Froggatt wields axe at troubled S&N

Brewer may abandon historic locations in Newcastle and Edinburgh in bid to cut costs

British beer enthusiasts must rue the day that Tony Froggatt was appointed head of Scottish & Newcastle, the country's biggest brewer. The blunt antipodean will have few qualms when it comes to deciding whether to pull the plug on two-and-a-half centuries of brewing heritage.

The first outsider to head the historic company in almost 30 years, Mr Froggatt is unlikely to let sentiment cloud his judgement when it comes to making a decision as highly charged as whether to sever the group's ties with two of its five UK breweries. That the breweries happen to be in Edinburgh and Newcastle has only heightened the fervour that has greeted reports of their imminent demise.

When union leaders meet senior S&N executives today the question uppermost in their minds will be how to safeguard the jobs of the breweries' 400 employees. Yet the question swirling around the City yesterday was somewhat different: what would a company that no longer brewed beer in Scotland or produced the internationally renowned Newcastle Brown Ale call itself? Finnish & Moscow? French & Brussels? Indian & Lisbon? Hardly names that trip off the tongue but, believe it or not, more accurate descriptions of the sole surviving member of the triumvirate of UK brewers that ruled the roost until the Europeans arrived on the scene, helping to consign rivals Bass and Whitbread to the history books.

S&N yesterday declined to comment on mounting speculation that it was preparing to close its Fountain brewery in Edinburgh and outsource production of its iconic "Newkie Brown" from its Tyne brewery to Gateshead. A company spokeswoman would confirm only that its "clear objective" was to "become more efficient and reduce our costs".

Mr Froggatt has promised to slash the group's UK cost base by about a quarter - or £45m - over the next 12 to 18 months. Given that analysts at Credit Suisse First Boston, the investment bank, have estimated that closing one brewery alone could add £25m to its annual profits, the decision is a no-brainer, according to some S&N watchers.

The very thought may be anathema to the good folk of Edinburgh and Newcastle - whose towns have been united since Scottish Brewers joined forces with The Newcastle Breweries in 1960 - but what is irrefutable is what the move says about the fate of a company that is but a tiddler compared with its global peers.

When S&N swallowed Brasseries Kronenbourg of France and Alken Maes of Belgium in 2000, it inadvertently positioned itself as a pawn in an international chess match that won't end until someone manages to checkmate Anheuser Busch, the US brewing Goliath that owns Budweiser. Since that deal, S&N has joined rivals such as SABMiller and Belgium's Interbrew on a global shopping spree that has seen it buy stakes in brewers in countries as far apart as Finland, Russia, India and - last week - China. With about 3.5 per cent of the global brewing market, few in the City think S&N is approaching the endgame.

"If I was Mr Froggatt, I would look for a joint venture with another international brewer," one analyst said yesterday, adding that companies could only take so much rationalisation. "Ever heard of anorexia industrialis? You can only slim down so far before you die," he said.

It is well known that S&N, then under the command of its now chairman Sir Brian Stewart, had run the slide rule over merging with SABMiller. The snag is that aside from the former South African Breweries, which is still struggling to bed down its own audacious £3.4bn acquisition of Miller Brewing, the options are fairly limited since most of the European breweries are off limits because of competition concerns and the mighty A-B just isn't interested.

As if the regulatory risk wasn't enough, a straight merger with Carlsberg Breweries is a no-no because the Danish brewer's majority shareholder is a charitable trust that must, by law, retain a minimum 50 per cent stake and a "significant influence" over how the Carlsberg brand is managed. Hence many analysts believe the only solution lies in Carlsberg and Heineken joining forces to carve up S&N, with the Danish brewer taking its French business and the Dutch one its UK operations. This would preserve the four-way status quo in the UK beer market that the Government made clear was non-negotiable when it blocked Interbrew's attempt to merge the Bass and Whitbread beer businesses in 2001.

Which all leaves Mr Froggatt with few options other than bashing the Edinburgh-based business back into shape. Few think he will opt to close any of S&N's other three UK breweries, in Manchester, Reading and Tadcaster. Analysts note that Manchester's Royal Brewery is the company's most productive in terms how much beer it brews, while its southern Berkshire Brewery is its biggest, brewing 6.5 million hectolitres a year and employing 500 people. Meanwhile the company's Tadcaster brewery, home of John Smith's, is steeped in history: the sulphate-rich water made it a natural brewing centre.

Given the mess the company has made so far of overhauling its UK distribution operations, it could do with some public relations - and investment - successes. The botched revamp of its supply chain and distribution centres has so far already cost S&N £60m more than intended and about 0.5 percentage points of market share, quite apart from the goodwill of many of its customers. When it reports its preliminary numbers next Monday, the company is expected to reveal that profits at its UK beer arm have plunged by 17 per cent to £166m. It will also confirm that no cost savings from the distribution overhaul are likely until 2005 at the earliest.

Mr Froggatt badly needs the cash if he is to fulfil his pledge of rectifying S&N's historic under-investment in its marketing. Analysts at CSFB reckon the company spends about 6 per cent of net sales on advertising and promotion in the UK, against some 15 per cent by Heineken. They estimate that S&N will have to more than double its marketing spend over the next four years, to at least £130m, if it is to make a go of what other analysts dub its "third or fourth-rate brands".

S&N's announcement last month that it is teaming up with Carlsberg to combine the technical support services the pair provide to British pubs and bars is proof that Mr Froggatt is open to all options. Whether he will manage to do enough to safeguard the brewer's future for another 255 years is another question.