Adnams has reported on the six months to 30 June, with chairman Jonathan Adnams providing real insights into the trading and operating conditions that the brewer is working hard to combat – like many others. Innovations and diversifications, such as its award winning distillery outputs and growing web business, are increasingly important to the future health of the company.
Difficult for beer and pubs
“We noted in our AGM statement at the end of April that we expected our first half operating profits to be behind those achieved in 2012. This has been a difficult six months for our beer and pubs businesses in particular, and our operating profit stands at £668,000, compared to £857,000 last year. Our profits are weighted towards the second half of the year and so changes in the performance of our business in the first half can have a disproportionately large effect on our interim result.
“Turnover was just ahead of 2012 and the reduced profit reflected pressure on beer business margins in the last six months and tough times experienced by a number of our pubs. The coldest spring for over fifty years undoubtedly took its toll. Due to property disposals in the first half, notably sale of the Southwold Arms, our profit before
tax was comfortably ahead of 2012 at £1,327,000 compared to £754,000.
Moving to managed houses
“The beer and pubs markets have been changing fast and one aspect of this is that food-led managed houses have grown whilst beer-led tenancies and leased pubs have, with many notable exceptions, declined. Industry data shows that the rate of pub closures in the six months to March rose from 18 pubs per week to 26 pubs per week. Given the relative growth of the sector, we have for some while been moving our sales focus from the leased and tenanted pub companies towards the managed houses, however, sales to managed houses can be more volatile; they often come in the form of larger contracts, possibly for short periods and at relatively tight margins.
Excess production capacity
Another evident trend is growing excess production capacity in the beer market. Beer consumption has been falling whilst producer numbers have been rising. This creates an inevitable squeeze on margins. A key influence here has undoubtedly been the disproportionate generosity of the duty subsidies given to small brewers in the UK, which are many times more generous than those given in other countries. We have reacted by
building our consumer-focused brand, by innovation, by holding prices, by offering first rate customer service and by diversifying, including building our new distillery.
“A more welcome trend is that the cask ale market has been outperforming other parts of the beer market, though disappointingly it is still in decline. Industry statistics suggest that cask volumes fell by 1.7% in the first half of this year compared to the equivalent period in 2012.
“We believe that Adnams is providing a range and quality of ales that can appeal to all. We have seen continuing growth in the sales of Adnams Ghost Ship and we have just launched a new range of Adnams ‘Jack Brand’ beers which are being sold in bottle and keg and which should appeal to the growing interest in ‘craft’ beers. Within pubs, the relative success of cask beer and the growth of smaller brewers have often meant that beers are rotated more frequently and fewer are permanently stocked. This means that traditional favourites, such as Adnams Southwold Bitter, have to fight ever harder to remain continuously on pub bars.
The Beer and Pubs Business
“Comparatives with the previous year were particularly tough, because in the first six months of 2012 our business performed strongly. We had success in the national trade with beers for St George’s Day and for the Diamond Jubilee, and also with our Flame Runner
beer, ahead of the Olympics. Our pubs traded well and tenant turnover was low. This year we did not achieve the same large distribution opportunities with managed houses, and a number of our pubs ran into difficulties, all exacerbated by the exceptionally poor weather.
“The Adnams directly delivered free trade also had a strong first half last year and grew distribution. In 2013 we held our beer prices for the fifth successive year, in support of the UK on-trade, but despite this we saw a small decline in volumes in a very competitive market. Part of the challenge comes from successful and important customers being bought by competitors. Part also comes from a continuing strong growth of smaller brewers.
Take home beer volumes up
“The take home beer business represented a bright spot in the first half of this year and has continued the good growth that we saw in the last two years, with volumes up by a
further 25%. Industry data shows that the long-term trend towards drinking at home rather than drinking in pubs has reasserted itself this year and this trend has been very marked in our own results.
“Overall our volumes of own beer sold at the half year slipped by 2% and Bitburger Pilsner volumes slipped 8%.
“Our tenanted pub estate performed robustly in both 2011 and 2012, despite the very challenging circumstances that face the pub trade. Small rural pubs have been having an especially hard time with reduced visits, particularly when the weather has been so poor. Most of our pubs continued to do well in the first half of this year, but a small number found the conditions too difficult and we experienced a higher than normal number of tenancy changes. Two important pubs were closed for several weeks when their lessee became insolvent. Whilst we hope to appoint a new licensee soon, one of these remains closed.
“We are in the process of selling a number of smaller outlets as we continue to restructure our pubs business to preserve its success. We completed two pub sales in the first six months: the Oyster at Butley and the British Grenadier in Colchester. We remain interested in adding good new pubs to our estate, but we are careful about what we buy and the right property at the right price has not come our way so far this year.
Spirits: important diversification
“The Copper House Distillery, our new spirits business, continued to perform well with volumes rising by 27%. This is an important diversification for our business and taps into a growing interest in craft and local production, but it also has real export and national sales potential. We continue to win many high profile awards, which are evidence of the quality of our products and our positioning as a genuine ‘grain to glass’ producer of spirits. The fact that our Adnams Copper House Distilled Gin recently won the International Wine & Spirit Competition’s ‘Trophy for Gin’ against internationally regarded competition is testament to our seriousness and success. We are looking forward to the release of the first Adnams whiskies on 5th December this year, in time for the Christmas trade.
Hotels
“The difficult conditions that have prevailed in the last few years for the Swan and Crown continued during the first half of this year. Nonetheless, the hotels increased their sales and improved their profits in comparison to 2012. Occupancy levels were generally improved though it was harder to maintain room rates. We had the advantage this year of a full six months trading for the newly refurbished rooms at the Crown. This year we have been investing in the Swan and the upstairs Reading Room has been turned into a very attractive venue for meetings and for guests to sit comfortably and work or relax in peaceful surroundings.
Shops
“Turnover in the wine and shops business was slightly lower than in 2012, but with costs savings achieved following a business reorganisation last year, the bottom line improved. There have been minor changes in our portfolio of shops since last year. We
closed the Spitalfields shop last autumn and we opened the Norwich shop at the end of May last year. Having opened our own Norwich shop we closed the concession that we had in the House of Fraser store in Norwich in January this year. Sales in our shops fell by 1.7% compared to last year, though like-for-like sales were up by 0.6%. We have been investing in understanding the trading performance of each store so that it provides the best service for its local customer base.
Mail order and growing web business
“Aside from our shops we also saw a good performance from our mail order and web businesses over the last six months. There is a long-term shift in our business, as with many others, away from traditional mail order and towards web sales, but with a strong seasonal cellar offering and with en primeur wine sales our mail order business has had a good six months alongside a growing web business which has become important for sales of hotel rooms and brewery and distillery tours as well as Cellar & Kitchen products.
The Future
“This was a tough first half for our business and the fundamental trends within the beer industry seem unlikely to change, though we did experience an unusually disrupted period within our tied estate in the first half of the year. However, as I write in mid-July we are enjoying some long awaited better weather and we believe that we are doing many of the right things to ensure our long-term sustainable success. We have built an enviable consumer brand backed by first rate products and customer service.
“Adnams has many great strengths, a deep-rooted culture of taking a longer- term view, a strong vein of innovation, and a values base that supports us through harder times. We will continue to seek to do the right things and deliver value to all our stakeholders.”
Jonathan Adnams OBE, Chairman