Subjects: Spring into action for the spring Budget, BrewDog’s change in strategy could mean last orders for craft beer drinkers, new year, new growth, and why we’re still wearing the brewery tie 

In the last month alone, I have had a Sunday roast in my local pub, met with friends in a cocktail bar, stayed overnight in many hotels across the UK, hosted MPs of all parties in countless hospitality venues and enjoyed several coffees in several cafés. Perhaps, due to my job, that’s more visits to hospitality venues than most people make – but not so many more. In fact, more than 90% of the UK population visit a hospitality venue at least monthly. 

Yet new figures released this week show 6,000 venues have closed in the last year. That takes the total number of closures to 23,000 since the pandemic. Combined with the number of openings declining for the third year in a row, there are significantly fewer venues now available for people to visit.

Over and over again, we have proved that we are a confident and resilient sector that can overcome multiple challenges, but the sheer scale of what we have faced in recent years is threatening businesses and stymying growth. As we head towards the spring Budget, we need to make it clear to those in power that the industry remains constrained by the impact of covid, not least the extent of covid-related debt and reduced tourism, and spell out the impact of the energy crisis and the fact that an extremely tight labour market has led to record vacancy levels. 

We need to show how all this has left businesses on the cliff-edge and has deterred investment. Operators have had no choice but to use their cash reserves to pay bills, keep the lights on and help people remain in jobs, instead of investing in and growing their businesses. Our message to the government, therefore, is that there is a clear choice between acting now to support the sector or risk losing many businesses for good and constraining those that want to grow. 

The upcoming spring Budget, therefore, needs to support business survival, protect jobs and provide the conditions for rapid growth that our industry has demonstrated itself more than capable of delivering. As a result, one of our headline asks of the government is that the rate of VAT for hospitality, leisure and tourism businesses be reduced. The reduction in the rate of VAT for sector businesses was a huge success during the pandemic and has proved both here and in other global markets to be an effective way to boost tourism and support employment. As a result, we are proposing that the government reduces the rate for businesses operating within our sector to 12.5% or lower.

We are also asking for action around business rates. In the autumn statement, the chancellor announced a significant 6.7% increase to business rates that will affect up to 20,000 hospitality businesses, representing almost two-thirds of the sector’s trade, putting yet more operators at risk of failure. For those that can survive, it will simply divert spending earmarked for investment into the higher rates payments. That’s why we need a cap on the increase of 3%, alongside longer-term root and branch reform of the business rates system.

Finally, we could not go into the Budget without acknowledging the national minimum and living wage. The record increases coming into force in April are higher than we were expecting. While we support the move towards a higher-wage economy, this move will put additional pressure on operators, with barely any measures to reduce their own cost burden to help manage the increase. We therefore propose a sharing of the burden between businesses and government, by cutting the lower rate of employer’s National Insurance contributions to 10%.

As communities across the country face losing yet more of the vital assets that are their local hospitality businesses – businesses that contribute to the well-being of locals, boost the local economy and create local jobs (more than 3.5 million of them all across the country, in fact) – these asks are the bare minimum that is required. They will help to remove some of the barriers to growth, to deliver measures that provide immediate assistance to businesses, and that will benefit all corners of the UK. A flourishing, healthy hospitality sector will deliver investment in local communities, contribute to the levelling up agenda in diverse areas, drive social mobility, deliver greater skills, empowering people to take control of their own careers; generate much-needed economic growth; and, importantly, bring more people together to produce a sense of community cohesion. 

This unique role our industry plays, and the potential it has, is recognised by MPs across the political spectrum, as demonstrated by the support we saw in a Westminster Hall debate on “fiscal support for the hospitality sector”, earlier this week. Secured by Alyn Smith, MP for Stirling (Scottish National Party), there was broad agreement from MPs from all the major parties that the sector needs further backing by the government. Many echoed our key asks ahead of the Budget, in particular the need to cut VAT. 

