Foster’s diversion into wine was heralded as a key strategic moment in the development of the Australian drink industry. But as a global wine oversupply and weak US economy hit hard the company has refocused on its brewing roots to see it through the tough times. David Robertson reports.
Not too long ago the Foster’s Group was being linked with every acquisition opportunity in the industry, from UK brewers to US wine makers, but the company has gone conspicuously quiet in the last year.
The audacious A$2.9 billion Beringer deal three years ago set a new standard for traditional brewers. At the time Foster’s was the hot ticket: it was an old economy stock with lots of cash that was investing heavily in new economy, high profit, wines. Rivals like Lion Nathan and Allied Domecq were quick to jump on the bandwagon.
But in the last year Foster’s has gone quiet. It has continued to pick up wine businesses but has spent only tens of millions of dollars rather than billions. Its share price has been similarly dull: it was A$4.68 at the end of last October and dropped as low as $4.16 in early March, but is currently trading at $4.51.
The company continues to be linked with Southcorp, the struggling Aussie wine maker, but talk of mega-deals with Gallo or Heineken or Scottish & Newcastle have died. Why?
It appears that Foster’s has pulled in its horns. According to Morgan Stanley the US wine industry is heading for a 10 to 20% increase in output this year while, at the same time, the US economy is struggling; clearly, the US wine business is not going to deliver the exceptional returns that it was just 18 months ago. Foster’s has therefore decided to revert back to its old economy roots.
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By GlobalDataIts Carlton United Brewing business announced a couple of weeks ago that it was embarking on a A$100m cost cutting exercise. This should maintain an earnings growth rate of 5 to 6% a year for the next five years – generating more cash to offset a dip in wine.
CUB managing director Trevor O’Hoy confirmed his status as leader-in-waiting (for when current Foster’s chief executive Ted Kunkel steps aside) with a brave decision to close the company’s brewing facility in New South Wales, a state that accounts for 40% of the country’s beer consumption. The Kent Brewery in central Sydney will close with the loss of 300 jobs – a decision that could have gone badly with die hard NSW consumers. But it is a logical move and Foster’s stands to gain A$180m from the sale of the property alone.
CUB also announced other cost cutting measures, all aimed at bolstering the parent company’s bottom line during the lean years ahead. It is merging its sales team, cutting sports sponsorship and overhauling its advertising.
Financial analysts have reflected this sombre mood in their forecasts: nobody is expecting anything very exciting from Foster’s for some time. The company remains the favourite drinks industry stock in Australia, but it doesn’t have a lot of competition (most of the large wine makers are now held by foreign companies while Lion Nathan, Australia’s other brewer, is 46% owned by Japan’s Kirin).
Without the exuberance of the wine business to give Foster’s figures a glow, analysts are now concentrating on how else the business could be improve. Some commentators suggest that the company could go much further than the cost cuts O’Hoy announced – Foster’s costs are higher than its smaller rival Lion Nathan’s, despite the advantages of economies of scale. Changing the organisation of sales teams and advertising accounts are short-term upheavals that are not likely to produce much long term change. Foster’s pub portfolio has also been in difficulty, and a securitisation or sell off is a possible solution.
“CUB is doing pretty well but the market is a duopoly in Australia so it is pretty stable,” said one commentator. “They are making plenty of money in beer but they have a problem in the US with wine and also their peripheral businesses like the hotels [pubs].”
The expectation that a foreign buyer might be lining up Foster’s has also died. Diageo is one of the few who could afford the Melbourne-based company, but Diageo has just signed a deal with Foster’s for the distribution of Guinness, Kilkenny and draught Ready-To-Drinks – making an acquisition unnecessary.
Foster’s will continue to be linked with Southcorp because the synergies from such a deal would make sense. But there is no indication that Southcorp’s major shareholders (three people hold 40% of the company) will sell when its share price is so depressed. Instead, analysts are looking at Europe as a possible next venture for Foster’s. There are rumours that the company is considering a bid for a large European wine maker, to even out its geographical spread.
However, even if Fosters does make such a bid the company looks reliant on its traditional beer drinkers for some time to come.
