BEER GROUP PRESSURES

S&N’s Courage merger is something of a reverse takeover. Courage is the one with the huge ad spend and the impressive brands. It is also from Courage ranks that marketing chief John Nicolson has emerged. He must rationalise a sprawling busines

Scottish Courage and its newly appointed marketing director John Nicolson are about to perform a supreme juggling act.

The company has been formed from Scottish & Newcastle’s (S&N) takeover of Courage and the melding of the two brewing businesses. Scottish Courage has 50 beer brands and is undergoing a comprehensive business review to decide how best to market them.

Nicolson’s role will be like that of an animal trainer in the Scottish Courage circus. The 50 brands he controls are fragmented, as is the marketing spend. This is in contrast to rivals such as Bass, which has just two major lager brands, Carling and Tennants, or Whitbread, with Heineken and Stella Artois.

The appointment of Nicolson to the top marketing job, as exclusively revealed in Marketing Week (MW August 11) took the industry by surprise. After all, here was S&N taking over Courage. S&N’s marketing director, Richard Gibb, could have been safely expected to head marketing for the combined group.

Instead, S&N snatched Nicolson and side-lined Gibb as corporate affairs director for the parent company. Nicolson’s knowledge of the Courage portfolio, his experience of new product development and his ability to spot a good advertising campaign, will be key to the success of Scottish Courage (see box).

Courage has an impressive array of premium lagers: Foster’s Lager and Foster’s Ice, Holsten Export and Holsten Pils and Kronenbourg 1664. S&N has Beck’s Bier, Coors Extra Gold, the McEwan’s brand and Pilsner Urquell. On the ales side, Courage boasts John Smith’s, Directors and Courage Best to S&N’s Newcastle Brown, Younger’s and the Theakston range.

S&N sees this brand proliferation as a good point in the deal. A spokesman says: “Free trade customers want a strong portfolio.”

But there may be too much choice in the Scottish Courage portfolio. How will retailers choose between six premium lagers if they only have shelf space for four? It seems unlikely that S&N will hold onto the complete combined portfolio after the business review it is carrying out over the next six months.

The company has had to renegotiate deals with brand owners and reassure them that their lagers are safe with Scottish Courage. The first sign that the new company is shifting its spend from certain brands to concentrate on others may provoke some owners to move their products out of the company.

It seems the Courage cockerel is swooping on S&N’s brands and will pick them to pieces in the search for the best portfolio. The Courage brands dwarf those of S&N. Their 21m ad spend is over four times that of S&N. Courage’s portfolio features an array of big brand names that tower above S&N’s.

Nicolson will have to crack the whip to ensure Courage and S&N brands receive equal treatment. Otherwise, he may be tempted to let Coors and Beck’s suffer at the expense of brands such as Holsten and Kronenbourg.

S&N has persuaded its shareholders that the acquisition makes sense. It talks of a perfect geographical fit, with S&N’s strength in Scotland and the North of England matching Courage’s success in Yorkshire and south of Birmingham.

S&N chief executive Brian Stewart is optimistic about cost savings of 40m to 60m a year for the merged business – which will come straight out of the bottom line. Savings will be found by cutting head office staff and overheads, and closing breweries.

Many argue that the loss of excess capacity will be good for the industry. But savings never seemed to materialise in the

case of Carlsberg-Tetley, and there are doubts whether Scottish Courage will be different.

If the Halifax and Bristol breweries were closed, this would take out no more than two per cent of UK brewing capacity. Brewing over-capacity is running at 20 per cent – the size of the second-largest brewer Bass.

While S&N is in the midst of merging the businesses, other brewers have started targeting Scottish Courage by cutting their wholesale beer prices.

S&N has to respond: either through wholesale price reductions or by increasing its spend on brands. This may, in turn, wipe out its planned cost savings.

Like all good performers, the S&N management are supremely confident. The company says it has “factored in any competitor responses” to the merger and is well-placed to deal with them.

But some analysts accuse S&N of complacency. They point to the lack of real information about how S&N plans to structure its brand portfolio in the face of a price and marketing onslaught from Bass and Whitbread.

S&N says that the two-thirds rise in its share price since it announced its takeover plans in May is ample evidence that it has the backing of the City. The deal’s detractors claim it will be forced to hike its marketing and advertising budget to ward off competition. What is bad for the shareholders may turn out to be good news for Nicolson’s marketing department and the ad industry as a whole.

BZW analyst Charles Winston – a critic of the deal – says: “If S&N does respond to competitors with increased marketing spend, it will be good news for ad agencies, though I doubt the company will be able to sustain it.”

The beer market of the Nineties is an uncomfortable place to be. It is driven by product innovation, zany ad campaigns and the need to increase marketing muscle. There are growing pressures towards the concentration of brewing interests since the 1989 Beer Orders untied many pubs from their brewery masters. Brewers are grappling with the dislocation of their lines of distribution and have accepted their point of contact with consumers is through ads rather than at the bar.

The formation of Scottish Courage takes the British brewing industry onto a new level of concentration. It creates a company with a market share of between 25 per cent and 30 per cent, making it the biggest brewer in the industry and knocking Bass off the top spot.

Some observers believe Nicolson will carry out a twin strategy. He will promote S&N beers as strong regional brands and build them up in their heartlands in the North and Scotland, without making of an much effort to force them down the throats of Southern drinkers.

The Courage brands on the other hand, will be built up as national brands and continue to get the ad support they have had until now, with maybe some extra funding.

So S&N’s attempts to make a national brand out of McEwan’s will give way to the standard Foster’s brand. Choices will be made between Theakston and John Smith’s and Webster’s.

S&N needs not only Courage’s wide portfolio but its expertise in new product development – an area in which the Scottish company has lagged behind. It hopes the Courage cockerel will crow over a new type of brewing business, which will move from having a select number of big brands to offering a wide variety instead.

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