You can all help build on this by highlighting the need for support with your local MPs. We know that MPs respond and react to the issues that appear in their inbox and you can access a template letter, drafted by us and outlining the above, here. Writing to your local MP is a powerful way to drive home the urgent need for action and we would urge you to take a minute to do so, as we head towards the spring Budget next month.

We’ve not got far into January, and yet we’ve seen even more seismic activity in a craft beer world that was already proving a particularly active category as 2023 came to a conclusion. Amid a disappointing number of failures in the sector came the shocking news that North Brewing Co had gone into administration (and thankfully subsequently been rescued). Whereas I’d not been overly surprised by the collapse of some of the poorly run crowdfunding-supported breweries over the past few years, the North news was more telling of the tough conditions in this competitive market.

 

My experience – for what it’s worth – suggested it was a serious and responsible operator. North was a star others could follow. The founders of the business were pioneers in the sector, having created the renowned North Bar pub in Leeds before craft beer bars even existed. Over the years, they’ve added a number of bars and taprooms as well as opening a brewery, which expanded out to an impressive £2.3m facility in 2020.

 

They have justifiably been garlanded with awards over the years, and on my visit to see co-founder Christian Townsley, found management and the operation very impressive. The administration was a result of debt liabilities that have mounted due to interest rate rises, recent periods of tough trading on the back of the cost-of-living crisis and rising operating costs. 

 

This demoralising news came alongside the announcement that Carlsberg had acquired a 20% stake in Danish-based brewer Mikkeller. So what, you might ask? In the craft beer revolution that has fundamentally changed the beer landscape – certainly in Europe – Mikkeller was arguably the leading architects of the change. When I visited it in 2015, there was a team of a mere eight people in a small office in Copenhagen, but it was producing hundreds of different experimental beers a year and selling them globally. This was possible through an asset-lite model involving outsourcing all production to a brewery in Belgium. 

 

Mikkeller was garnering column inches around the world celebrating its radical, and successful, new approach to brewing. Needless to say, on this same trip, when I visited the brewing team at Carlsberg, it could not hide its animosity to Mikkeller. The feeling was mutual. So, here we are in early 2024, and the enemy Carlsberg has taken a minority stake in its local upstart. No doubt it will follow the playbook of the earlier deals of Camden Town Brewery and AB InBev and Beavertown and Heineken in buying the remaining 80% at some point.

 

This represents the ongoing evolution of the craft beer sector. But, with respect to North and Mikkeller, their news is maybe not the biggest in early January for the brewing sector. We can generally rely on BrewDog for that, and it has delivered on it again. The news the company is to stop paying staff the real living wage certainly hit the headlines, but it was something else in its announcement that is more telling. It said the cost saving move was necessary to get the business back to profitability. 

 

This is a change in strategy, as I don’t recall the company previously making such references. The strategy since BrewDog received a £213m investment from private equity firm TSG (in exchange for a 23% stake) in 2017 has been all about top-line growth, and the business has failed to make a profit since that date. As part of the deal, TSG received an 18% compounding coupon that has so far earned it a total of more than £600m, which BrewDog now owes. This payment will be made when the brewery is either bought in a trade sale or undertakes an initial public offering. 

 

The fact BrewDog is now talking about profits represents a change in the narrative that could be the precursor to TSG initiating a course of action that, seven years into its investment, will enable it to take out some money out for its investors. The problem for the tens of thousands of Equity for Punks investors that have funded BrewDog’s growth to date is that they could be wiped out. 

 

With the value of TSG’s investment currently worth almost £680m – representing a rise in the value of its shares from £13.18 to £42 – a deal or float would need to be valued at a hefty £2.9bn for all other shareholders to make any sort of return. This is a fanciful figure in the brewing sector – as it would represent seven times its annual sales of around £385m – and suggests there is much more pain to come for shareholders. 

 

The craft brewing revolution has long since passed its honeymoon period, and North Brewing and Mikkeller highlight how things have moved on – sometimes with plenty of pain. But it could be the poster child of the sector, BrewDog, that potentially takes things on to the divorce stage for the industry and craft beer drinkers.

