The ‘pub’: decline of a British institution – how the brewers fought back

563
CASE
STUDY

Stephen J. Oliver and Barry Whitehouse
The plight of the pub
Pubs (public houses) are a uniquely British institution,
offering food, drink and social entertainment to the masses.
The type of pub available is very varied, from idyllic
thatched country pubs to backstreet ‘boozers’. They all
cater for a wide range of customers and for centuries have
formed part of the social history of the UK. On his recent
visit to the UK the Chinese President Xi Jinping insisted on
visiting a pub, the ‘Plough’ near Chequers, with Prime
Minister David Cameron to sample a pint of ale and eat a
traditional fish and chips meal. Numerous surveys cite ‘the
pub’ as one of the top tourist attractions in the UK.
As the pub market has grown more sophisticated,
responding to the change in consumer habits, companies
have had to adapt their strategies. The days of the ‘wetled’
pub, where sales of drinks were the main source of
revenue, were numbered and many of these closed. The
regeneration of many urban areas, as well as societal
changes in the nature of work and the traditional role of
men within the family, also changed pub-going habits. In
the aftermath of the smoking ban in public places in
This case study examines the prevailing market conditions in the UK brewing industry from the perspective
of the UK’s largest remaining brewers, Marston’s and Greene King, both of which brew beer and operate large
pub estates. They occupy the middle ground of the market between the international mega-brewers and the
resurgent micro-breweries. The industry has seen significant change due to shifts in the market structure,
demand and the position of the ‘pub’ in UK society.
2007, many pubs closed their doors forever. At the
height of the recession in 2009, some 50 pubs per week
were closing, 1 although there are still over 50,000 pubs
in the UK (see Figure 1 ). In the place of the traditional
pub came the development of a new type of pub-restaurant.
These ranged from so-called gastro-pubs, which
were quasi-restaurants, to large family-oriented pubs
offering play areas for children, a wide range of wines and
soft drinks, with a strong emphasis on food sales.
The changing industry
For many years, the UK brewing and pub industry was
characterised by vertical integration, in which the
brewers also owned pubs that were ‘tied’ to the brewery
for their beer supplies. This provided the brewery with a
guaranteed market for their beer and created supply
chain efficiencies, albeit at the expense of consumer
choice. No other major market in the world had the same
system; indeed in the US it was illegal to own the means
of both production and distribution.
The traditional British beer is ‘ale’. This is usually
dark, continues to ferment in the cellar (in a cask) and is
Stephen J. Oliver is MD of TrigPoint Coaching and Development Ltd and was formerly the Managing Director of Marston’s Beer
Company. Barry Whitehouse is Senior Lecturer in Strategy at Wolverhampton University Business School. This case study is
intended as a basis for class discussion and not as an illustration of good or bad practice.
1982
67,800
1987
65,700
1992
61,600
1997
60,600
2002
60,100
2010
55,400
2011
54,700
2012
53,800
2013
52,500
2014
51,900
Figure 1 Total number of pubs in the UK
Source : British Beer and Pubs Association (BBPA).
THE ‘PUB’: DECLINE OF A BRITISH INSTITUTION – HOW THE BREWERS FOUGHT BACK
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highly hopped to give it a distinct bitter flavour.
Continental beers (‘beer’ is a generic term) tend to be
‘lagers’, much lighter in colour, colder, pasteurised and
bottom fermented. Stouts, e.g. Guinness, are very dark
and usually strong in alcohol. The ingredients are longstanding:
grain, hops, yeast, lots of water and heat!
As foreign travel made British consumers more cosmopolitan
in their tastes, they demanded more interesting
brands of beer as substitutes for their regular ale. Premium
lagers such as Beck’s Bier from Germany and Pilsner
Urquell from the Czech Republic entered the UK lager
market, providing a bridgehead for the entry of other international
brewers into the UK. Anheuser-Busch of the US
brought its key brand Budweiser to the UK to capitalise on
the growth in lager, which rapidly overtook ale. Big advertising
budgets were funded from the substantial margins
generated, and weaker secondary and tertiary brands
failed, driven out by the power brands.
Direct government intervention in the pub and brewing
sector over several decades helped create giant pub
companies (‘pubco’s’) such as Punch Taverns and
Enterprise Inns, which came to own over 30 per cent of the
market. In the late 1980s, the UK government introduced
legislation, The Beer Orders (1989), which forced Brewers
with over 2000 pubs to decide between brewing or pub
ownership, by making them dispose of half of the excess.
