Guinness Plc

Bodiam House
Twyford Abbey Road
London NW10 7ES
England
01–965–7700

Public Company
Incorporated: 1886
Employees: 18,616
Sales: £1.187 billion (US$1.744 billion)
Market value: £4.71 billion (US$6.924 billion)
Stock Index: London

The dark creamy stout brewed by Guinness for more than two centuries is a product that is regarded as synonomous with the drinking habits of the Irish. Yet Guinness stout is now purchased in many foreign countries; through ingenious marketing strategies and adept management, Guinness has achieved the status of a multi-national corporation. This success, however, has recently been threatened by a scandal surrouding the firm’s first non-family leader: it has severely disrupted brewing operations and thrown doubt on the company’s future independence.

In 1759 Arthur Guinness, an experienced brewer, leased an old brewery at James Gate in Dublin. Besides renting the brewery Guinness signed an unusual 9,000 year lease for a mill, a storehouse, a stable, a house, and two malthouses. As it turned out, he didn’t require so long a lease—in just four years significant quantities of ale and table beer were emerging from the new workplace.

Soon after the brewery was in full operation, Arthur Guinness began to establish a reputation in both business and civic affairs. The company secured an active trade with pubs in towns surrounding Dublin and also became one of the largest employers in the city. As a vocal participant in public life, Guinness supported such diverse issues as penal reform, parliamentary reform, and the discouragement of dueling. Furthermore, although a Protestant, he strongly supported the claims of the Irish Catholic majority for equality.

The business nearly came to an abrupt end in 1775 when a dispute over water rights erupted into a heated exchange between Guinness and the mayor’s emissaries. The argument centered around the City Corporation’s decision to fill in the channel that provided the brewery with water. When the sheriff’s men appeared at James Gate, Guinness grabbed a pickaxe from a workman and with a good deal of “improper language” ordered them to leave. For fear of escalating violence, the parties to the dispute finally settled by means of a tenant agreement.

In 1761 Arthur Guinness married Olivia Whitmore; of the 21 children born to them only 10 survived. Their eldest son, Hosea, became a clergyman. Consequently, after the founder’s death in 1803, the thriving company was passed on to the second son, Arthur, who, like his father, soon became active in both civic and political affairs. He served in the Farming Society of Ireland, the Dublin Society, the Meath Hospital, and the Dublin Chamber of Commerce. Most importantly, as an elected director in the Bank of Ireland, he played a significant role in settling currency issues. In politics, Arthur adhered to his father’s beliefs by advocating the claims of the religious majority.

From the very beginning of his career, it appears that Arthur’s main concern was not so much in managing the company as in pursuing his banking interests. Nonetheless, brewery records indicate that from the end of the Napoleonic Wars to the end of the Great Famine in 1850, the company’s production output increased by 50%. For this reason, Arthur is often credited with making the Guinness fortune.

A great deal of that success, of course, can be attributed to Arthur Guinness’s decision to shift most of the firm’s trade from Ireland to England. Yet the growth of Guinness was a result not only of management’s business acumen and the firm’s financial strength but also of the myths surrounding the beverage: from its earliest days Guinness stout was considered a nutritional beverage and promoter of virility. Although the company was once accused of mashing Protestant Bibles and Methodist hymn books into the brew in order to force ingestion of antiPapal doctrine, Britain’s leading medical journal during the mid-19th century claimed the drink was “... one of the best cordials not included in the pharmacopeia.” This notion formed the basis of the company’s advertisement campaign of 1929, which suggested that drinking Guinness could lead to the development of “strong muscles,” “enriched blood,” and the alleviation of “exhausted nerves.” Somewhat surprisingly, this tradition still continues in Britain: the national health insurance system underwrites the purchase of Guinness for nursing mothers.

When Arthur died in 1855, his son, Benjamin Lee, assumed control of the company. Fifty-seven years old at the time, he had already worked for nearly 30 years at the brewery. During his tenure as head of the firm, the James Gate facility became the pre-eminenet porter brewery in the world. Following the tradition of his family, he was also intimately involved in civic affairs. He was awarded a baronetcy in 1867 for his contributions to the restoration of St. Patrick’s Cathedral and other services; he died a year later.

Although Benjamin Lee Guinness, in his will, divided the responsibility for running the firm equally between his two sons, Edward Cecil and Arthur Edward, Edward soon emerged as the more astute of the two. The younger of the brothers, he was said to be an energetic yet excitable man. His decisions were controversial and, apparently, overwhelming: after eight years Arthur decided to leave the brewing business, and the partnership was dissolved.

