Flat markets make S&N one to avoid

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The Independent Online

The performance of Scottish & Newcastle, the UK's largest brewer, with brands including Fosters, Kronenbourg, John Smiths and Strongbow, has been as flat as a watery pint for the past few years.

The performance of Scottish & Newcastle, the UK's largest brewer, with brands including Fosters, Kronenbourg, John Smiths and Strongbow, has been as flat as a watery pint for the past few years.

The UK beer market is stale and Tony Froggatt, who joined as chief executive in 2003, has had to make major cost cuts to inject some fizz. The company now has more money for marketing and for brand developments, such as Fosters Superchilled and Kronenbourg Blanc. This is the only way to drive sales in the UK's mature beer market.

The increased advertising spend has paid off. S&N said yesterday, reporting its full-year results, that volumes in its four key brands grew 4.5 per cent in the UK over 2004. Profits fell as a result of disposing of its pubs business in late 2003, but underlying profits were up 11 per cent to £373m.

Not bad, but the UK and French markets are still tough and the current boost being felt as a result of management changes will soon sober up. Total UK volumes were up only 1 per cent and in France, weak consumer spending and a miserable summer last year hit volumes.

Eastern Europe is the bright spot. S&N's joint-venture with Carlsberg, BBH, produces Russia's leading beer and S&N is also beefing up its investments in India and China, potentially two of the biggest beer markets in the world. Given the vastness of the regions involved, however, sales growth will take years to ferment.

Takeover speculation has lifted the shares recently but it is hard to see anyone paying much for a business so reliant on the flat UK and French markets. Acquisitions by S&N may be the answer, but S&N's rivals also look pretty fully valued. Existing investors may want to hold on for the income, but new buyers should get a round in elsewhere.

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