MARKETING FOCUS: Storm brewing in a pint pot - Carlsberg-Tetley’s future is uncertain now its proposed merger with Bass has been thwarted Harriet Marsh looks at the changing competitive climate for the UK brewers.

In the next few weeks Carlsberg-Tetley will announce the results of an internal review of its UK brewing business, following the decision by trade and industry secretary Margaret Beckett to block its proposed merger with Bass Brewers.

In the next few weeks Carlsberg-Tetley will announce the results of

an internal review of its UK brewing business, following the decision by

trade and industry secretary Margaret Beckett to block its proposed

merger with Bass Brewers.



The decision was a clear statement that the Labour government is not

going to allow the concentration of power at the top end of the brewing

industry to increase.



In this, the government differs from the Conservatives, who by allowing

the merger of Scottish & Newcastle and Courage in 1995, aided the rise

of the four-company power base dominating UK brewing today.



Although Beckett was no doubt hoping her decision would stem the tide

toward further brand concentration and rising retail prices that is

currently sweeping the industry, the ruling has left Carlsberg-Tetley in

real trouble.



That Carlsberg-Tetley has ended up in this predicament, in contrast to

its main competitors Scottish Courage, Bass and Whitbread, demonstrates

the change in market conditions across the industry.



Carlsberg-Tetley’s problems stem from two sources. The first is its lack

of a tied retail estate. Not only would this give the company a

guaranteed long-term distribution route for its brands, it would also

give it a slice of what is fast becoming the most profitable part of the

on-trade sector.



A head for business



Second, in contrast to Bass, which is currently heading the

premium-packaged lager market with Carling, and Whitbread with its

strong premium branding and high off-trade sales of Stella,

Carlsberg-Tetley has failed to give its brands the key ’added value’

ingredient necessary to ensure success in this highly competitive

industry.



As one analyst says: ’They have a flawless record of failure in terms of

new product development. They did a good job of reformulating Carlsberg,

but the difference in profit in selling in the off-trade as a 4.2% abv

rather than 3.2% is frightening. As a brand it is a warhorse rather than

a player. Their strongest brand is Tetley but it is not marketed

well.’



Given its lack of tied estate, Carlsberg-Tetley’s brands have suffered

from limited marketing support. It spent pounds 1.6m on advertising

Carlsberg in the year to March 1997, compared with Scottish Courage’s

pounds 4.4m on Foster’s (Register-MEAL).



This is especially relevant in view of the fact that since the end of

the last decade, two factors have become important to success across the

industry - establishing strong brands and ensuring they gain

distribution in both on- and off-trade.



In the on-trade, distribution became an issue following the introduction

of the Beer Orders in 1989. These limited each brewer to no more than

2000 wholly-owned pubs in its retail estate. The subsequent forced sale

of much of the breweries’ tied estates has resulted in the establishment

of new retail-pub chains, many of which have considerable buying

power.



Carlsberg-Tetley, which was originally formed in a joint venture between

Carlsberg A/S and Allied Lyons (subsequently Allied Domecq), has

benefited from a distribution agreement with Allied Domecq Retail, but

this expires in the autumn.



While both its ’headline’ brands, Carlsberg lager and Tetley Bitter,

have a sound following, neither has developed the powerful brand

positioning of other retail-free players, such as Guinness with its

black stout or Anheuser-Busch with Budweiser.



’The purchasing power is increasingly concentrated into fewer hands in

both the on- and off-trade,’ says Dave Carruthers, brands marketing

director of South African Breweries and a brands director at Bass. ’As a

consequence, national account management and negotiation becomes more

important, as does the establishment of proven products that are strong

consumer brands.’



And as the industry approaches the millennium, the battle to establish

strong brands is expected to become more bloody, both in the on- and the

off-trade.



Battle of the beers



’Brands are now under threat if they are not number one or two in the

market,’ says Carruthers. ’Success now comes from a big brand or from

NPD.’



This situation is exacerbated by additional pressures on the industry,

such as the decline in the beer-drinking population - primarily among

18- to 24-year-old men.



The industry is also facing the steady decline of on-trade volumes with

a parallel, although not corresponding increase in off-trade. Industry

insiders anticipate that by 2000 the take-home industry will be a third

of the market and over the next five years the UK industry is expected

to lose one million barrels in volume terms.



Closely aligned to this is the growth in what the industry terms

’repertoire’ drinking. ’People will now drink across a range of

categories depending on mood, company and location,’ says John Dirkash,

marketing director of Whitbread. ’While people may make a choice on type

of product according to location, the choice is down to the brand.’



It is this, combined with a brand-conscious consumer, which is resulting

in the growth of premium beers and the expansion of new product

categories such as alcopops.



’Four years ago everyone said there was no more room in the market for

NPD, but my view is that the brewers have only touched the surface,’

says Carruthers. ’The industry has got to accept quicker, short-term

wins.



It is the one who spots it first and delivers against a gap in the

market who is going to come out on top.’



In its submission to the Monopolies and Mergers Commission,

Carlsberg-Tetley warned that without a merger partner it would have to

scale down its portfolio to its Carlsberg and Tetley brands. It argued

that this would damage its standing in the market (see graphic).



Even so, the company may not have either the economies of scale to keep

production costs down nor the volume of sales to make widespread

advertising cost-effective.



While Carlsberg was presenting its worst case scenario in a bid to

persuade the MMC of the legitimacy of the deal with Bass, industry

observers believe Carlsberg-Tetley is likely to struggle. As one City

analyst predicts: ’I just can’t see a logical role for it in this market

in the future.’