Over the course of less than a decade, multiple pub operators
and the new pubcos went from nowhere to controlling
a third of the market. These pub groups were able to exercise
considerable buyer power over the brewers. Profit
margins in brewing businesses were under severe pressure
and industry consolidation was encouraged.
Consumer habits were changing too, as people’s
increasingly comfortable homes became more of a focus
of their social life and ‘cocooning’2 drove the significant
growth in the ‘take home’ market. The home became a
social hub instead of the pub. While in the 1980s the vast
majority of beer sales were through pubs (‘on trade’), by
2015 over 50 per cent of all sales were through the
‘off-trade’ of supermarkets and off-licenses.3 The ‘off-trade’
sector is dominated by the UK’s four big supermarket
chains, each of which has immense buying power and
where the price of alcohol is significantly cheaper, often
being used as a ‘loss-leader’ to lure consumers into the
stores, which are also engaged in a price war and a
desperate battle for market share. This has led to largescale
pub closures as beer drinkers were drawn in by the
off-trade price differential of around 150 per cent: based
on the British Beer and Pub Association (BBPA) data,
almost 15 per cent of pubs closed between 2000 and
2015, particularly ‘wet-led’ pubs where beer sales were
the major source of income, compared to those that
focused on providing drinks and food. Figure 2 shows offand
on-trade sales of beer between 2000 and 2014.
The impact of falling demand was compounded by the
rising price of alcohol, largely triggered by the amount of
tax and duty levied on the products of the industry by the
UK government and thus beyond the control of the
brewers. As can be seen from the BBPA Beer Story
(2015) diagram (Figure 3), this is significantly higher
than for most other European countries.
New competitors
In 2002, the government introduced progressive beer
duty (PBD), which meant that smaller brewers paid
significantly less beer duty than larger breweries. It was
designed to encourage new start-ups. The cost of smallscale
brewing technology dropped as more suppliers
entered the market. In 2000, there were around 20 new
start-ups nationally. This rocketed in the years after the
introduction of PBD, peaking in 2013 with a total of 224
starting operations.4 This was the peak of the microbrewery
or ‘craft beer’ boom that was born in the USA
and imported to the UK. New entrants came to market,
experimenting with new beer styles and exciting variants
of old favourites. The pub market was less ‘tied’ than
ever and they found publicans willing to stock their beers
in place of established brands such as Marston’s
Pedigree and Greene King IPA. Some of the start-ups
rapidly went on to achieve international success, such as
the Scottish brewer Brewdog, and some were sold to
0
10,000
20,000
30,000
40,000
2000 2002 2004 2006 2008 2010 2012 2014
Barrels(000s)
Years
Totalsales
On-tradesales
Off-tradesales
Figure 2 UK off-trade and on-trade sales of beer, 2000–2014
Source: British Beer and Pubs Association (BBPA).
THE ‘PUB’: DECLINE OF A BRITISH INSTITUTION – HOW THE BREWERS FOUGHT BACK
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competitor brand, Hobgoblin, in the rapidly growing
premium bottled ale (PBA) sector of the off-trade6, as
well as market and category expertise in that sector,
which it had lacked. It also invested in building its own
bottling lines, as the costs of outsourcing bottling were
becoming prohibitive, and in addition offered opportunities
for contract packaging work for other brewers.
Marston’s kept open most of the breweries it acquired
and used the brands, distribution channels and pubs it
now owned to develop new regions for sales and distribution.
In contrast, Greene King followed a centralised
strategy, closing down breweries and integrating the
operations into its HQ in East Anglia. The multimillion
pound synergies or cost-savings created were significant
and were a key driver of the strategy. The Scottish
Belhaven business was an exception and Greene King
used its new purchase to build a Scottish distribution
base. Unlike Marston’s, Greene King aggressively culled
its brand portfolio and pumped marketing support into
its key brands such as IPA and Old Speckled Hen, to
challenge Marston’s for sector share.
Both companies were adopting a modern version of
vertical integration. They were consolidating the regional
breweries sector, focusing single-mindedly on the UK,
and beginning to invest heavily in M&A (Greene King)
and/or building new managed pubs. Marston’s started to
extend its managed portfolio by building pubs in
Scotland and across the whole of the UK, well beyond its
original Midlands base. Marston’s raised £140m in 2009
to build around 20 pubs per year, becoming the country’s
largest builder of new pubs. By contrast, Greene King
built its managed business mainly by buying other pub
companies. Their largest acquisition was the £773m
purchase of Spirit (1200 pubs) in 2015, making Greene
King the UK’s largest managed pub operator, with over
3000, well ahead of its rival Marston’s which had 1600.
multinationals, such as Camden Town Brewery, which
was acquired by global giant AB InBev for £85m5 in
December 2015.
