The trouble brewing for S&N

While the rest of the drinks industry is consolidating in a stagnant market, Scottish & Newcastle has invested in technology that should extend the appeal of its beers. The strategy has helped S&N to lift sales, but neglecting an acquisitions policy has left it open to suitors. By Sonoo Singh

Summer is drawing to a close, and the days of sitting outside in the warm sun sipping a cold beer are fast disappearing. Yet the quest by brewers to find new beer drinkers continues unabated.

Scottish & Newcastle (S&N), owner of Scottish Courage, has been trying to inject some fizz into the declining beer market for some time, and “extra-cold” versions seem to be the new big thing (MW last week). The UK’s largest brewer is investing heavily in its Super Chilled technology, aiming to keep pints of Foster’s and John Smith’s colder for longer.

The Super Chilled formula is being extended across other brands, including premium lager Kronenbourg 1664, San Miguel and Strongbow cider. The extra-cold variants will be available But while the Edinburgh-based brewer continues to invest in new technology, the rest of the industry has been busy consolidating. Analysts say brewers have been responding to the negligible growth in beer drinking in western Europe and the US by acquiring other drinks companies in an effort to boost sales and profits.

Raising the bar

Last week, InBev, the world’s largest brewer by volume, posted a profit of E382m (&£257m) for the first half of 2005, compared with a E205m (&£138m) profit for Interbrew in the first half of 2004. InBev was formed last year through a merger of Belgium’s Interbrew and AmBev, the largest South American brewer.

In August, InBev bought Russian brewery Tinkoff, and a few weeks earlier it acquired the owner of Chinese brewer KK. Rival SABMiller followed the trend by taking over South American company Bavaria, a dominant brewer in Panama, Peru and Ecuador. Danish brewer Heineken also recently bought two Russian beer companies.

Consolidation is predicted to continue. The industry is waiting to see whether S&N is on the shopping list for those wanting to achieve reasonable growth in the European market. One expert says that at a time when most global drinks giants are almost frantically engaged in acquisitions, S&N is likely to be bandied about as a potential target.

Teather & Greenwood City analyst Nigel Popham says S&N has a problem: “It is in the middle ground, which is not an enviable position to be in. Neither too small, nor too big.” Popham adds that although S&N might be performing well in the UK, it is too financially constrained to make any big acquisitions. He says there is a distinct possibility that in the next two to three years S&N will be ripe for sale.

Match-making

Shares in the company have been buoyed by speculation of a buyout, with pundits foreseeing either a merger with Carlsberg or a possible takeover by SABMiller. A source at one rival brewer says that a merger with Carlsberg will make sense, because both S&N and Carlsberg need to bolster their global positions.

He adds: “It also makes sense on another level: both companies have a joint stake in Russian beer venture Baltic Beverage Holding (BBH), which is a rather complex partnership and will not easily allow one party to buy the other partner’s share.”

BBH is facing a court case brought by minority shareholders in Russia, who are opposed to its plans to consolidate the ownership of three Russian breweries, Yarpivo, Vena and Pikra, into an enlarged group branded Baltika. The deal would give S&N and Carlsberg a foothold in Russia, the Ukraine, the Baltic countries and Kazakhstan.

Sticking to the local

Another industry commentator says SABMiller would probably not be interested in acquiring S&N because of its lack of brands with an international reach: “Kronenbourg is the only brand with the potential to be a global player, but it has neither the premium Stella positioning, nor is it anything like Carling.”

He argues the BBH deal S&N shares with Carlsberg currently makes any acquisition of S&N “unattractive”, alongside the fact that recent speculation surrounding a takeover has pushed up its share price.

A spokesman for S&N refuses to be drawn on the subject, adding that the company has been busy focusing on developing its four key brands. Recent investment in innovation, such as the Super Chilled technology, contributed to volume growth for Foster’s, Kronenbourg, John Smith’s and Strongbow, reported in the latest half-year results.

The brewer reported a collective volume increase of 5.5 per cent, with value sales up 5.4 per cent, for the six months to June 30.

The S&N spokesman points out that earlier this year, the company passed the marketing of Miller Genuine Draft and Peroni back to SABMiller in order to concentrate on its four core brands.

Strongbow was made part of S&N’s portfolio in 2003, as part of the company’s purchase of Bulmers, and the brand is seen as one of its most significant acquisitions in recent years.

The move to concentrate on key brands is welcomed by analysts. Popham states: “S&N chief executive Tony Froggatt has been taking costs out and instead boosting the marketing of core brands, which is a sensible strategy for a company that is more of a regional than a global player.”

Take courage

S&N, which took over rival Courage in 1995 (see History of Scottish & Newcastle), has been restructuring its business since Froggatt took the helm in May 2003. That same year, S&N axed its non-performing Kestrel, Hofmeister and McEwan’s Lager brands, as well as slashing running costs by closing two of its breweries.

Froggatt also changed the board that oversees daily operations and strategy formulation to promote faster and more transparent decision-making. Three new group directors have been appointed, responsible for marketing, operations and systems.

As well as its investment in brewing technology, S&N is attempting to build the business in developing markets. It has strengthened its presence in India by expanding its partnership with United Breweries, controlled by the Indian beer baron Vijay Mallya. And in China, the group has a stake in Chongqing Breweries.

Popham says that all these ventures are strategically aimed at expanding the company globally to compensate for the stagnating market conditions at home. But despite S&N’s growing presence outside its home territory, it may be difficult for the brewer to deflect suitors for much longer.v

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