British beer market leader Scottish & Newcastle may have to focus much harder on cost efficiencies and increasing operating margins than its international competitors, since the majority of its profit derives from the stagnant UK beer market, but as the company grows larger it will benefit from these tight financial controls, according to a new report from beverage industry analysts Canadean.
The 3.6 per cent decline in turnover and 5.1 per cent fall in operating profit which S&N reported in 2001/02 may seem disappointing on the surface, but the figures are not a true reflection of a business which is in fact very capable, said Canadean.
"If the cost of disposing of more than 1,000 outlets along with staff redundancies and logistical improvements are discounted, the year's performance would have rated as a turnover increase of 3.2 and an operating profit rise of 7.3 per cent," said Canadean.
Despite the sell off, S&N still retains the most profitable pub restaurants, branded pubs, large traditional pubs and lodge houses and supplies them with its leading brands and locally produced beers in a vertically integrated operation.
The company's focus is, however, shifting. As the UK's largest and the world's eighth largest brewer, it has investments in 47 countries and a number of powerful local and regional brands as well as exports to more than 40 countries via S&N International. In Europe S&N now also works through a number of wholly owned businesses in France, Belgium, Portugal and Greece.
Its Finnish subsidiary Hartwall owns 50 per cent of BBH, together with Carlsberg, giving S&N access to the Baltic and Russian markets. During 2002 the group also moved into India, and is expected to continue to seek operating partners for joint ventures worldwide, since its high level of debt will rule out sufficient strategic acquisitions.
S&N's strategy is to develop into growing and emerging markets via partnerships with experienced local players, according to Canadean, while at the same time providing high levels of customer service within the domestic beer division. In addition, it aims to pursue cost efficiencies while expanding its market leading position in western Europe through focused brand building.
Already the best selling beer in France, Kronenbourg is being relaunched with a view to becoming one of the top six UK beers by 2010. On a wider front, S&N is keen to use Kronenbourg to spearhead a premium beer campaign on the worldwide market where it already has several big names.
Looking to the future, Canadean highlights two areas of importance. Firstly, how will S&N tidy up its domestic pub operation? It could float it in order to generate funds for international acquisitions, it could perform a sale and leaseback operation or it could sell the business outright. Whatever solution is adopted, 'do nothing' is not an option, as this could jeopardise future growth strategy and stall the internationalisation process.
Secondly, having already established a good relationship with Carlsberg, could S&N extend this and subsequently benefit from the Danish company's links in Scandinavia, Switzerland and Germany? Recent rumours in the British press that S&N was preparing a bid for Carlsberg have been rubbished by the Danish company, but an extension of the two firms' partnership can certainly not be ruled out.
For more details of Canadean's Scottish & Newcastle company profile, click here.