Real Profits from Real Ale

Less than 10 years ago, cask ale brewing was in the last-chance saloon. So how did Greene King win through? Andrew Purvis reports.

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Last Updated: 31 Aug 2010

Walking from the staff car park to Greene King's head office in Bury St Edmunds, Suffolk, I enter a Dr Who time-warp. To my left is the old stable block where the horse-drawn drays are housed (for promotional purposes only), to my right the brewery museum with its hop shovels, beer ephemera and wobbly mannequins in period costume. Directly ahead lies the towering 1930s edifice of the Brew House, all burnished coppers (giant kettles), mash tuns (barrels) lined with wood, and sacks of hops with names like Fuggles, Bramling Cross and First Gold.

This, I am certain, is a world where 21st-century ideas will have failed to penetrate, where traditional ales are brewed by men in brown overalls, and key dates in the company's 200-year history are chalked on boards next to the sepia photographs of Suffolk Punch horses and Jack Russell terriers smoking clay pipes.

Inside, I'm met by a different kind of graffiti altogether - a PowerPoint graphic outlining the Brewing Company values of honesty ('Telling it like it is'), unity ('All for one and one for all'), delivery ('Do what you say you're going to do'), respect ('Treat others as you wish to be treated yourselves') and can-do ('If you believe you can, you will'). On a separate slide, the Greene King mission statement is represented by 'the three blobs' - best brands, best beer quality and best service.

These are the cornerstones of what new chief executive Rooney Anand calls 'our unique and compelling WoW (ways of working)' - a phrase that, by Anand's own admission, causes the odd raised eyebrow among analysts and fund managers.

'They hate it when I talk that way,' he says - and staff probably felt the same when he arrived from the Sara Lee Corporation in 2001 to head up the Brewing Company, one of Greene King's three divisions. 'Having been on all the training courses and speaking the management language from the Dilbert cartoons,' he says, 'I would say there was a little bit of management-course power lacking.'

How things change. Greene King plc today is almost a caricature of US-style management technique, with its cheerful 'beer ambassadors' (staff who pull pints at Newmarket or swap shirts with rugby players at Twickenham), 'cross-functioning' (trying each other's jobs) and incentive schemes for call-centre sales staff - although Anand refutes the comparison. 'We don't want to be too American about it,' he maintains. 'It has to be real, it has to come from here (clenched fist on breast). It's not about just learning a language and then playing a game.'

Whatever it's about, this unique company culture has somehow ring-fenced Greene King from the drastic downturn faced by other cask-ale brewers.

Even before the mid-1990s, when a tide of lagers, imported bottled beers and New World wines flooded pubs and supermarkets, real ale had been in decline. By 1998, its share of the beer market had shrunk to 10.9% compared with nearly 20% five years before. Dozens of breweries were forced to close. The (then) Big Four - Interbrew, Carlsberg Tetley, Scottish & Newcastle and Guin- ness, supplying 85% of the UK beer market between them - poured all their resources into lager and pressurised keg beers.

Real ale (a 'live' product containing yeast) became a quirky minority interest, while the keg variety (sterile and brought to life with a blast of CO2) was the love of Clonetown Britain, consumed by the bucketful in town-centre theme pubs up and down the land. For brewers, keg beer is easier to store, handle and transport, extending market boundaries and allowing tighter control of brands.

Real ale, by comparison, is a tricky, mercurial product more akin to bread than a can of beans. No wonder the big brewers are wary of it. Today, trading in cask ales typically runs at -8% or -9% (recently up from minus double figures), yet sales of Greene King's Abbot Ale enjoyed an 11.3% growth in its East Anglia heartland last year.

Its award-winning IPA (the best-selling cask ale in Britain) and Old Speckled Hen (jostling with Newcastle Brown for pole position in supermarkets) saw similar growth, while The Beer to Dine For - marketed as an accompaniment to meals - has enjoyed a growth of 277% since its relaunch last summer.

It is one unusual success story in a mash tun of disappointing failures - even for the lager giants. In late February, both Heineken and Carlsberg reported falling profits after beer sales in western Europe fell flat. They blamed a sluggish European economy, the weak dollar and the impact of pub smoking bans in several countries, adding that brewery closures might be necessary later in 2005.

