We don't get in the way of independents: Lion
Lion’s Managing Director David Smith has told a Federal Parliamentary Committee looking into competition in Australia that Lion has an “absolute policy” of not getting in the way of taps for independent brewers, despite the company having a history of directly targeting them with its tap contracts.
Smith was giving evidence before the House of Representatives Standing Committee on Economics that has already heard from Coopers’ Managing Director Dr Tim Cooper and Independent Brewers Association representative Richard Adamson.
Adamson’s evidence included the suggestion that pubs were making purchasing decisions to meet rebate targets set in their contacts with Lion and CUB.
Committee Chair, Dr Daniel Mulino MP, recalled the earlier evidence from the Independent Brewers Association where publicans ‘short ordered’ independent beer as a result of contracts, though Smith said that he couldn’t imagine that occurring.
“I don’t know whether anyone on the committee has ever been into a pub and asked for a beer and they say, ‘sorry, we’ve not got that beer, because we’re trying to sell more of this beer because we get a rebate’,” Smith said.
“I mean, these are sophisticated retailers we’re talking about here, passionate about their consumers and passionate about their customers and want to give them what they come in to order.”
Dr Mulio responding asking whether, if it were to happen, would it be a problem.
Smith replied that he didn’t think it was happening.
“I think there’d be more more to it than that,” he said.
“I think there are craft beers, whereby the retailer, the publican, might make more margin, because they’re selling it at a higher price.
“So it’s almost too complex to get into. So I don’t even recognise the issue.”
Smith’s evidence came in response to the IBA’s Richard Adamson who told the committee in July that rebate schemes that have been put in place as an incentive to increase volume restricts access to sales.
“So having that sort of mechanism in place is artificially restricting how much independent product could sell through that outlet, and it’s also depriving the consumer of access to those products as well.”
During his evidence, Smith told the Committee that Lion has an “absolute policy where we don’t get in the way of taps for independents”.
“But then there’s a lot of independents looking for taps as well.
“And then that comes down, I think, to whether the person in the pub, the publican thinks that the consumer is going to buy their brands or not.”
Smith’s evidence came despite Lion having a record of specifically targeting independent brewers through its contracts with publicans.
In 2020 Brews News revealed that Lion was signing trading agreements with venues that sought to specifically exclude the then-independent Stone & Wood brewery from uncontracted taps.
Amongst Lion’s terms, the multi-year tap contract saw the venue commit 75 per cent of taps to Lion products, while excluding CUB/Asahi, Coopers, CCA and Stone & Wood from the remaining uncontracted taps.
“For the avoidance of doubt, you may pour any other competitor brand(s) on the remaining tap(s) subject to our exclusivities and tap share percentages above,” the agreement stated.
Lion said at the time that it “does not seek to exclude particular small craft brewers in our agreements with venues” apparently seeing Stone & Wood as different from the more than 600 other independent breweries.
Lion then acquired Stone & Wood in September 2021.
While Stone & Wood was specifically targeted in contracts prior to being acquired, Brews News regularly receives reports from brewers that Lion seeks to exclude popular classes and styles of beer through its contracts in a move that directly impacts their ability to sell to venues.
Brews News contacted Lion seeking clarification of its ‘absolute policy’ in light of its actions. The company advised through a spokesperson that, despite Mr Smith’s evidence, it was “a matter of principle” not to exclude small craft players or their brands.
“Our commercial arrangements are driven by the desires of our on-premise customers, who are in turn responsive to what their patrons want,” the spokesperson said in the response.
“We celebrate the diversity and interest that the craft brewing movement has ignited in the broader beer category. As a matter of principle, Lion’s tap contracts do not exclude small craft players or their brands.
“Our industry is highly competitive, and this is reflected in the growth in craft beer over the past decade.”
In response to a question clarifying the difference between “a matter of principle” and “an absolute policy”, the spokesperson advised, “it is our policy”.
Plenty of choice
Smith told the Committee that Lion’s share of the market was 34 per cent of the beer category, while its largest competitor, CUB, was “in the high 40s, early 50s.”
