Published February 20, 2009

F&N to regain distribution of soft drinks next year

It will also launch new products, spend on marketing and infrastructure

By EMILYN YAP

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FRASER and Neave Ltd (F&N) said last night that it will regain distribution of its soft drinks in Singapore after agreements with The Coca-Cola Company (TCCC) end next year. The local conglomerate will also launch new products and spend on infrastructure in conjunction with this move.

The news adds a twist to F&N's earlier announcement on Wednesday night - in contrasting fate, its Malaysian unit will lose rights to bottle and distribute TCCC beverages next year.

The market choked at news of the impending franchise loss yesterday. F&N shed as much as 19 cents or 7 per cent in intraday trading, before ending 18 cents down at $2.50. The market closed before F&N disclosed future distribution changes in Singapore.

Here in 1999, F&N had sold its stake in a bottling operation, F&N Coca-Cola (Singapore) (F&NCCS), to US-based TCCC.

F&N then granted F&NCCS a trademark licence agreement to produce and distribute its line of beverages such as 100Plus and Seasons Asian drinks and teas in Singapore. In return, F&N receives a nominal royalty fee. The contract will expire in January 2010 and will not be renewed.

F&N also has a beverage base manufacturing agreement with TCCC, under which it receives payment for granting TCCC the right to produce F&N syrups for sale to F&NCCS. This income was around $1 million in 2008.

According to F&N, there will be no adverse financial impact when the agreements with TCCC in Singapore lapse. In fact, there will be a new phase of development in the group's soft drinks business.

'We will invest in marketing and distribution infrastructure in Singapore,' said CEO of F&N's food and beverage (F&B) arm, Koh Poh Tiong. 'Getting 100 per cent of the income from the sales and manufacture of F&N soft drinks will be a good foundation for future earnings of the F&B business.'

There are also plans to launch a new range of beverages, he added. 'Singapore is a market we know extremely well and where we have many very established relationships. From here, we will springboard our plans to grow this business regionally.'

The situation is different in Malaysia, where F&N's subsidiary Fraser & Neave Holdings Bhd (F&NHB) has agreements with TCCC to bottle and distribute drinks such as Coca-Cola, Sprite and Aquarius.

Effective since January 2005, the franchise agreements will expire on Jan 26, 2010. But in what a CIMB analyst described as a 'negative surprise', F&NHB announced on Wednesday that TCCC will not renew the contracts when they are due.

Neither party explained the decision. But according to F&NHB CEO Tan Ang Meng yesterday, there were differing views and expectations in the collaboration with TCCC.

TCCC products made up RM421 million (S$176 million) or 12 per cent of F&NHB's revenue in FY2007/08. F&NHB said that the agreement lapses could have a 'material' impact on 'profitability for the following year . . . depending on the outcome of the post-termination transition plan, if any.'

The effect on parent F&N may not be significant. DBS Vickers estimated in a note yesterday that TCCC's products account for just 4 per cent of its revenue and around 3 per cent of operating profit.

Despite all that has happened, Coca-Cola Singapore told BT that TCCC 'remains strongly committed to the future of our brands in Singapore and Malaysia'. It also said that 'TCCC is continuing its dialogue with F&N to determine the nature of our relationship in Singapore and Malaysia after those bottling agreements expire in 2010. We are committed to explore mutually beneficial arrangements'.