Real Profits from Real Ale

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