UK: Globalisation threatens Scottish & Newcastle

There is fevered speculation about a takeover bid for Scottish & Newcastle, Morning Advertiser published April 19. For many years, S&N was the Mr Nobody of the brewing world. It was far and away the smallest of the national brewers in Britain in the 1970s and '80s, no match for the likes of Allied, Bass, Watneys and Whitbread.

But they all left brewing. Carlsberg, Coors and Interbrew picked up the pieces but found competition in the British market intense. As a result, mighty lager brands have had to fight like fury to maintain market share. S&N finds itself top of the heap and has developed an impressive presence both in Western Europe, and Russia and the Baltic states.

It has formed an alliance with Carlsberg and, trading as Baltika, is the biggest producer in the fast-growing beer market in Russia and the surrounding former Soviet Union countries.

The success of Baltika has prompted suggestions that a full-scale merger between Carlsberg and S&N in Europe and Scandinavia would make sound financial sense. But Carlsberg in Denmark is owned by a foundation that is involved in arts and museums as well as brewing. It would mean a change to the rules of the foundation to allow it to merge with another company. Some members of the board that runs the foundation might frown on such grubby financial matters as mergers and takeovers.

Carlsberg's domestic problems have left the field open to other global brewers to buy S&N. Such a merger would be a disaster for S&N's British base.

SABMiller has currently ruled itself out but could come back at a future date. The group is the result of a merger between South African Breweries and Miller of the United States. Neither company has ever had much presence in Britain where its brands are too bland for local palates. Heineken has also been mentioned as possible suitor for S&N.

The chief reasons for global brewers' interests in S&N are Kronenbourg, which the Scottish group owns outright, and its massive business in Russia and the Baltic. Kronenbourg is brewed near Strasbourg in the biggest brewing plant in Europe. It is far and away the biggest brand in France and has considerable sales in neighbouring countries.

SABMiller owns most of the key brands in the Czech Republic, including the renowned Pilsner Urquell, which is also brewed under licence in Poland and Russia. The group is keen to expand in Russia, where the growth of the beer market seems unstoppable. Heineken is building a presence in Russia but is far behind Baltika in market share.

In the Soviet Union, beer was a small player and vodka was the main form of alcohol. But the arrival of the market economy and Western styles and values have seen beer sales boom. Last year, 75% of alcohol consumed in Russia was beer.

Analysts say the Russian beer market has the potential to grow by 15% to 20% a year. Baltika's domination of Russia makes S&N a tempting target for even bigger Western brewers. If the likes of SABMiller or Heinken did succeed in buying S&N, they would have to satisfy Carlsberg they were suitable partners to run Baltika.

Other globals would also be keen to soak up S&N's interests in China. This is a bigger beer market than even Russia's and is expected to overtake the United States within a few years and become the world's biggest producer.

S&N owns the Chongqing Brewery, whose profits jumped by 50% last year, making it a tempting target for globals keen to muscle into a vast and largely untapped market.

In Britain, the outlook is gloomy. Analysts expect that any global giant would break up S&N. John Smith's Bitter, the biggest ale brand in the country, might interest Coors, which is anxious to build the ale side of its business.

But the Smith's brewery in Tadcaster would almost certainly close. The globalisation of brewing proves yet again that it is a process that is bad for choice as well as jobs.

E-malt.com, the global information source for the brewing and malting industry professionals. The bi-weekly E-malt.com Newsletters feature latest industry news, statistics in graphs and tables, world barley and malt prices, and other relevant information. Click here to get full access to E-malt.com. If you are a Castle Malting client, you can get free access to E-malt.com website and publications. Contact us for more information at marketing@castlemalting.com .