A new year, and with it comes new beginnings and new optimism. And while many of the challenges remain from last year – the cost-of-living crisis and the cost of doing business – it is hoped that the numerous record festive season trading updates seen across the sector will translate to help replenish cash reserves and provide much needed momentum as the slower days of January are left behind.

Judging by the last Propel Club database of multi-site companies, which has now grown to include 3,048 companies, which operate 71,214 sites, there remains a significant number of operators looking to take advantage of that momentum, from all parts of the sector, whether that is opening a second site, entering a new market or building an existing openings pipeline.

One of those doubling up is Steve Locke, co-founder of Be At One, the cocktail bar chain acquired by Stonegate in 2018 for circa £50m. Locke launched his neighbourhood bar concept called Lockes in Covent Garden in September 2019. Late last year, he secured a new site situated at the top of Battersea Rise by Clapham Common. The site is a few doors down from where Locke opened his first bar in 1998. As Locke told Propel: “We want to build the business and we hope to open a third site in the summer. We are focusing on London, and I expect more opportunities will arise in terms of new locations as the next 12 months plays out. We have good momentum.”

Likewise, Filipino street food operator Filishack, which was launched by brothers Jonathan and Justice Cacho in 2014. It operated purely out of food trucks until 2021, when the business secured a first bricks-and-mortar site, in Peckham. The siblings have now added a 611 square-foot site in Sayer Street, London, for their second permanent location. Opened last month, Filishack’s Elephant Park restaurant serves an all-day menu where customers can build their own rice boxes, burritos and salads, with Filipino street food favourites such as grilled chicken inasal and beef adobo.

At the same time, the owners of Beaufort House, the Chelsea-based events venue and brasserie, are to open a second restaurant in the capital, under their restaurant brand Azteca. The business has secured the former The Breakfast Club site at 5-9 Battersea Rise, for a new opening under the Mexican concept. Beaufort House founders Simon Oldham and Louis Hysa already operate an Azteca restaurant in the King’s Road in Chelsea.

Another operator with a second site in the pipeline is Sourdough Sophia, the London micro bakery concept, which raised £500,000 in summer 2023 through a crowdfunding campaign to aid its further growth in the capital. It has lined up an opening in Essex Road, Islington, with a launch opening planned for March. The company, which said it has an 87% repeat customer rate and a £10.26 average spend in store, raised the funds through Kickstarter in under three weeks. Sourdough Sophia plans to have a third store opened by 2025 and is targeting revenues of £3m by 2026.

As in 2023, the growth of the experiential category is set to continue over the next 12 months. Omniplex Cinema Group, Ireland’s largest cinema company, expanded into the UK in December 2023 by acquiring five Empire Cinema locations. The move saw Empire’s Birmingham, Ipswich, Sutton, Clydebank and High Wycombe sites join Omniplex, with more openings to be announced this year. Omniplex is making a total investment of £22.5m over 18 months to acquire and then renovate the sites. With the business already operating 38 cinema locations on the island of Ireland, it said this signals its commitment to “establishing a strong presence in the British cinema market,” with its investment securing 150 jobs. 

Meanwhile, Breakthrough Bars – formed in August 2023 by Pete Terry, owner of Disco Bowl, and Ryan Fanthorpe, formerly of Red Ladybird and Black Cat Bars – aims to take advantage of opportunities in the bar and nightclub industry. The company acquired its first site – Bloom, in Stone, Staffordshire, last summer, which was transformed into the new concept Blame Frida. Subsequently, it acquired nightclubs Manhattans and Buddha in Ashby-de-la-Zouch and Dusk in Mansfield. The latter is currently under refurbishment, due to reopen later this month under a new concept called Playground. 

Following the acquisition of eight bingo clubs and their freeholds from Majestic Bingo out of administration in December 2023, Real Fun Group is aiming to become a “prominent player” in the UK’s independent bingo sector. The deal expands Real Fun Group’s portfolio to a total of ten such clubs throughout England and Wales, while safeguarding the employment of more than 140 individuals. 