He was asked by Dr Andrew Charlton MP whether the beer market was a ‘cosy duopoly’ as suggested by a former ACCC Chairman.
“Do you think that’s a fair description of a market with two players with a market share combined in the mid-80s,” Dr Charlton asked.
“No, I wouldn’t say that,” Smith replied.
“It doesn’t feel like that, as I say we’ve seen our market share decline over time and we’ve seen competition significantly increase over time.”
He said if you walk into a bottle shop, the first thing you will see is wine or spirits.
“And when you see the beer, you see a whole range of beer products,” he said.
“There are hundreds of different brands, over 60 per cent of the shelf space is craft, local, independent brands.
“And so it just doesn’t feel like that to the consumer.”
He went on to say that if a consumer walks into a pub there’s also choice of different brands.
“Typically from different manufacturers, there’s typically some local craft brands in there as well, or different craft brands.
“It’s tough that the dynamics have changed over the years and it’s competitive.”
Dr Charlton sought to clarify David Smith’s assertion that craft beer had sixty per cent of the shelf space, though Smith wasn’t able to provide specifics beyond saying that Lion had 15 per cent market share of the ‘craft’ segment through brands such as Stone & Wood, Little Creatures and Kosciuszko.
Marketing more important than rebates
While the Lion Managing Director said Lion’s marketing was the most important incentive the company used to get taps, discounts in the form of rebates were also used.
“The biggest thing we do is obviously market our brands,” Smith explained.
“So you know, the ideal thing for us is a consumer walks into a pub and says ‘I’ll have a Toohey’s please’ or ‘I’ll have a XXXX’ or ‘I’ll have a Hahn’, And that’s the most important thing for us is to market our brands.”
However, he said publicans are also interested in price.
“They typically look for lower price based on the amount of volume that they buy,” Smith explained.
“So we’re responding to customers around that, and we do that then in the form of a discount.”
He said that the discount given is based on the volume a customer is going to buy, with the discount paid “in retrospect, as a rebate off their total bill.”
Smith said the other thing Lion does is install tap systems, but these had no restriction on what they can pour.
“One of the things that we do for our customers is to put in those tap systems into their outlets at a cost to us of about $3,000 a tap,” Smith explained.
“And we have no restriction then on what they put through that.
“So, for instance, craft beers selling in pubs would be all going through a tap that we’ve invested in the infrastructure.
“And we just see as part of, you know, creating a vibrant beer market.”
Declining margins and tough market
Responding to a question from the Committee Chair about the company’s performance over the past twenty years, Mr Smith said that Lion had been experiencing declining margins.
“The general direction is one of increasingly declining margins, it’s becoming tougher and tougher,” he said.
“Beer is a business where there’s lots of fixed costs and, as volume goes down, that puts pressure on margins, and then at the same time, as costs go up, that does the same.”
He said that the overall size of the business had reduced as consumers drank less beer and the company’s margins had declined by approximately twenty per cent over the last five or ten years.
Smith told the Committee about the significant reduction in beer consumption from a point five years ago where beer comprised 38 per cent of all retail sales, and was twelve per cent bigger than spirits and ready-to-drink products combined.
“Five years later it’s now twenty-four per cent smaller,” he said.
“So what we’ve seen consumers do over the last five years is move into other sectors, particularly into spirits and particularly into ready-to-drink products.
“There’s still a decent shout out for beer at 34 per cent of total alcohol, but we’ve really been declining relative to other sectors.
“What we’ve seen in the last few months is those declines on beer have continued but we’ve begun to see declines in spirits and ready-to-drink as well.
“So it’s kind of the couple of categories that were doing better, are kind of returned to the pack.
“And our numbers are still in decline based on customers drinking less,” he explained.
Smith said Lion’s share of the market was 34 per cent of the beer category, while his largest competitor CUB was “in the high 40s, early 50s.”
Mr Smith was giving evidence before the House of Representatives Standing Committee on Economics’ inquiry into economic dynamism.