In the tradition of his family, Edward became a leading figure in both civic affairs and in English social life. After his marriage to his cousin Adelaide, he seems to have “arrived,” and the young couple circulated freely in elite circles. Among the many dignitaries entertained at their opulent 23,000 acre estate in Suffolk was King Edward VII.

Edward Guinness’s wealth, prestige, influence, and mainly his philanthropies eventually earned him the title of Lord Iveagh. He drew heavily from the family fortune to contribute to worthy causes. He established the Iveagh Trust to provide basic necessities for 950 indigent families. He donated money for the continuing restoration of St. Patricks’ Cathedral. He was, as well, recognized as an enlightened employer, ahead of his time in providing pension plans, health services, and housing for his employees.

In 1886 Guinness became a public company, its shares traded on the London exchange (Dublin, at that time lacked its own exchange). The company raised six million pounds on its shares, and embarked on an ambitious period of expansion in Ireland, England, and abroad. Guinness’s unique brewing process ensured that the quality of the produce would not be impaired by long voyages to foreign markets. By the 1920’s Guinness had reached the shores of East and West Africa and the Caribbean.

In 1927 leadership of the company passed to the next generation. The second Lord Iveagh is recognized primarily for his role in creating a modern brewery at Park Royal in London, built to service the company’s growing business in southeast England. The facility became operational in 1936, and it is there that Guinness Extra and Draught Guinness were first brewed for the British market. By 1974 production at this plant exceeded that at James Gate by 100%.

Construction of the Park Royal facility was completed under the supervision of a civil engineer named Hugh E. C. Beaver. He formed a close association with managing director C. J. Newbold yet turned down Newbold’s invitation to join the Guinness board of directors. After World War II Lord Iveagh personally asked Beaver to join the company as assistant managing director—and this time Beaver accepted. When Newbold died in the late 1940’s, Beaver assumed the position of managing director. He is credited with modernizing the company’s operations, introducing new management and research policies, increasing exports, and diversifying the company’s product base. On his initiative the company was officially divided into Guinness Ireland and Guinness U.K. (control of both concerns remains with a central board of directors).

Beaver was also a strong advocate of generating new ideas through “brainstorming sessions.” One now-famous product to emerge from these meetings was Harp lager. When Britons began taking their holidays abroad during the 1950’s, they returned home with a new taste for chilled lager. Beaver sensed this changing preference, and during one of the “brainstorming sessions” company executives decided that Guinness should become the first local firm to market its own lager. Named for the harp on the label of Guinness’s traditional product, Harp lager soon became the most successful product in the growing British lager market.

Beaver is also recognized as the founder of the extraordinarily successful publication, Guinness Book of World Records. Initially created as something of a company lark, the book has been such a success, throughout the world, that it is now a company tradition. The Guinness Book of World Records now sells some five million copies in 13 different languages.

Beaver, now Sir Hugh, retired in 1960, but throughout the next decade Guinness continued to expand—notably abroad, in countries with warm climates. Consistent with this strategy, the company constructed new breweries in Nigeria and Malaysia—then a second and third brewery in Nigeria as well as breweries in Cameroon, Ghana, and Jamaica. Guinness also developed a new product during this period, Irish Ale, which was exported to France and Britain. To offset the declining market for stout, the company began to diversify into pharmaceuticals, confectionary, and plastics, as well as other beverages.

Although both sales and earnings per share had doubled between 1965 and 1971, Guinness entered the 1970’s confronting a number of problems. Compared to those of its competitors, the company’s shares sold at modest prices, largely because Guinness operated outside the tied-house system (the five largest brewers owned and operated most of the country’s 100,000 pubs), and investors felt the other breweries had the advantage for growth. The London financial community reasoned that Guinness was at a disadvantage because the company had to absorb the added costs of retailing.

There were also problems at the James Gate brewery. The Park Royal facility continued to outproduce the older Dublin site, and the company and its employees’ union reached an agreement whereby the James Gate work force would be reduced by nearly one half. This solution temporarily solved the problem of decreasing profits at the James Gate facility and allowed operations to continue at the highly esteemed landmark facility. By 1976, however, the cost-cutting plan was seen to have achieved less than had been expected.

The company’s diversification efforts were also, during this period, less than stellar; in the event, the company had gone on a purchasing spree in which 270 companies, producing a wide variety of products from baby bibs to car polish, had been acquired, and many of these companies were operating in deficit.

Even in the base brewing business, Guinness had its share of troubles. Its witty advertisements certainly appealed to the middle class but ignored the working class that provided the bulk of Guinness’s custom. A new product, designed to combine the tastes of stout and ale, was a three-million-pound mistake.

The Guinness share price continued to decline.

