UK & Russia: Scottish & Newcastle posts an unshaken faith in Russian beer market despite Morgan Stanley pessimistic previsions

"We're looking at 3 to 5 per cent growth in the Russian beer market this year and we see that as being pretty much constant going forward," Scottish & Newcastle President, Tony Froggatt, said July 02 in an interview to The Independent.

Morgan Stanley is particularly concerned about Russia, a market that helped boost S&N's pre-tax profits last year by 9.5 per cent to £392m. Morgan Stanley's predictions for growth in this part of the world are considerably lower than consensus, at 1 per cent. It points out that the population is shrinking dramatically and that there is a "real risk" of increased regulation and greater competition. Its findings make for pretty dire reading.

S&N's Eastern European business, Baltic Beverages Holdings (BBH), a joint venture with Denmark's Carlsberg and Russia's leading brewer, reported a modest 2 per cent growth in the first quarter of this financial year, but Froggatt puts that down to unseasonably bad weather that sent drinkers scurrying back to their more warming vodka.

"We will continue to take market share. We have confidence in the Russian market. The standard of living is rising and as that happens, we will get a higher birth rate. The former Soviet Union is a good place to have your investments."

While Morgan Stanley may be pessimistic, the rest of the market has largely been bullish about S&N. It wasn't just BBH that helped push the shares 11 per cent higher last year, though; takeover speculation also played a part. With a market value of around £4.7bn and an open share register, the brewer is an obvious target. Anheuser-Busch, SABMiller and Carlsberg have been touted as possible buyers, the first two because of their small presence in the UK, the latter because of its existing relationship with S&N.

"We enjoy working with the Carlsberg management," says Froggatt. "We have a lot of respect for them. Would we like to get closer? We would like to get closer but it does take two."

Ahead of any possible bids, however, Froggatt is doing his own wheeling and dealing. The most recent move was to buy the Foster's lager brand in Europe from the Australian drinks group of the same name for £309m. S&N has been brewing Foster's under licence since 1995, for a bargain £15m a year. But Froggatt believes full control will allow him to develop the brand, and increase marketing and sales.

Innovation and marketing are big issues for Froggatt, who has spent the bulk of his career at drinks companies. He believes brewers lag behind their peers in the spirits industry in embracing new ideas, something he is keen to change at S&N.

For instance, "super-chilled" versions of two of S&N's core brands, Foster's and Kronenbourg 1664, complete with fake condensation, have helped boost market share.

Froggatt has also turned his attention to cider. "We took over Bulmers just before I joined and I was very supportive of it. My first experience was being on the phone in Australia to the board meeting [in the UK] when it was decided we'd go for it."

The buy has proved to be a timely one. Noticing how Magners, owned by the Irish drinks group C&C, was taking off with a younger, trendier market - just as alcopops started falling out of fashion - Froggatt has shaken up S&N's offering, adding a new version of Strongbow, called Cirrus. He has also tried to change the reputation of budget brands such as White Lightning. Labels boasting "20 per cent free" did nothing for the "tramps' juice" reputation of these ciders, so the bottles have become smaller and there are now fewer promotions. As Froggatt concedes: "It just did not give out the right sort of message."

But innovation alone will not reverse a declining UK market. So Froggatt, who divides his time between Edinburgh, London and Sydney, has also been axing costs in the UK. Factories in Edinburgh and Newcastle have been closed and he is on course to take £60m a year out of the British business.

Although number one in the UK, Russia and France, S&N does not have the same international exposure as rivals such as the Belgian beer giant InBev. Out of all the overseas brewers in China, for instance, S&N has one of the smallest operations.

But, says Froggatt: "Let's not be apologetic about being in Western markets. Growth in sales doesn't necessarily equate to return on investment or profitability. You cannot be seduced into thinking that. We're building value in mature markets and in emerging markets, and that's a pretty good combination.

"We've got to have a strong position in the markets that we compete in. Even if markets are declining, you can still make good profits and sales there."

Some well-established brands have also found new sources of profit in different markets - Newcastle Brown Ale, for instance, has been repackaged in smaller bottles for US consumers who cannot get enough of this trendy British import.

Born in Thailand and raised in Australia, Froggatt first came to the UK to study law, intending to become a barrister. Instead, he ended up at the consumer goods group Gillette before kick-starting a long career in the drinks industry at the Australian spirits distributor Swift & Moore.

When not cutting costs and pushing new versions of drinks, Froggatt, who is married with three sons, and two dogs, is an avid sports fan and collector of historical autographs.

But it's obvious that, for the time being at least, S&N is his biggest passion. "I'm a great believer that chief executives shouldn't overstay their welcome," he says of his eventual retirement. "But I still believe, and I hope my board does, that I have a lot more that needs to be done. I want to leave in a much stronger position."

Morgan Stanley is not the sort of bank one can dismiss lightly, no matter what Froggatt thinks. But there can be no doubt that Froggatt - ever the competitive Aussie - is going to do as much as he can to make sure it's his own predictions, and not some analyst's, that end up winning out.

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