CARLSBERG-TETLEY



The UK’s third largest brewer with around 14% of the market in 1996,

Carlsberg-Tetley, which has no tied retail estate, is the most

vulnerable and its share of the market is expected to drop to around 10%

in the next two years.



C-T was set up in 1992. Following Allied Domecq’s decision to pull out

of brewing, the company sold its 50% share of C-T to Bass in August 1996

with the latter applying to buy an extra 30% of Carlsberg’s shares - the

deal which brought about the MMC inquiry.



Under arrangements set in place prior to the merger, Carlsberg is the

majority owner with 85.1%, and AD has had to buy back 14.99% of the firm

- a sufficiently small percentage of the share capital to avoid being

termed a brewer for the purpose of the Tied Estate Orders.



C-T’s turnover has remained level at about pounds 1bn since 1992, but

operating profits fell from pounds 85m in 1994 to pounds 61m in 1996.

Its largest customer is Allied Domecq Retailing but its supply

agreement, which requires ADR to take 1.35 million barrels of beer a

year at prices advantageous to C-T, is due for renewal. The new contract

may cost the brewer pounds 42m in lost revenue.



C-T is carrying out a review of the business, which could lead to

cost-cutting, closure of two breweries and 20 distribution depots, as

well as job losses.



The company is expected to sell or withdraw its smaller brands, which

include Skol and Castlemaine, to boost resources behind Tetley and

Carlsberg.



If it chooses to maintain these brands, long-term survival will depend

upon its ability to secure distribution for its brands.



SCOTTISH COURAGE



The brewing division of Scottish & Newcastle plc, Scottish Courage is

the UK’s largest brewer with 28% of the market in 1996 and around 2700

tied houses. The company shot to the top of the league in 1995 following

the merger of Scottish & Newcastle and Courage.



Since then the company has worked to integrate two well-fitting

portfolios - although support for both S&N’s Kestrel and Courage’s

Hofmeister was subsequently cut. The company has closed two breweries

and reduced its workforce by around 1800 people, with integrated savings

of pounds 46m to date.



Scottish & Newcastle’s results for the year ending April 27 1997, show

turnover up 12.8% to over pounds 3.3bn. Around pounds 172m of turnover

comes from its retail division, which has around 400 themed sites,

including Chef & Brewer, John Barras & Co, Rat & Parrot, T&J Bernard and

Finnegan’s Wake.



The brewing division’s portfolio includes Foster’s, Kronenbourg, Beck’s

and John Smith’s, sales of which grew last year. The company has made it

a policy not to chase unprofitable volume in the free trade and overall

beer volume dropped 3%. This has not prevented a growth in turnover.

Leading brands contributed to an increase in net margins from 6.8% to

8.2% and the firm remains committed to developing strong ’added value’

brands. However, with a portfolio which relies on licensed brands -

Foster’s, Kronenbourg and Beck’s, an NPD success would doubtless be

welcome.



BASS



Bass Brewers is part of Bass plc, which also owns Holiday Inn Worldwide,

Bass Taverns, owner of the Harvester restaurant, Vintage Inns and

O’Neill’s Irish bar brands, as well as Bass Leisure which includes

bookmaker Coral, and Britvic Soft Drinks. In 1996 the group had a

turnover of pounds 5.1bn, of which 36% or pounds 1.8bn was contributed

by the brewing interests.



The company is the UK’s second largest brewer, with 23% of the market in

1996, having lost its position at the top of the league after the

Scottish & Newcastle and Courage merger in 1995. Bass’s plan to regain

the number one slot by merging its brewing interests with

Carlsberg-Tetley was last month prevented from going ahead by the

secretary of state for trade and industry, Margaret Beckett.



The decision, after a wait of nearly a year, surprised City analysts

and, reportedly, the company itself. Bass, which has long impressed the

City with its NPD record - developing brands such as Carling, Caffrey’s

and Hooper’s Hooch - was expected to do much toward building

Carlsberg-Tetley’s neglected brands portfolio.



Since the arrival of marketing director Seamus McBride, Bass is also

credited with good branding skills and the recent cherry-picking of some

of its senior marketers has established it as the industry’s hothouse

for marketing talent. The company is expected to rally quickly after a

number of recent high profile departures, combined with the year of mild

inertia while awaiting the outcome of the MMC inquiry.



WHITBREAD



Whitbread plc is made up of four businesses: the Beer Company; Whitbread

Pub Partnerships (WPP), which consists of 2137 tied pubs and 195 free

houses due for disposal in October this year; Restaurants and Lesiure,

which includes Beefeater, TGI Friday’s, Pizza Hut, Thresher Wine Shops

and David Lloyd Leisure; and Whitbread Inns, with brands including

Brewers Fayre and Hogshead.



The group’s financial results for the year ending March 1 1997 reported

a 10% increase in turnover to just over pounds 3bn.



The Whitbread Beer Company boasts Stella Artois, Heineken Export and

Boddingtons among it portfolio. It is the fourth largest brewer in the

UK, with around 13% of the market in 1996.



In the last financial year the company reported a 5.5% growth in sales

volume in a market down 1.6% year-on-year. Whitbread’s best brand

performance came from Stella Artois which grew in volume by 20% to over

one million barrels. Stella is now the biggest-selling premium-packaged

lager in the take-home market.



Whitbread has a strong portfolio and has impressed the City by

establishing strong premium brands such as Stella and Boddingtons,

although both Stella and its leading lager brand Heineken are licensed.

The company has expressed its desire to expand its portfolio and is

putting a lot of effort into NPD.



Industry observers believe Whitbread’s top priority is to develop its

retail presence. ’Whitbread’s heart belongs to retail,’ says one

analyst.



’It’s the thought of TGI Friday and Pizza Hut which makes their eyes

light up.’



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