Isaac Sheps stepped into the top job at Carlsberg UK almost a year ago with a brief to improve profitability in the UK. Carlsberg chief executive Jorgen Rasmussen says he has a track record of challenging the "status quo". The PMA Team questions Sheps on the company's progress
Q The big story for Carlsberg in 2009 was winning contracts with companies such as JD Wetherspoon, Greene King and Shepherd Neame. How did you manage it?
A I think you should ask our customers. I think that it's all about believing in our success and maybe understanding a little bit better why it didn't work in the past and maybe what we did wrong.
I visited many of our customers from the beginning of 2009 to hear their perception of us in the marketplace. Everybody told me that we are a take-home company and we don't actually care about the on-trade.
Customers wondered why they trade with us if we are not going to invest or support them. So the main effort was to change this perception.
On one occasion we recorded a message from our chief executive saying how much we are committed to the UK. It started to move forward before the Wetherspoon's contract win.
I think part of our leverage was that we were very flexible and Wetherspoon understood we were really going to support our brands.
In the background, we changed our sales operation — we merged the on-trade and off-trade. Everybody told us we were not investing in the on-trade. Yet we are the only ones with our own on-trade distribution, which is a big burden in cost terms.
In the same way that they told me we are not an on-trade company, they said we have the highest quality on-trade distribution.
We had very clear direction, with a very consistent message and a strong belief that yes, we can do it.
The bottom line is that in the past eight weeks or so we are selling more within the independent on-trade than last year.
Q Carlsberg had a 17% market share of beer in the off-trade and around 9% in the on-trade in early 2009. The perception has been that Carlsberg had become commoditised by being sold very cheaply in supermarkets. There is perhaps a perception that pubs shouldn't try to sell a product that was available for so much less in the supermarkets.
A I read that Wetherspoon's founder Tim Martin says pubs shouldn't talk so much about supermarket prices because it's not the real story. I really believe that it's not why pubs are selling less and closing down. There are many reasons.
And the fact is that some groups of pubs say they are doing well.
Part of it was that we were very successful in take-home, but we are not losing money in the take-home. The bigger supermarket retailers are using beer tactically — they use Carlsberg as a key part of their promotional activity because people will buy it. It shows it is a very strong brand.
If I was a pub owner I would ask myself: "Why shouldn't I offer people the brands they drink at home?" It wouldn't be wise to assume that customers would not prefer it in the on-trade.
We are close to 20% of market share take-home today, and nearly 10% in on-trade; so we are increasing our market share across both channels.
It's a fact that if you put Carlsberg on the bar it can compete very nicely with other brands. Carlsberg is selling three times as much as other brands. It is a very strong brand.
Q It would seem, though, that the off-trade is an increasing priority for major brewers.
A It's better to have a portfolio mix. Different channels have different types of profitability and they all have different costs to service them.
There's no doubt that you can easily do a big volume of sales when you go to a big retailer, have one delivery to the main warehouse and just sign the contract. But retailers could sell another brand tomorrow, and they are right to do so. So you can't put all your eggs in the same basket.
Carlsberg UK hasn't, in recent times, done enough within the on-trade — it's one of the things we are changing. In more premium brands you have better profitability.
San Miguel, for example, which is new and important for us, is stronger in the on-trade.
You could say Tuborg is becoming more of an on-trade brand. It is likely, though, that the on-trade will get smaller and the total volume from our take-home sales will get much bigger.
I think it's the right assumption that the on-trade will be somewhere between 30% and 40% of the market and not 50% as it is today. But the on-trade will remain very important to us.
Q How do you go about recreating some margin for Carlsberg when you have three strong national competitors in the marketplace?
A We already have better margins than a year ago and we're planning that in 2010 they will be the same, if not better. We will continue to do it by squeezing ourselves, by getting more and more efficient. There are always ways to do things better and more cheaply.
That's what we're continuously doing — trying to be very modest in our costs and managing the mix, package, portfolios and offers. You can actually move your profitability from one place to another.
You can also convince customers that it's better for them if we invest money in promoting the brands, instead of just giving them a discount because they also need a pull for their customers. We are investing in that pull.
Q The Mitchells & Butlers boss Adam Fowle recently told City analysts that the major brewers have become more punchy. Would it be fair to say you've become more persuasive with major customers about the need for you to better margins?
A Most of the spare capacity in the UK market is closed down. One or two years ago everyone had too much capacity because of the drop in the total market. All the big brewers are looking for value — and will continue to go for value more than volume.
Historically, Carlsberg signed contracts with some assumptions that were wrong — that costs would not change and then they did change.
We signed contracts with fixed prices and that doesn't make sense in the long term. They were OK for a few years, but then the costs increased on everything.
We will always honour contracts. But we discuss contracts all the time — we went to a customer where we have a problematic contract and we weren't shown out of the door. The discussions are ongoing and I'm sure we will find a solution.
Q Some of the tenants of large companies complain that the discounts the companies earn from the major brewers aren't being sufficiently passed on to them to compete.
A I don't know if I should talk about the tied story because I'm not a pub company. I stay out of it. The only thing I would say is that the relationship between tenants and pubcos is a contract and the terms are known.
I tell my people one thing not to forget — if you want a contract badly you may get a bad contract, so we all have to be very cautious and look to the long term.
Q Carlsberg's "We deliver more" initiative looks to help licensees in areas outside the traditional beer supply. What is the thinking behind it?
A Colleagues told me about the idea and I thought it was great. The basics of business are to understand what your customers really need and what you can add in value.
If you understand the psychology of your customers better and/or faster than your competitor, then you can really bring your customer something of value — and that is what we are all about. So it's all about delivering more.
The biggest saving one of our licensee customers has seen is £10,000 and more than 1,100 pubs use it. More than 200 customers are pursuing business rates appeals via the We Deliver More website and more than 140 customers are using the utilities service.
More than 1,160 print orders have been placed by customers. We also have the free-to-attend Carlsberg Academy, where some 330-odd customers have been already to get business insight and study best practices. Those who want to out-perform must be more and mo