URGENCY. That was the word repeatedly used by Tony Froggatt as he made his debut performance as chief executive of Scottish & Newcastle, Scotland’s fifth-largest company, at its annual results conference in Terence Conran’s plush Great Eastern Hotel in the City of London last week.
The Australian-born global marketeer, now seven weeks into the job, said: “My primary task at Scottish and Newcastle is to maximise the growth of key brands and operational efficiencies within our existing business. By tackling these issues with pace and energy we can make the most of our excellent current platform.”
It’s not as if Froggatt believes that the ancien regime, led by predecessor Sir Brian Stewart, who has become non-executive chairman of S&N, in addition to his role as chairman of Standard Life, has in any way screwed up.
Rather it seems that the former Seagram executive wants to quickly stamp his authority on the Edinburgh-based brewer — at the same time as ensuring greater benefits from its partial transformation into a true multinational.
“Building brand equity is the only way to build sustainable value in the international drinks business,” said Froggatt, who is more familiar with global spirits brands such as Chivas Regal and Absolut than with the patchwork of local brands that still comprise the global beer market.
He said: “The internationalisation of beer brands has only just begun. The biggest-selling brand in Europe has only 3% of beer sales. Brand development means a great deal more than just creating great ads.”
It’s clear that Froggatt believes the existing portfolio of beer brands in S&N’s stable — which include Kronenbourg, Foster’s and Baltika — have been under-exploited and that they offer tremendous potential for growth.
He is certainly quick off the mark. At the results conference he announced that Baltika — a brand which commands a 34% share of the Russian market and in which S&N owns a 50% stake — is to be introduced to 25 to 40-year-olds in the UK. He also declared that Australian lager Foster’s, to which S&N gained the European rights following its 1995 acquisition of Courage, is to be launched in France.
Not only does Froggatt believe that this sort of cross- fertilisation and global brand development is the way forward for S&N, he also believes it is only going to be feasible if there is a shake-up at the top.
This lay behind his announcement that he wants to install three new group directors — to cover marketing/distribution, systems and operations directors — all of whom will work at an international level, although they will ostensibly be based at S&N’s Ellersly Road HQ.
Internal and external candidates are to be considered for each role, which will be just below board level. However, it seems likely, given the international experience that is going to be a prerequisite, that the strongest candidates are going to come from outside. Froggatt expects the three new directors will be installed by December.
Until now S&N has been very much a dominant UK brewer which, following a recent spate of deals, also happens to own a number of overseas beer brands. In addition to Kronenbourg and Baltika, these include John Smith’s in the UK, Alken Maes in Belgium, Sagres in Portugal and Lapin Kulta in Finland.
Froggatt believes the group’s management structure has not kept pace with the shift in the business engineered by Brian Stewart. The aim is to promote faster and more transparent decision-making.And once again it comes down to urgency. There are bound to be a few bruised egos within the operating companies in each geographic market once the new directors are installed. But ultimately the new structure looks certain to pay off — as long as it does not stultify innovation at a country level.
“It’s not about exerting control,” insisted Froggatt. “It’s more about getting the right kind of discipline to [permeate] through the business.”
Froggatt has other problems to surmount, including a UK beer division which last year saw its operating profits tumble by 9% due to a botched reorganisation of the supply chain. “This is the single most important issue for [UK subsidiary] Scottish Courage,” he said. He added that Scottish Courage is “reviewing” all its agreements with logistics partner Hays and that “the management team are tackling these issues with urgency”.
He also has to contend with the problem of dwindling beer sales in France, where S&N is market leader, with the Kronenbourg 1664 brand.
Froggatt must also ensure the £2.3 billion sale of S&N’s managed pub business, which officially kicked off last Monday, goes through smoothly. Bidders include Mitchells & Butler (recently demerged from Six Continents), Hugh Osmond’s Sun Capital, and a host of private equity players.
The sale is likely to depress earnings per share, but will strengthen S&N’s balance sheet, as gearing is going to be reduced to 40%, giving the group further scope for acquisitions in Europe. But Froggatt said further acquisitions were not currently on the agenda. “The priority is to drive the most we can out of our existing business,” he said. “Our focus is on brands, distribution and people.”
In the year ended 27 April, an unorthodox date for its year end, S&N made pre-tax profits of £284.6 million, down 18% on group sales which rose 19% to £4.99bn. Profits were hit by increased goodwill amortisation as well as restructuring costs in the UK. The company also incurred £9.1m in fees on abortive deals, mainly from an earlier plan to sell part of its pub estate to Nomura. Excluding exceptional items, pre-tax profits rose 15% to £507.3m.
David Liston, a Gerrard analyst, said: “S&N shares offer good value and as the group completes its transition to a focused European brewer with reasonable long-term earnings growth prospects, they should enjoy a re-rating against the sector.”
This article was published in the Sunday Herald on 6 July 2003