The break-up of traditional vertically integrated
brewers also encouraged many start-up businesses into
the tenanted pubco market. New chains of higher-quality
managed pub groups such as Wetherspoon, Laurel,
Spirit and M&B were created, as barriers to entry fell,
following the change to the ‘tie’. The traditional regional
mid-sized vertically integrated brewer pub owners such
as Marston’s and Greene King faced big strategic decisions.
Did they sell out part of their operations to focus
on brewing or did they become pubcos? Or was there a
third strategic option of remaining vertically integrated,
particularly as the government had by 2002 relaxed the
rules on pub ownership?
Strategic responses
Greene King and Marston’s embarked on rival takeovers
of other breweries. Greene King, based in eastern
England, was keen to extend its geographic distribution.
Founded in 1799, it has a proud brewing heritage and
has built a broad-based business with breweries, pubs,
restaurants and hotels. Marston’s is also over 180 years
old and was firmly based in the English Midlands, with
very wet-led pubs and traditional ales. Marston’s strategy
was to grow rapidly by geographical expansion and
acquiring new brands, both beer and pub, e.g. the
Pitcher & Piano chain. Each company found itself often
bidding against its direct competitor for a third-party
target. The prevailing strategic approach became ‘dog
eat dog’, as acquiring critical mass and generating
growth through acquisition, rather than organic development,
was seen as the quickest response to pressures
from financial investors. Marston’s bought a credible
Germany
0
10
20
30
40
50
Spain Belgium Poland Austria Netherlands UK
Figure 3 Beer duty rates in top six EU brewing nations (pence per pint of 5% ABV beer)
Source: British Beer and Pubs Association (BBPA).
THE ‘PUB’: DECLINE OF A BRITISH INSTITUTION – HOW THE BREWERS FOUGHT BACK
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Consumers wanted an experience as well as food, so
décor, customisation of meals, healthy options and flexibility
of serving times, as well as customer service have
become fundamental differentiators.
For both companies the pub operations now represent
the bulk of corporate profits9. Their brewing operations
are still culturally important, however. Nevertheless,
despite the strong competition in the sector, including
from many micro or craft brewers, Marston’s share of
total premium cask ale had grown to 17.6 per cent by
201510 and 21.7 per cent of bottled ale. In the same
period Greene King’s share of total ale grew by 40 basis
points to ten per cent.
Significantly, the global brewing industry leader AB
InBev has been acquiring successful micro-brewers to
gain a foothold in this segment of the US market and also
in Brazil. They have set up a ‘Disruptive Growth’ team
which includes these micro-brewers. The development of
craft beers and micro-brewers is now a global development.
At the other end of the scale, AB InBev agreed a
takeover of industry number two, SABMiller in 2016 (see
the Megabrew case study), a deal worth £71bn which
would create a ‘mega-brewer’ company, producing a third
of all the world’s beer with global brands such as
Budweiser, Stella Artois, Grolsch, Peroni, Corona, Miller
and Beck’s.11 In 2011, Molson Coors, another major international
brewer, had moved from simply distributing Cornish
brewer Sharp’s ales to taking them over, and has since
secured the widest distribution for any ale in the UK –
another clear sign that the giants of the industry were
prepared to buy their way into the ale market rather than
going through organic development.
The microbrewery or craft beer revolution brought
new, younger consumers into the beer market and sales
of premium cask beer grew for the first time in years.
Traditional breweries had to adapt to the new entrants
and some, like Greene King, set up in 2013 their own
craft small batch beer plant brewing beers that would
appeal to ‘affluent 25–40-year-old young professionals.
Trend-setting early adopters with a work hard, play hard
attitude to life’.12 Marston’s already had a wide range of
ale brands, with its five breweries (Banks’s, Marston’s,
Jennings, Wychwood and Ringwood) and eight brand
families (beers from the above breweries plus Brakspear,
Thwaites and Mansfield) but then launched a new range
of craft beers under the ‘Revisionist’ label, playing down
associations with the parent brand. In this increasingly
competitive market, bottled beers became even more
important and Marston’s excelled in the off-trade sector,
selling 55 per cent of its beers through supermarkets.13
Marston’s brewing division achieved UK sector leadership
with a 20 per cent share of both premium bottled
and premium cask beers. Meanwhile, Greene King
Both businesses brew and market ales as their
primary products. Lager is still a significant sector in pub
retailing and so key suppliers to both companies are the
international brewers, which focus on well-known lager
brands such as Carling, Fosters, Peroni and Stella Artois.