In such a climate, Greene King appears to be bucking the trend - but that is a trait embedded in the company's culture. To begin with, it has an unusual structure. Explains Anand: 'It has gone from being one board with functional directors - a tenanted director, a retail director, a brewing director - to a business unit structure where each unit is fully empowered and accountable to manage its own operations.'

Second, Greene King embraces both brewing and retailing (through pub outlets and supermarkets), something the financial pundits said couldn't work. 'By 2001, when I arrived,' recalls Anand, 'the stock market was starting to think that maybe this integrated model does work - after 10 years of saying no, no, no, all the textbooks say you should be in brewing or retailing, not both.'

The most perverse decision of all was to withdraw completely from the lager market 10 years ago - just when it was really taking off - to focus on real ale. Was it luck, good judgment, market research or sheer defiance that made Greene King exit the Harp consortium to pursue a shrinking niche market?

'There was a bunch of people here,' says Anand, 'including Tim Bridge (his predecessor as CEO), who sat down and had a strategic discussion.

There are lots of complex definitions of strategy, but the best one is "playing the game in a way that you can win". The Greene King position was: are we going to take on the big players in lager? The ale market is declining - and the MBA marketing textbook says get out of ale and into the area that's growing.

'But then they just asked themselves the important questions: how much of it is demand-driven and what can you do about that? How much of it is supply, and structurally created by the withdrawal of the big players? Does that create a space for the smaller guys to come in? That was the thinking.'

By 1999, when cask-ale brewers were dropping like flies, Greene King bullishly acquired the Morland brewery in Abingdon, Oxfordshire. Like all Greene King acquisitions, it was designed to benefit all three elements of the business - and enlarged the company's footprint from its East Anglian roots towards the south Midlands and the south coast. Two years later, Anand arrived and faced an even bigger challenge than he had at Sara Lee.

'There, I'd been trying to turn around a business that was losing money,' he says. 'There was very much a Sword of Damocles hanging over it. In a negative environment, everyone knows what direction to pull in - they're all in it together. Greene King was to all intents and purposes a very successful company, but there were issues. One thing I found difficult was getting people to recognise that there was a need for change.'

The company's worst enemy was complacency, created by what Anand calls the 'lightly myopic' perspective of a labour force secure in Greene King's 200-year history. Like the company itself, some employees had never left Bury St Edmunds and generations of their families had never worked anywhere but the brewery. 'What they had was affiliation, loyalty and an encyclopaedic knowledge of the business,' says Anand, 'and that is a great clay to work with.'

What the employees may not have known was that the entire beer market - not just cask ale - was almost dead. Since 1979, when the market peaked, the UK's total beer consumption has fallen by 13%, while consumption of wine has almost tripled. In the same period, the major brewers have closed 86 breweries out of 142 - and further withdrawal is expected. According to a report by Lazard, there is still a 10%-15% overcapacity in the industry.

Knowing this, the management at Greene King decided to pre-empt catastrophe by making it a leaner, keener organisation. 'I said: look, we're up against some big guys,' Anand remembers. 'We haven't the wherewithal to compete with an Interbrew, a Bass or a Carlsberg Tetley, but we could be better than them. So we talked about that ... what does "best" mean? In whose eyes do you want to be best? - not just shareholders, but employees, customers, partners, suppliers.'

An initiative was launched to make Greene King's beer quality exemplary, with a range of staff - not just analysts - judging the beers in weekly tastings. Quality control measures were put in place that bore comparison with the more fastidious food industry. 'We were the first brewer in the UK to receive ISO (quality management) accreditation across the whole business,' says Anand, 'and if you get the quality right, it's a win-win. Not only do your products improve, but you save money because you don't have to go back and do things again.'

The same investment was made in customer service, with attentive call-centre staff on hand to take orders from pub licensees and attend to quality issues. The draymen were considered an important part of the strategy, since they met publicans every day and were experts in cellar management and installing beer equipment correctly. Many are given the keys to pub premises, such is the degree of trust. At the same time, Anand set about addressing the issues he had noticed on arrival.

