Honduras,Nicaragua and Panama with similar agreements due to be firmed up with Costa Rica, El Salvador and Guatemala later this year.

While other alcohol segments do not receive such a largess of state backing, firms across different categories are tenaciously investing for growth and finding ways to exploit government funded business support. BrewDog, never chary to hide its distaste for ‘‘the establishment’, supports its expansion via its ‘equity for punks’ scheme whereby members of the public buy shares in the company at £95 a pop which is valued at £111m.

Will Chase built up his distillery’s production capability on the back of the sale of his first manufacturing venture, Tyrrells crisps. The last of the Tyrrells money to go to Chase before, in Mr Chase’s words, it “stands on its own two feet” is being spent on £500,000 worth of bottling and labelling equipment this autumn.

Banks are baking booze-maker too, with Penderyn agreeing a £900,000 finance package with HSBC in June.

Orchard Pig, one of many small Somerset-based cider producers, used money from a

Orchard Pig turned to the Manufacturing Advisory Service for help with its business plan

regional agency to work with Manufacturing Advisory Service consultants on the formation of a business plan and Furleigh Estate, the only English producer ever to win a gold medal at the international sparkling wine competition, Effervescence du Monde, found it could tap into funding from the Department for Rural Affairs (Defra). It has just received the last instalment ofa grant which covered 30% of the cost of extending its temperature controlled storage facilities, buying new vats and presses and commissioning a new bottling line.

The Defra grant recognised the importance of Furleigh’s wine production to local farmers explains Rebecca Hansford, co-founder of Furleigh Estate. “We’ve encouraged neighbouring farmers to plant grapes in order to boost the harvest we can get from our own vines,” she says. It’s a piece of supply chain innovation and collaboration which has mutual benefits, boosting Furleigh’s volumes and securing a new income stream for farmers with a local, fair paying customer.

It might also surprise you to know that manufacturers of alcoholic drinks, and of the production or supply chain technologies required to deliver them, are tapping into funding from the Technology Strategy Board in order to drive hi-tech advances in the sector.

For instance, a TSB-led £50,000 project is investigating solutions to a problem that costs the UK beer industry £50m a year – missing casks. Using tagging and tracking technologies within the developing ‘internet of things’ TSB hopes to help brewers overcome this unnecessary additional cost to their operations.

Another programme, with over £100,000 of TSB backing, is exploring the use of new plastics as potential replacement materials for stainless steel beer kegs.

See more of the sector

To read more about the British alcoholic drinks manufacturers and for insight into the companies visited during this sector focus see:

Down in one

So, taken in balance, while the UK market is heavily taxed, burdened by low consumer confidence and shrinking in terms of overall volumes, British manufacturers of alcoholic drinks have lots to be positive about.

Their domestic market is embracing more diverse product ranges and generally trading-up to premium quality drinks which, even after the tax man, distributors and supermarkets, or other traders, have taken their cut, offer higher margins. Financial support is available if you have good management and a nose for such things, and while certain processes will never change, innovation is taking place in products, processes and supply to ensure a sustainable future for production and distribution.

And then there’s the world to explore. While wine producers like Furleigh worry about preserving the quality of their products on the water, most alcoholic drinks can travel well and have a ballooning global middle class with a growing thirst to quench.

Here’s to the health of the industry.