E-Malt.com News article: 3176

UK: Scottish & Newcastle is locked in contract talks with all of the UK's leading pub companies in a move which could spark yet more job losses from its depleted brewing operations. Beer supply deals with JD Wetherspoon, Enterprise Inns and Pubmaster are all currently up for renegotiation - partly due to the flurry of consolidation in the sector, Scotland on Sunday posted August 31.

John Dunsmore, the managing director of Scottish Courage, S&N's UK brewing arm, warned that with the Pubcos looking for their "pound of flesh" it will be "a challenge" for the group to hold its ground. But he is pinning his hopes on the strength of S&N's brands and a string of potential new products in the pipeline - including fruit beers branded under the Kronenbourg label.

Dunsmore - who has already announced plans to close S&N's flagship Fountain Brewery in Edinburgh and the Tyne brewery in Newcastle - said: "We wouldn't rule out further job losses. The reality is that we've got the Wetherspoon negotiations, Enterprise Inns and Unique negotiations coming up, you've got Pubmaster negotiations coming up.

"If we lose those, we have to look at our cost base because of what's going to happen there. If we gain more than we expect, I'm not going to mind saying that we will achieve less cost savings than we promised due to having increased revenues. But we don't determine these things, these are determined by the market."

He also said: "They [the pub companies] are not exactly going to be gentle on us. But we believe that the portfolio we've got, which is driven by John Smith's, Fosters, Kronenbourg and Strongbow, is such that we can hold our own with these contracts.

"Clearly they are going to want their pound of flesh, but there should be something for us because we've got some pretty powerful brands."

S&N's international expansion plans were knocked slightly out of kilter last week after the Russian parliament approved legislation that restricts the advertising of beer on TV and at sporting events.

Domestically, where S&N remains the biggest player with a 28 percent market share, the company and its rivals have been battling falling beer consumption for the past 10 years.

For S&N, this was compounded by a heavy cost base. The decisions to close the group's two eponymous breweries followed an initially disastrous overhaul of the S&N supply chain. "Through 2003, you may remember there was a thing called the sun that shone. It was one of the best summers in years and we weren't getting the promotional space in the supermarkets because they were so lacking in confidence about our supply chain," Dunsmore said.

Those problems are now resolved. Combined, the brewery closures and supply chain overhaul have led to 800 job cuts over the past 12 months. Total cost savings are projected to reach GBP 100m by the end of 2007.

"Although we're saying that we've cut costs and we're making progress, the reality is that the biggest challenge for the business is to grow revenues," Dunsmore said. "You can only take costs out once. You need sustainable revenue growth to have a real business, so that's where we're turning our attention to."

With UK beer sales now dominated by a mixture of off sales and the big pub companies, branding is becoming ever more important. Pubcos have no allegiance to particular breweries, which is why the consumer's allegiance to particular brands is now crucial. With the combination of, for example, Punch Taverns and Pubmaster, these contracts have been put back out to tender.

The top seven beer and cider brands in the UK - Guinness, Budweiser, Stella Artois, John Smith's, Fosters, Carling and Strongbow - now account for 42 percent of total sales compared to 22 percent 10 years ago, Dunsmore said. He expects the market share of these brands - of which John Smith's, Fosters and Strongbow are part of the S&N stable - to reach 62 percent within the next decade.

Dunsmore admits that it is no coincidence that the latest GBP 8m TV advertising campaign for Fosters - coupled with the fresh pitch for Strongbow - happen to have coincided with the current negotiations with the pub companies. But as the branding issue becomes more prevalent, much simpler tactics are having a noticeable impact.

"Consumer research tells you that if you can serve beer, well-presented in a branded glass, and cold, you'll sell more. "It looks like we shouldn't have spent GBP 2m on that research - it's quite pathetic in terms of its insight - but what's happening is that all the big players are putting money into taking the temperature down of draught beers.

"The most dynamic beer category in the on-trade today is standard lager and that's being driven by Carling Extra Cold and Fosters Extra Cold. That's a dispense innovation - i.e. the tap on the bar delivers beer at three to five degrees. The brewers are also putting loads of money into branded glassware. It doesn't sound very innovative but it is actually making quite a big difference."

Since the new range of Fosters taps were introduced in pubs across Scotland a few months ago, he continued, sales of Fosters have rocketed by 42 percent. Similar trends are noticeable across the UK. But in a market where beer sales have been slipping overall, there will still have to a be considerable deal of innovation.

He is happy with the reception for Kronenbourg Blanc - a white wheat beer targeted partly at women drinkers which was launched earlier in the year. Similar ideas are already in the pipeline - many of which also prey on existing brewing ideas that are largely unknown to the mass market. "Something like Kronenbourg Blanc is a very good example of how you can innovate," he said. "It takes a lot of the mystery out of what is quite an esoteric category and makes it very user-friendly. The Kronenbourg brand acts as an endorsement. People understand what that's about.

"People don't necessarily want to know everything there is to know about wheat beer and its complexity and where its from. It's just that this is a beer and it's a nice thing to have." He adds: "I think we have tended to be a bit hide-bound by what beer can be. In fact, in technology terms, it can be almost anything. But we've tended to say that it is light-yellow, with this amount of gas in it. "Bringing a niche of a niche and making it much more accessible in image terms can in itself be a very successful way of doing things. I've got no compunction about being plagiaristic. Creative plagiarism can be very successful.

"The critical thing is that you've got to accept that eight out of 10 things will fail." One of these, he admits, was a product called Deco - a bottle of Kronenbourg with a pack on top containing a shot of Absinth. But that doesn't stop new ideas being generated. One such potential new line is a range of fruit beers, based on a group of existing products the firm owns in Belgium.

"They're called Lambic beers and they spontaneously forment. The issue we have [with the marketing] is, do you get in to all that technical stuff, which for 90 percent of consumers will just be a massive yawn? Or do you just simply take the product - which is excellent - and present it in a completely different way? "If you make it mainstream in its appeal people may end up saying 'I just like this, it's a nice flavour of peach or cherry or whatever'."


06 September, 2004