The subject of this week’s SME Focus managed to achieve the apparently impossible by creating an upmarket ale which has become a big seller in supermarkets at a time when giants like Scottish & Newcastle were deciding the only drink with a future was lager.

Not surprisingly Dougal Sharp has strong views about the role that pricing pays in the decisions that consumers make about what to drink.

 

Name: Dougal Sharp.

Age: 37.

 

What is your business called?

Innis & Gunn Brewing.

 

Where is it based?

Edinburgh, where we directly manage customer service, our supply chain, sales and marketing and quality control.

All our production is outsourced meaning that we can operate more efficiently by investing in building the Innis & Gunn brand and driving sales growth.

No other beer company in the UK follows this business model.

It has served us well through the vital start-up phase but there will come a time when it is more financially viable to run our own brewery.

 

What does it produce, what services does it offer?

Innis & Gunn is an independent specialty beer company that produces oak-aged beers using a process that is unique to us. We were the first brewer in the UK to develop a beer and a brand that is regarded as a connoisseur product, treating it in a similar way to wine.

We were very lucky to discover our production process by accident but, since then, have ensured that we remain at the forefront of beer innovation by experimenting with different beer styles and maturation techniques.

The whisky industry is still innovating with wood after hundreds of years of the practice.

To whom does it sell?

We sell via first-tier distributors to the on- and off-trade industry in the UK and six other markets (Ireland, Canada, USA, Finland, Sweden and Norway).

In the UK you’ll find Innis & Gunn in the World or Specialty Beer fixtures of all the big multiples, where our brand is number three in value sales behind big international brands like Leffe and Hoegaarden.

In Canada it’s the best-selling British beer and, in Sweden, Innis & Gunn is the second best-selling imported beer.

Innis & Gunn is popular amongst premium wine and spirits drinkers as well as beer connoisseurs. There is huge growth potential here.

 

What is its turnover?

We are expecting to reach just under £5m to the year ending December 2009. Since we started in 2003, we’re averaging 60% year-on-year growth in turnover.

 

How many employees does it have?

There are currently five of us at Innis & Gunn in Edinburgh and a brand ambassador in Canada. We are now in the process of setting up Innis & Gunn Inc, based on the east coast of the US, and are now recruiting for a managing director for North America.

 

When was it formed?

Innis & Gunn was first established in 2003 as a joint venture with William Grant & Sons. I led a management buyout from Grant’s in 2007.

 

Why did you take the plunge?

It was just too good an opportunity to miss. I never set out to carve a career for myself in the beer industry. I studied chemistry at university and was intent on pursuing a career-related field.

Brewing was the first ‘trade’, however, that I learned, working during holidays at the Caledonian Brewery, where dad was managing director. I built a working knowledge of the operational aspects of a brewery as well as the craft of making beer and developed a real passion for it.

When the technical manager quit in 1994 following a big fire at the brewery, I was drafted in to help with the rebuild but soon saw an opportunity to ring changes in the way beer was being produced and to innovate with the ingredients and brewing techniques.

It led to Deuchars IPA winning Champion Beer of Britain in 2002, something I am very proud of. By that time, however, I was growing disillusioned by what was happening in the beer industry: discounting, chasing volume instead of profit and short-sighted cost-cutting measures were laying waste to many great beer brands.

Innis & Gunn gave me the opportunity to start with a blank canvas and build a premium brand that represented quality and innovation.

 

What were you doing before you took the plunge?

I had been working as head brewer at the Caledonian Brewery and was leaving to pursue an MBA. I was then approached by William Grant & Sons to pull together a business plan for Innis & Gunn.

As I had a few months before the start of the course, I duly accepted and, some weeks later, presented the plans. Two weeks after that, Grant’s chief executive flew up to Scotland and offered me the opportunity to build the business, which is now Innis & Gunn. How could I refuse?

 

How did you raise the start-up funding?