To remedy the situation, Guinness executives called in the first non-family professional manager to take over leadership of the company. The sixth Lord Iveagh, as well as numerous Guinness relations, remained on the board, but Ernest Saunders, a former executive at J. Walter Thompson and Nestlé, stepped in as chief executive officer.

Saunders saw his first task as reducing the company’s disparate holdings. He sold 160 companies. The companies that remained were all retail businesses. He then reduced the work force and brought in a new management team to develop and market the company’s products. He made a large investment in increased and more eclectic advertising. He made cunning acquisitions in specialty foods, publishing, and retailing (including the 7-Eleven convenience stores). Brewing, according to Saunders, would in the future comprise only half of Guinness’s total volume.

Financial analysts, and the City of London in general, were pleased with Saunders’s efforts. The Guinness share price began noticeably to climb.

By mid-1985 Saunders seemed to have conquered. During his tenure the company’s profits had tripled, its share price increased fourfold. He had accomplished a dazzling takeover of Distillers Company (Dewar’s White Label, Johnnie Walker, Gordon’s). That Guinness could—and would—pay £2.5 billion for a company twice its size surprised many industry analysts, yet Saunders’s wish to create a multi-national company on the scale of Nestle seemed to justify the expense. There were rumors that Saunders might be honored with a knighthood.

Within a matter of months, however, there were other kinds of rumors in the City—rumors concerning Saunders’s methods in making the Distillers acquisition. In order to make possible the Distillers takeover, Saunders, with two of his fellow directors, allegedly had orchestrated an international scheme to provoke the sale of Guinness shares, thus raise their value and make possible the acquisition. Outside investors were indemnified in various ways against any losses incurred in purchasing huge numbers of Guinness shares. Bank Leu in Switzerland purchased Guinness shares with the understanding that the company would eventually buy them back. In return, Guinness deposited $75 million (in a non-interest-earning account) with the bank. The bank’s chairman happened to be Saunders’s ex-boss at Nestle and a Guinness board member. Ivan F. Boesky, the American arbitrageur who has now admitted to “insider trading” in numerous deals, has been cited as the primary source of information about the Distillers takeover. Boesky is himself believed to have played a large role in the takeover; Guinness made a $100 million investment in a limited partnership run by Boesky only one month after Boesky had made significant purchases of Guinness shares. Boesky is now believed to have been only the tip of the iceberg, only one of various international investors who bought Guinness shares in an effort to increase their value. The company’s auditors have discovered some $38 million worth of invoices for “services” rendered by various international investors during the takeover.

The charges, if true, are extremely serious—and obviously a violation of British company laws. Since late 1986, events have moved quickly. In December of that year the British Trade and Industry Department instigated an investigation of Guinness. In January of 1987 the Guinness board of directors asked for Saunders’s resignation, and subsequently, in March, brought legal action against Saunders and one of his fellow directors, John Ward. In May the British government brought charges of fraud against Saunders: the claim is that Saunders knowingly destroyed evidence during the Trade and Industry Department investigation. The case remains unresolved. Throughout these events, Saunders has continued to deny all charges brought against him.

The Guinness share price has tumbled as a result of the continuing scandal. To prevent any further decline, Anthony Tennant, Guinness’s new chief executive officer, has announced a plan to sell the company’s subsidiary businesses and hereafter to concentrate solely on brewing. Clares Equipment, a manufacturer of shopping equipment, was sold for £28.5 million. Plans to sell the remaining holdings are presently being implemented. Tennant seems determined., to rescue Guinness, even to bring it back to its days of glory. Whether his strategy will enable Guinness to survive, and to maintain its independence, obviously remains uncertain.

Principal Subsidiaries

Arthur Guinness Son & Co. (Great Britain) Ltd.; Arthur Guinness Son & Co. (Belfast) Ltd.; Irish Bonding Co. Ltd. (N. Ireland); Croft Inns Ltd. (N. Ireland); Martin the Newsagent plc; Guinness Enterprises Ltd.; Clares Equipment Ltd.; R. Gordon Drummond Ltd. (Scotland); Lavells Ltd.; The Harp Lager Co. Ltd.; Guinness Ireland Ltd.; Arthur Guinness Son & Co. (Dublin); Guinness Group Sales; Harp Ireland Ltd.; Irish Ale Breweries Ltd.; Murtagh Properties Ltd.; Meadow Meats Ltd.; Guinness Overseas Ltd.; Guinness Exports Ltd.; Guinness Malaysia Berhad (Malaysia); Guinness Cameroun SA (Cameroon); Guinness-Harp Corp. (U.S.A.); Arthur Bell & Sons plc; The Distillers Co. plc; The Champneys Group Ltd.; Neighborhood Stores plc; Richter Brothers Inc.