'We did some work with groups of people to find out what their issues were,' says human resources manager Roy Webber. 'They were normal things like: if I work harder, you give me more work to do; he's lazy and people ignore him; if I tell the boss that, he ignores me. We undid all that; trainers from a firm called Unicus worked with us and lived in the business for a week. They devised a course that enabled us to give everyone a common language, based on our values - respect, honesty, can-do, delivery - and it's about feedback, talking to people, working together. Now, everyone can say just about anything to anyone.'

This was the beginning of Anand's 'unique and compelling WoW' - but there was the bottom line to consider as well. First came a draconian cost-reduction strategy, spearheaded by financial director Duncan Stirling, to make Greene King more competitive before disaster struck. 'When Rooney arrived,' Stirling recalls, 'he'd just come from a burning deck situation (at Sara Lee). Fortunately, we were not there yet - but looking at trends, we could be. He said: let's start clearing the decks now, before it happens, before we have to.'

With specialist help, Greene King looked at what it was spending on big-ticket items first, then zoomed in closer. 'We said: look, understand what you are spending right down to the minutiae. And we put 50 people through a course that told them how to negotiate with suppliers. The line was: encourage all employees to think of spend as their own. If it were your money, would you buy a new mash tun or reline the existing one? Can we do it for £50 instead of £60?' Such measures took £1 million out of the cost base - plus a further £300,000 through staff negotiating one-off deals on everything from training to stationery.

What's more, this enforced focus on strategy rather than on pound signs led automatically to profit. 'If you've got the quality right,' he insists, 'if you've got your brands and service right, then the profits are going to drop off the bottom right-hand corner - unless you are very unlucky.

Before, Rooney would ask: What do we have to deliver to the corporate centre to stay in business ... is it 5%, is it 6%? We tended to start with the answer and then decide how we would get there. What we do now is say: What do we have to do to support this strategy? What resources do we need - and what are our returns then likely to be? We tend to leave the numbers bit to the end.'

Browsing the financial highlights of Greene King's annual report for 2005, it has clearly worked. A 14% rise in pre-tax profits yielded a record £94 million for the year to the end of May, matching the forecasts of City analysts. Trading profits were 39% higher at £156 million, and turnover increased by a third to £733 million. All three units (brewing, tenanted pubs and managed estate pubs) delivered a strong performance, according to Anand, who said the company had successfully integrated the 432 tenanted pubs acquired last August from the Laurel Group for £645 million.

Following the announcement of the results, shares rose to £12.96, close to their all-time high of £13.36, valuing the company at £930 million.

Two days earlier, Greene King had snapped up the Essex-based independent brewer TD Ridley & Sons in a £53.6 million deal. Ridley's brewery outside Chelmsford will be closed and some of the family firm's venerable brands transferred to Bury St Edmunds, although its IPA will no longer be brewed, as it competes with Greene King's own version.

In a year blighted by smoking bans and controversy over 24-hour licensing, it's not a bad achievement. 'I think it's repeatable, too,' says Stirling, 'unless we're very unlucky.'

BUCKING THE MARKET THE GREENE KING WAY

Life as a small player in a shrinking market is precarious. But smart operators can turn what looks like terminal decline to their advantage.

Here's how ...

Don't follow the herd. Just because institutional investors and the big multinationals are abandoning your market doesn't mean you should.

Worry less about why they are leaving and more about how you can pick up their market share.

Cut costs without sacrificing value. A redundancy programme, or axing that big CapEx project, may provide a quick numbers fix, but will the business still be able to prosper afterwards? Smart saving is about taking costs out across the board without losing your ability to flourish.

Play a game you can win. Identify where your real strengths lie and make it your mission to improve them still further.

Be prepared to restructure the business if you need to.

Lead from the front. Don't hide bad news from your staff; tell it like it is and then tell them what they can do to remedy things.

Avoid a siege mentality. Battening down the hatches and waiting for things to blow over may be a natural response to crisis, but it's not a good one. Far better to pre-empt trouble by concentrating on the opportunities rather than the threats.

RISING PROFITS IN A SHRINKING MARKET UK cask ale Greene King Greene King production turnover pre-tax (barrels) pounds profit £2004 2.38m 552.7m 82.6m 2003 2.48m 535.6m 75.0m 2002 2.63m 494.5m 69.2m 2001 2.85m 431.7m 62.8m 2000 3.00m 414.1m 54.5m Sources: British Beer & Pub Association/Greene King annual reports

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