The joint venture was financed by William Grant & Sons. Innis & Gunn benefited hugely from tapping into the incredible brand-building experience of the Grant’s management team and staff, for which I am very grateful.

When I led the MBO in 2007 we received funding from HBOS, who were extremely supportive of the business. Banks were under severe scrutiny at the time and were tightening up on lending so I’m glad they placed their confidence with us. We repaid all acquisition debt within 14 months.

 

What was your biggest break?

In all honesty, the discovery of the beer. It was such an incredible twist of fate as the beer was being discarded -- a by-product for Grant’s Cask Ale Reserve blended Scotch whisky -- until the distillery manager noticed staff were drinking it instead of pouring it away.

 

What was your worst moment?

At the end the acquisition from Grant’s we assembled in the offices of our lawyers, DLA Piper, in Edinburgh to conclude the deal. There was a table of paperwork to sign, and representatives from Grant’s, the bank, Grant Thornton, DLA and Innis & Gunn.

We signed everything off and then settled down to await the bank transfer of funds for the acquisition into DLA’s holding account. 75% of the cash arrived on time, but the remaining 25% didn’t -- there was an issue with the transfer. This was my first deal, and the fact that we couldn’t complete was terrifying.

Everyone else in the meeting was completely relaxed, saying things like don’t worry, this sort of thing happens all the time in deals. But it did not feel like that to me, I was tearing my hair out. Luckily there had been an administrative mix-up at the bank and the funds arrived shortly afterwards.

 

What do you most enjoy about running the business?

Helping Innis & Gunn to achieve its potential. What is particularly rewarding is that, as we’re a small team, everyone shares the success.

 

What do you least enjoy?

On the flip side, being part of a small team means that I have to turn my attention to a great many different tasks, some of which I’m better at than others.

It’s the dichotomy of internal versus external focus where sales growth is the primary objective. Things will change now as we’re recruiting to further build the team here and in the US.

 

What is your biggest bugbear?

When I embarked on the MBO, our family risked everything -- our homes, pensions, financial wellbeing, the lot. We have since started to take on staff, we pay NI, large corporation tax bills -- we are good corporate citizens.

Our reward from Whitehall was a revised Capital Gains Tax regimen, which, if we ever sell the company, means that we will pay 80% more tax. For me, the revised CGT system has been one of the worst-advised and implemented pieces of legislation ever introduced.

It simply incentivised short-term thinking and ambition in business, and unfortunately we are all too aware of where that has got us.

 

What are your ambitions for the firm?

Our goals are for Innis & Gunn to be one of the world’s leading specialty beers and a product that can be instantly associated with Scotland, like Scotch whisky.

 

What are your top priorities?

Cash is king. Generating and managing cash flow is the lifeblood of this business and we have worked hard to ensure a strong cash profile.

A focus on a few core markets that represent high-value, high-volume-generative opportunities to build our brands, such as Canada, Sweden and now the USA.

Developing the team -- investing in the right people is a surefire way to add value to the business.

Continuing to be at the forefront of beer quality and innovation -- this strategy strengthens our premium positioning and enhances our relationships with the trade and their customers.

 

What single thing would most help?

Cutting the UK drinks industry a little slack and revising the oppressive tax regime on alcohol. Premium beers like Innis & Gunn don’t fuel binge drinking, but 18 alcohol units of strong cider for under £4 does.

 

What could the Westminster and/or Scottish governments do that would most help?

A system that supports SMEs where it counts would serve the nation well.

Offering greater financial assistance to businesses that show vision and drive backed up by a robust business plan and commercial acumen would help … and simplifying taxation.

 

What was the most valuable lesson that you learned?

That you’re never too old or wise to take advice. We are very fortunate to have a group of directors and business advisors that have a huge, relevant pool of knowledge.

Perhaps the most edifying piece of advice I received was when my dad, Russell, who is a director, suggested we name the business after the middle names of my brother and I -- Innis & Gunn. I was not too keen but when we asked consumers they loved it, so the name was set.