Similarly, Social Gaming Group, the experiential leisure company behind gastro-gaming entertainment brands SHUFL, Play Flyby Darts and Play SHUFL, is looking to grow its darts concept, Oche, here. Oche made its UK debut in The Strand and has secured approval to open a site in Edinburgh. The company is set to open its second UK Oche site, at 80 George Street in the city. 

Despite the traditional tough start to the year, operators – new and old – continue to explore opportunities to grow their businesses and drive the sector forward. 

It’s plain that life isn’t easy for Britain’s independent brewers. High-profile businesses continue to stumble and fail, surprising all but the closest industry observers. Manchester’s Squawk Brewing is the latest, in this case, being forced to close by maintenance work on the building. But it seems restarting isn’t seen as a viable option, even for a brand with a strong cult following.

Last week, it was North Brewing, rescued from administration at the last minute by industry veteran Steve Holt, who already owns local rival Kirkstall Brewery. And before that it was Purity, Black Sheep, Brew by Numbers and Brick, to name only the brewers that have been snapped up by investment firm Breal on announcing their intention to appoint an administrator.

Breal’s longer term plan remains unclear, and my fellow columnist Glynn Davis has already expressed some bewilderment at what it might be. To boil it down, the big question is, where is it going to sell all that beer? The UK’s on-trade market has been contracting for many years, and while pubs have been closing and beer has become less important to the mix for more, new breweries, until very recently, continued to open.

Numbers have probably been inflated. Closures were not as carefully counted as the new entries. My guess is that there were never more than 2,000 breweries in the country. But that’s still an awful lot. The bubble was sure to burst at some point. Some complain that independents struggle because they don’t have a free access to the marketplace, which is true. At least half of Britain’s dwindling stock of pubs are owned by brewers or pubcos with deals with major brewers – though it seems to me there’s more flexibility these days. It’s appreciated that customers demand a wider choice and guest beers are common.

And you have to wonder what the alternative might be. Would it really be in the small brewer’s interest to have a totally free market? It’ll be all-out war for every tap. How many would survive that? The tied house system came to dominate from the 19th century when brewers sought to secure routes to market in uncertain times by loan-ties, then buying the pubs when they failed (to cut a long story short). It was a way of stabilising the industry and hedging against a declining market.

When consolidation in the second half of the 20th century prompted a series of investigations into the system, culminating in the 1989 Beer Orders and the enforced sales of some 11,000 tied pubs, the protection of smaller businesses, at that time the family brewers, was a key argument in favour of the tie. The 2,000-pub cut-off point for the legislation allowed what were then family concerns, Greene King and what would become Marston’s, to become the force they are today.

And tied houses remain an important factor in ensuring the success of many smaller producers. The Society of Independent Brewers reports that a quarter of its membership own at least one pub, rising to four in ten if you include taprooms. When we had the big surge of brewery openings a few years back, few serious business plans did not include a taproom. It was an obvious way to secure volume at a high rate of profit, provide a shop window for your beer and build a local consumer base.

A lot of them, though, open only at weekends – understandable if your tap is in the middle of a working brewery. So, some have realised they need more. They need a pub estate. Even if it’s only a few houses, it can make the difference between success and failure. Of course, it means extra investment and a whole new set of skills to develop within the business if you don’t find a willing retail partner.

But without pubs, or at least a large stand-alone taproom, independent brewers are vulnerable. Black Sheep had a few houses, and has a great taproom, but probably not enough for a company that size. Brew by Numbers and Brick have taprooms, but no pubs. Purity has the Purecraft Bar & Kitchen in Birmingham city centre, but it wouldn’t have made much difference in the current climate.

North, in contrast, has ten bars (its Birmingham outpost has now closed, probably for distance reasons) so seems to undermine the theory. But would Holt, whose Kirkstall Brewery has a small estate of its own, have taken it on without such a strong tied trade attached? Perhaps there’s a good reason why vertical integration, to give the tie its technical name, remains a persistent, arguably essential, feature of the UK brewing industry.