Barr hopes water deal will help it fizz again

AS THE clock struck 2am last Sunday, Roger White, chief executive of AG Barr, rubbed his eyes, took out his pen and signed his name. After three days of intense negotiations, he had finally agreed a £15m price tag for the Strathmore mineral water company from its American owner, Constellation Brands.

White had been courting Strathmore since February. With larger players such as Coca-Cola keen on entering the UK water market, it was crucial Barr beat them to it.

For months analysts had said AG Barr looked like a company that was working extremely hard just to stand still. Its flagship brand Irn-Bru, alongside its stablemates Tizer and Orangina, are facing an onslaught of health campaigns waged against sugary, carbonated drinks. The 105-year-old fizzy soft drink is still loved by Scots, but in a market increasingly dominated by warnings of obesity and diabetes, Irn-Bru is slowly losing market share.

Although Barr already owns Findlays mineral water company, the Strathmore deal is a major departure from selling syrup-based fizzy drinks and a clear statement of intent. If the market demands healthy drinks, then AG Barr - a firm that originally started life as a cork-cutting business - wants to supply it.

"There is no point carping and looking backwards," says White. "My job is to determine what people want, not sell them what I make." White has splashed out on Strathmore in an effort to get hold of a brand that will grow steadily - the trend towards healthy and sport-related soft drinks is not cyclical.

There is also the opportunity to develop the brand in the on-trade (hotels, pubs and clubs), where it is the UK's number one water brand, and to improve its presence in the retail sector, where it has under-performed.

The key to White's strategy is distribution, getting the product from the bottling line to the point of sale. The firm presently supplies 32,000 outlets on a weekly basis direct to store. But it's an area in which Barr can improve.

Later this year the curtain will rise on a 17m extension to the Cumbernauld bottling factory. The new production facility-cum-distribution hub will be one of the most efficient in the world, taking 1m from costs. As soon as the bottles leave the line they will be robotically stacked and stored in a vast 12-storey warehouse. From there they can be loaded directly on to the lorries.

But will it be enough? For all the cost savings, the improved efficiency and state-of-the-art bottling facilities, sales of fizzy drinks continue to fall.

Figures from market analysts AC Nielsen show that Barr's most significant brands fall into what it calls "other flavoured carbonates" - essentially any fizzy drink that cannot be classed as cola.

This happens to be the worst performing category in the country, delivering a 10% decline in 2005-06. Research shows that the UK is not as keen on Tango, Fanta and Tizer as it once was, preferring dairy-based and energy drinks.

More worryingly, criticism by the Food Commission of the levels of artificial colours and sweeteners in soft drinks means that school children are unlikely to be drinking high-sugar drinks in school for much longer.

But significantly, Barr can grow its offerings abroad - Russia is a fan of the sweet, fluorescent Irn-Bru and the brand is due to launch in Poland.

White says: "We are not negative about our carbonates business. Let's not forget the carbonates market has enjoyed strong growth right the way through the 1970s, 1980s and early 2000s. Yes, last year saw the carbonates struggle and they will not grow at the same rate in the future, I have no doubt about that. But it's still a massive market and good brands will continue to do well."

In recent years there has been a move towards more quality, premium-based drinks, but consumers are continuing to mix and match. In the industry this is known as a "balanced portfolio" - consumers alternate between diet or health drinks and energy or full sugar offerings.

It is this trend that AG Barr aims to mirror in its own portfolio. This year it entered the energy drink market with its first new product for more than a quarter of a century.

Irn-Bru 32, referring to the number of ingredients used in the recipe, is aiming to attack the Red Bull demographic using the brand value of Irn-Bru.

Margins are high in the energy drink category and analysts say the move provides evidence of the strength and value of the brand, because it is going for the premium end of the market.

But energy drinks form just one small sector, and for all the relative early success of Irn-Bru 32 there have been failures.

Tizer is a worry. First launched in Manchester in 1924, it was bought by Barr in 1972. In 2004, White tried to revitalise the brand by introducing a range of Tizer flavours targeted at the teenage market.

It was a disaster, with sales of the drink crashing 45%. A relaunch is planned for the autumn backed by a significant marketing spend, but the market is certainly not holding its breath.

One analyst commented: "Barr has to decide what it is doing with Tizer.

"Will it offer it as a premium product and promote it, or will it go down the discounting route?"

One area where Barr is doing better in is office-based water coolers. In Findlays Spring, Barr has a sizeable foothold and with a growth in cooler placements at 46% there is an obvious upside in the business.

By the end of this week, when the Strathmore deal is legally completed, 12% of Barr's portfolio will come from water. White isn't ruling out other acquisitions - Highland Spring would seem a natural fit - but he isn't in any hurry to do another deal.

"It's not like the board sat around and said we must buy a water company," he said. "Don't forget Irn-Bru is still the number one Scottish grocery brand.

"Carbonates are still a very important part of our business and we believe there is growth potential for good quality products that are well marketed and well executed, in terms of selling to consumers who still want to consume fizzy drinks.

"We like to think we can develop the business to meet the market's expectations."

Back to the top of the page