TO THE BITTER END

The management of Carlsberg-Tetley is on the verge of revealing its plans to restore the company to health – the result of a three-month internal review.

But it was an announcement Ebbe Dinesen, the company’s Danish chief executive, never expected to have to make. For if the merger with Bass, blocked by the Department of Trade & Industry in June, had gone through, C-T’s weaknesses would have become somebody else’s problem. The internal review, the results of which were expected to be announced in August, is Dinesen’s response to the collapse of the deal.

Any announcement will come from a company that looks vulnerable. It could have been part of the biggest brewer in the UK, instead, as Marketing Week can reveal, C-T has now slipped into fourth place in a market where, before talk of the merger, it was third. Factory closures, redundancies and reduced distribution points will all feature heavily in Dinesen’s plan.

In that context there was little surprise when C-T director of marketing Doug Scott quit without a job to go to last week (MW September 4). For the past two years, Scott has commuted weekly from his Edinburgh home to C-T in Burton, underlining the continuing uncertainty over the company’s future which deepened with the Government’s decision to block the proposed merger.

Analysts say it is no longer viable as a national brewer, and predict the company will have to be radically restructured. They believe two of the company’s five breweries – at Wrexham in Wales and Alloa in Scotland – and some of C-T’s 20 distribution depots will have to close, accompanied by heavy job losses. There is speculation that Bass may step in and buy one of the brightest jewels in the crown – C-T’s Burton brewery, the biggest of the five, which makes Castlemaine XXXX, Skol and Burton Ale.

Philip Hawkins, analyst with Merrill Lynch, says: “C-T needs to find some alternative. It very much needed the Bass merger to juggle its production and achieve cost savings. There will now have to be a significant downscaling of production and the closure of breweries which would have been used by Bass.”

C-T was originally set up in 1992 as a joint brewing venture between Allied Domecq and Danish brewer Carlsberg. After Allied Domecq’s decision to pull out of brewing, it sold its 50 per cent share of C-T to Bass in August 1996 for 200m.

Carlsberg, which owned the other 50 per cent of C-T, agreed to contribute its half-share plus 20m in return for a 20 per cent interest in the merged company.

However, the Bass/C-T deal, which would have given Bass more than 30 per cent of the UK beer market, was referred to the MMC in December 1996 and then blocked by the new President of the Board of Trade Margaret Beckett in June.

Already the signs are that the company is in trouble. This week it emerged that Whitbread has ousted C-T from its position as the UK’s third largest brewer. Independent research company Stats MR refuses to give exact market share figures but confirms that Whitbread is now more than one per cent ahead in combined volume sales for the on- and off-trade.

C-T is fourth, with about 13 per cent volume share after Whitbread on 15 per cent, Bass on 23 per cent and Scottish Courage on 28 per cent, according to industry estimates.

Observers speculate that Carlsberg, C-T’s Danish parent, may decide to withdraw from brewing in the UK, and use C-T only as an importer for its lager brand. But it will be hard to find a buyer for C-T’s other main brand Tetley’s Bitter, the UK’s second most popular ale behind Scottish Courage’s John Smith’s, because of fall-back compensation penalties tied to the Bass/C-T merger deal, which make such a purchase financially unattractive to brewers such as Whitbread.

For instance, if at any time in the next four years Whitbread wants to buy Tetley’s, it will have to pay as much as 30m to Allied Domecq.

Hawkins argues: “C-T needs a strong joint venture partner. If not it will lose critical mass, and then it will lose the cash generation to advertise its brands, pushing it into a downward spiral.” He argues that overseas brewers, such as South African Breweries with its Lion beer brand, might be interested in taking on some of C-T’s spare capacity for a possible UK launch.

Yet in the short term, C-T is demonstrating commitment to brands such as Tetley’s by starting an advertising agency review of the account held by Saatchi & Saatchi (MW September 4). The review is understood to be part of a new C-T strategy of having roster agencies for its core brands.

Tetley’s lost market leadership to John Smith’s in 1995 and in the past three years its advertising has been taken in several different creative directions.

Last week, C-T announced that it is to increase the marketing spend behind Tetley’s, Carlsberg and Calder’s Cream Ale, the recent nitrokeg launch. Observers say uncertainty over the merger has badly damaged C-T’s marketing efforts, with under-investment in the brands and the loss of several senior personnel.

But according to trade customers, the company is preparing new marketing presentations for the near future. Carlsberg Export is seen as a likely candidate for a relaunch, to bring it in line with the stand-ard Carlsberg Lager, which was revamped before last year’s sponsorship of the Euro 96 football championships.

But the company will find market conditions increasingly tough because of the growing trend towards “repertoire” drinking, where consumers switch brands depending on their location, on the company or the mood they are in.

Charles Vallance, planning director at ad agency WCRS, which handles Bass brands such as Caffrey’s, says: “The challenge is to build and maintain brands of real scale and stature so they have the clout to earn a place in people’s repertoire. It will become more and more of a battle for secondary brands to survive.”

The company has only two really strong brands – Tetley’s Bitter and Carlsberg Lager. A question mark hangs over Castlemaine XXXX lager, licensed to C-T from Lion Nathan. According to one source, the brand would have been dropped if the Bass merger had gone ahead. Its future is still uncertain because there are fears it will be a drain on marketing resources.

Now C-T has been left exposed as an independent business, one of its biggest problems will be distribution. Its brands have no real route to market because the brewer has no tied pub estate, unlike its main rivals Bass, Scottish Courage and Whitbread. The merger offered C-T a means of getting its brands to market, as part of an integrated portfolio in Bass’ pubs.

At the time of the proposed deal, the MMC said that if the merger failed: “C-T would have to make significant reductions in capacity… C-T would not retain its position in the market and there was a risk that a continuing downward spiral would result.”

Despite the fact that three of the four MMC members who assessed the deal gave it the go-ahead, Beckett ignored their advice and the prediction that C-T could hit a downward spiral is apparently coming true.

Hawkins says: “If you have no distribution, the danger is that however good your brand, there is a large degree of exchangeability among beer brands, except perhaps Guinness, which also has no retail estate but is a must-stock brand.”

Until now, C-T has been able to rely on favourable supply contracts with Allied Domecq’s 4,000 pubs, drawn up as part of the original

C-T deal. If the merger had gone through, this would not have been renewed and Allied Domecq would have been free to behave as a unrestricted beer retailer, getting the best deal possible in the market.

But the collapse of the merger means that, although the supply agreement will be renewed when the original one expires in December, the new one will be slightly more favourable to Allied Domecq, and is expected to cost C-T about 30m.

Nevertheless, Allied Domecq is reportedly still unhappy and it has gone to the Office for Fair Trading to free itself from any deal with C-T.

The Government originally blocked the Bass merger because it wanted to see rigorous competition in the UK beer market. But by allowing C-T to struggle on alone, the existing problems caused by the surfeit of beer brands in the UK and the power of the retailers have not been solved.

The rationalisation of brand portfolios that would have happened as a result of the merger will still take place but more slowly and definitely more painfully for C-T. Ironically, with the brewer looking like an increasingly weak player, its rival Bass may yet be in line to gain the increased market share it wanted without having to pay any of the costs of integrating C-T into its business.