The control of routes-to-market through their directly
managed pubs gives Greene King and Marston’s a degree
of protection against supplier domination and strength.
They are able to negotiate effective prices for the main
lager brands because they hold the key to distribution
through their own pubs. They can also exert more direct
influence over the quality of the consumer experience.
Marston’s and Greene King both set out their pub
strategies to capitalise on the consumer’s interest in
casual dining. Preparation and cooking of food at
home was becoming less popular as households found
their working hours increasing and commuting times
lengthening. As ready meals and convenience food
offerings from supermarkets continued to grow,7 pub
restaurants found that their competitors included
large food retailers such as Marks & Spencer with
their ‘Gastropub’ convenience food range and deals
such as ‘Dine in for Two for £10’.
By 2014, the rate of pub closures in the UK had
slowed, but some sources still estimated that 30 pubs
shut their doors for good every week. Marston’s strategy
of building new pubs would seem counter-intuitive but
their CEO Ralph Findlay stressed that ‘good pubs are
doing really well, whereas pubs which aren’t attracting
anyone will close.’8 Findlay’s ‘new build strategy’ is a
slower way of generating incremental growth than Greene
King’s acquisition-led approach. Some financial analysts
favoured the premium paid by Greene King to acquire
ready-made pubs while others viewed Marston’s as
creating shareholder value through building them on
greenfield sites.
Back in 2006, Marston’s had conducted extensive
consumer research to understand how pubs were being
used, what different consumer groups wanted from the
pub, and how best to develop new offerings. This led to
what Marston’s dubbed the F-plan, which stood for
‘females, family, food and forty-to-fifty somethings’,
clearly defining the principal target clientele for their pub
restaurants. Given that the traditional market for many
pubs was beer-drinking young males, this was a significant
change in approach. Longer-term demographic
trends showed how consumers were growing older. Over
a decade Marston’s actively ‘churned’ its estate of pubs
in response, selling off poorer quality pubs with heavy
reliance on ‘wet sales’ and little opportunity to do food
well. Consumers responded positively to the growing
eating-out market. They sought pubs which offered good
value, good quality and in a convenient location.
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Notes and references

1. Institute of Economic Affairs, ‘Closing time – who’s killing the British
   pub’?, Christopher Snowdon, December 2014.
2. ‘Cocooning’ is used to describe people socialising less and spending
   time at home. The name was coined in the 1990s by Faith Popcorn, a
   trend forecaster and marketing consultant.
3. British Beer and Pub Association.
4. The Brewery Manual 2015, p. 28.
5. £1 = €1.2 = $1.5.
6. +10.5% year-on-year growth (IRI, BBPA data, Marston’s PBA Report
   2015).
7. +5.1% per annum to April 2015, worth £37.7bn (Institute of Grocery
   Distribution).
8. Interview with This is Money, August 2014.
9. 87% of Marston’s profits from pub operations, 13% from brewing
   (Marston’s Annual Report and Accounts 2015); Greene King 15% from
   brewing (Greene King Annual Report and Accounts 2015).
10. Marston’s Annual Report and Accounts 2015.
11. S. Daneshkhu, ‘AB InBev makes formal £71bn bid for SABMiller’,
    Financial Times, 11 November 2015.
12. Greene King website.
13. Marston’s Annual Report and Accounts 2015.
    focused on the larger standard ale sector and, helped by
    its iconic IPA brand, it has remained the UK’s largest
    cask ale brewer and the market leader for managed pubs.
    In the changing environment in which the UK brewers
    operate, there are still some serious questions about their
    future, e.g. can the vertical integration of the two indigenous
    players, Marston’s and Greene King hold off the
    mega- and microbrewers and resist competitive pressures
    from the pubcos and supermarkets? There are also
    questions about the future of the pub itself, e.g. will craft
    beers and better food offerings save it from the
    increasing competition of casual dining outlets, supermarkets
    and particularly from the seemingly inexorable
    rise of the coffee shops (some of which are starting to
    sell alcoholic drinks too)? Although the pub has been an
    iconic part of British life for centuries, is it in danger of
    become extinct during the twenty-first century?