Wine is the must have accessory for any drinks company at the moment and Australia's beer companies are no exception. But David Robertson asks whether the loss of focus on beer has had damaging effects.

Australia's drinks giants are returning their focus to beer after a year caught up in moves into the wine market.

Foster's in particular appears to have taken its eyes off the road and it may be too late to fend off the overseas rivals now circling this attractive antipodean company.

Foster's and Lion Nathan have both been eager to make wine acquisitions in order to take advantage of the growth the wine market is enjoying.

Foster's made its big play in the US with the A$2.6bn acquisition of Beringer while Lion Nathan has just beaten off Allied Domecq to win (subject to an inquiry) New Zealand's Montana Wines.

But both companies built their success on beer drinkers and commentators have suggested that they have neglected the lucrative A$4bn a year beer market while making their wine deals.

Foster's is in the most interesting position. It reported in February that in the six months preceding, beer volume had slumped about 4% but stronger premium beer sales had helped boost earnings by 5.1% to A$231.1m.


Commentators have suggested they neglected the lucrative A$4bn a year beer market while making their wine deals

Dropping volume and increasing earnings may be the finance officer's dream come true but in brewing it is not necessarily good for the bottom line.

The recent drop has been largely blamed on a 10% price hike imposed by the government by way of a A$0.22 excise increase.

But the Australian economy is also now struggling and punters are likely to switch from fancy, pricey beers to trusted and cheap old favourites.

The economic slowdown will hit volume further and the battle launched by Lion Nathan to score market share could also be having a damaging effect. Lion claims Fosters is down 2% in national market share (to about 53%) but these figures are always subjective.

What is certain is that Lion is aggressively buying its way into Victoria, a state that accounts for 21% of national beer consumption and is Foster's home territory.

Selection of Lion Nathans Brands

Lion's attack on Foster's stronghold seems to initially have taken the larger company by surprise but Foster's is fighting back with its staple domestic product, VB, now a major player in all states.

But with increased beer prices, the economic slowdown and Lion's aggressive tactics, Foster's could be forced into a situation where dropping volume slashes cashflow and therefore the company's ability to pay its debt on the Beringer deal. This could then force Foster's into a deal-making situation.

Foster's says no comment but rumours keep cropping up that link the company to both Diageo and Scottish & Newcastle. Analysts believe that a joint bid (as pioneered by Diageo and Pernod Ricard with Seagram last year) would have to be worth around A$12bn, compared to Foster's market capitalisation of just over A$9bn.

Lion Nathan, part-owned by Japan's Kirin, reports its half year results in a couple of weeks and analysts expect similar figures to Foster's. Its purchase of Montana is less stretching than the Beringer deal and even the expensive market-share buying spree Lion launched in Victoria shouldn't trouble the company if volumes do drop.

A Foster's advert: The Amber Nectar

But for Lion the big question is where next? There is a feeling that Lion is merely Foster's little brother, trying to compete by saying, "anything you can do, I can do better". Only last year, CEO Gordon Cairns had ruled out wine and was sniffing at a move into Victoria but as he watched Foster's make its move with Beringer priorities shifted.

With Australians expecting tougher times in the next six months the beer market will again resume top priority for the country's biggest drinks companies.

Lion Nathan has to step out of Foster's shadow and Foster's has to survive to continue casting one.