COMMENT: Foster's distinctive strategy pays off
Australian wine and brewing group Foster's has reported a 4.1% year-on-year increase in H1 net profits to A$197m. Revenues are up 6% to A$1.58 billion.
Foster's has admitted that its goal of 10% normalized earnings per share will be difficult to hit given the global economic downturn and troubled times in the Australian wine industry. Even so, Foster's is doing comparatively well, although it has stayed largely on the sidelines as large scale consolidation has reshaped the global wine and brewing industries in recent years.
That process, which appeared to be capped by the acquisition of Australia's successful wine maker BRL Hardy by US giant Constellation last month, has seen the balance of power in the industry shift from the Old to the New World. Now, however, the honeymoon appears to be over.
Australian producers rushed to plant new vines in the boom years of the 1990s, but demand has fallen with the slumping global economy, forcing producers to cut prices in order to shift a sudden glut of wine. To make matters worse, overproduction in Chile and California is keeping competition stiff, prices low and margins down.
But while Foster's expects the coming 18 months to be tough, it has avoided several key pitfalls
Foster's gambled that quality would win out over quantity - correctly, as it turns out. Its focus on premium wines has helped insulate it from price cutting and reduced margins. The company is also more diversified than some competitors. Strong performance by its Australian brewing wing that helped offset troubles in the wine market.
But most notably, Foster's has shied away from large scale mergers in the belief that smaller bolt-on deals add more value in the short term. It's a strategy that has worked so far, and one that is helping Foster's face up to difficult trading conditions better than expected.
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