UK & Australia: Scottish & Newcastle and Foster’s dispute over European distribution agreement

Scottish & Newcastle brewery is on the edge of a fight with Australian brewing giant Foster's over the terms of its multi-million pound European distribution agreement for the lager, Business Scotsman reported on September 24.

Trevor O'Hoy, Foster's chief executive last week launched an attack on the existing agreement, which gives S&N the right to brew and distribute in Europe and Russia. O'Hoy stated he was "hell-bent" on changing the terms of the S&N licence and another agreement with SABMiller to sell Foster's in the US, as he felt he was being short-changed.

Foster's is one of the main focuses of S&N's big budget advertising and promotion campaigns and has been responsible for the sales turnaround in its UK business.

O'Hoy told the briefing that the S&N deal was struck at a level far below current market rates. While the core Foster's brand sells as much globally as the rest of his beer brands combined, it only makes one fifteenth of the returns. He said: "Let me assure you that we are hell-bent on changing those agreements and getting our share of probably the fastest growing premium beer brand in the world today. "We just have to change the mechanics of old deals that have been around for some time."

Rick Scully, Foster's marketing director said: "We are always trying to renegotiate upwards. We're taking a more active role in driving brand strategy and distribution with our partners Scottish & Newcastle. While this region does not deliver the best returns on a per case basis it is still our greatest in terms of volume. We must look for efficiencies and extract the maximum value from this relationship."

He also indicated that the existing agreement with S&N only covers certain brands and that Foster's is considering a push into the beer or stout market to get a bigger share of European revenues. It is also weighing up a move into Finland or Russia - two markets where S&N is the market leader.

A spokesman for Scottish & Newcastle insisted that there were no ongoing negotiations between the two companies. He added that the firm was "delighted with the growth of Foster's, which has been driven by innovative marketing campaigns".

S&N's distribution agreement with Foster's was struck by S&N in 1995 as part of its £425m acquisition of Courage from the Australian group. The agreement lasts "in perpetuity" and grants Foster's a royalty payment on each case or keg of Foster's sold.

S&N close sources argue that the agreement is watertight and there is nothing Foster's can do about the terms of the deal within the existing framework. It is understood that if Foster's wants a bigger share of the revenue stream it will have to make a sizeable one-off payment to S&N or possibly propose a new revenue-sharing deal in a different territory.

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