Victorian values: the fight for Australia's beer market
A very unlady-like fight has broken out in the Australian state of Victoria as the country's two main brewers squabble for market share.
Victoria, and its capital Melbourne, is the base for the Foster's Group and its brewing arm, Carlton United Breweries, which has a monopoly on the beer drunk in the state.
But Lion Nathan, which despite being originally from New Zealand is seen as a New South Wales and Sydney company, has been trying to break the CUB stranglehold in an expensive drive to increase sales.
Lion has spent more than A$110m in Victoria but still has little more than a 15% market share and many analysts just cannot see why the Sydney company is throwing good money at buying its way into Victoria.
Lion is running extensive promotions for its staple beer Tooheys New and has signed multi-million dollar sponsorship deals with the Melbourne Cup horse racing and Australian Football League (Aussie Rules).
These deals have been a slap in the face for CUB, which has been associated with both the Cup and the AFL just about since it first started brewing.
Lion, which has around 42% of the national beer market, has been in a near deadlock with Foster's (56%) for years, but last year, when Foster's announced its billion-dollar acquisition of California's Beringer Wines, the time had come to strike.
Lion signed sponsorship deals with the Melbourne Cup horse racing and Australian Football League
Fosters is burdened with a massive amount of debt and is concentrating on integrating its wine operations, giving Lion a free run at relaunching into Victoria - a debtless Foster's might have decided to retaliate in NSW with price cutting but Beringer has prevented this from happening.
Apart from the sponsorships and promotions, Lion has also spent A$80m buying 45 hotels (pubs) to guarantee distribution, 34 are in Melbourne and 11 in the country. It has also negotiated beer-pouring rights at about 250 non-Lion pubs.
Lion chief executive Gordon Cairns explained to just-drinks: "In Victoria we've been criticised by people for moving in but at the end of the day we've got 42% of the beer market in Australia and had just 10% in Victoria, but Victoria is 20% of the country.
"There was an opportunity begging. We couldn't get our beer into Victoria because the hoteliers say, 'I'd love to take it but I may not be able to keep VB [Victoria Bitter is CUB's leading brand] so why should I risk my whole business just for the sake of giving you a couple of taps'. The only way we could do it is by buying hotels."
But despite the vast expenditure and Cairns' optimism, some analysts argue the Victorian gamble doesn't seem to be paying off.
Many of the hotels are located in Carlton around Melbourne University and students, fresh from their M1 anti-globalisation protests, have been unhappy at the unsubtle and blatant attack by Lion and are boycotting the pubs. Spotting an opportunity Foster's has stepped in to help fund a Student Union bar.
Foster's is to title sponsor Formula One's Australian Grand Prix until 2006
Other hotels are also running anti-Lion Nathan campaigns with the slogan "Please don't ask for Toohey's products as refusal may excite you". The boycott seems to be working in places with rumours suggesting some very busy pubs are selling just a handful of cartons (24 bottles) in a month.
Sales in some Lion-owned pubs are reported to have plummeted (and gone up in others, to be fair) but Lion has already put a number of them up for sale, which has angered some analysts who believe the company should have done a better job of selecting the right locations initially.
"We sold the freeholds but in any chain the ones that are not performing well you sell. Our view is always to sell ones not doing well and bring in new ones," says Cairns.
There are also questions over the exact benefit of all this activity. Lion says it has increased its market share from a dismal 10% to about 15% (some months as high as 17% depending on promotions) but this is not virgin territory for Lion. In past years Lion has often had a market share nearing 20%, which puts the success of the most recent push into perspective.
"I don't think it is buying market share," says Cairns. "Buying market share is going out and discounting your product but what we've effectively done is bought some outlets which enable people to try our beer. It's no more complicated than that because we believe in the premise that once they've tried our beer then they'll buy our beer. There is no point in advertising our beer if its not available anywhere.
"The arithmetic is very straight forward. We spent the thick end of $80m on the hotels; if we put that $80m in the bank we'd earn 5% on it, if we looked at the return on investing it internally we get 10%. We are getting a 15% return because we get a 7.5% return on beer profits and 7.5% in the increase in market share and that's what makes it a great investment. But only in a low market share environment like Victoria. It wouldn't work anywhere else because all you'd get is the beer return. Our critics say 'you've spent all this money' and all I can say is we've spent the money, here's what we expect to do and you can judge us when we give you the numbers every six months."
Lion has spent a lot of money for a seemingly small gain but the value in irking Foster's, which has had to sit back with its hands tied, must have been worth every penny. It does seem strange, however, that Lion has been happy spending large sums of money in Victoria but bailed out of Montana, leaving its aspirations in the wine industry in tatters, because it cost too much.
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