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Copyright © Ric Einstein 2009
A Titanic Wine Struggle (24 February)
In a News Corp article announcing the (then) upcoming expected announcement by Fosters in relation to it’s in-depth look at its wine division, the article said, “This, however, doesn't mean beer and wine must be run as one because, as Merrill Lynch's David Errington points out, wine is grown in the country, produced once a year and sold some time later, but beer is made 365 days a year in the city and sold shortly thereafter.”
To you and me, the point that Errington makes is obvious, as obvious as a big red pimple at the end of ones nose, but unfortunately it didn’t seem to be obvious to the ‘rocket scientists’ who were running Fosters when they bought Southcorp, and integrated it into their empire. Now that they have had a soul-searching look in the mirror, they have seen it for themselves, and have finally worked it out it’s not a pretty sight.
Here are some of the keys points, as well as a few comments (from the full announcement)
Summary of key outcomes from the Review
• Foster’s to retain and reshape its Wine business and implement significant organisational and operational change to improve performance
• Australian Wine and Beer, Cider & Spirits (BCS) divisions to be structurally separated to provide greater management focus, organisational simplicity, financial transparency and performance accountability
• Global supply operations to be integrated with respective demand regions to create end-to-end business units comprising sales, marketing, supply and functional support
• New and experienced operational leadership team to pursue performance improvement initiatives identified by the Review
• Sales force numbers to be increased in Australia to capture opportunities in both Wine and BCS
• Wine brand portfolio to be reshaped over time to focus on attractive segments starting with rationalisation of the Australian tail brand portfolio
• 36 non-core vineyards to be sold and 3 wineries to be closed, reconfigured or consolidated in Australia and California
• Overall operational benefits expected to exceed $100 million per annum in net pre-tax cost savings in F11 after allowing for additional investment in sales force numbers and other costs
• Total asset write downs and restructuring charges in the range of $330-415 million to be brought to account in H2 F09 ($130-165 million cash and $200-250 million non-cash) and approximately $60 million per annum of overheads to be transferred from Australian BCS to Wine resulting from structural separation
When Fosters bought Southcorp, they talked about all the great things they were going to do with the acquisition. Besides the fact that they paid way, way too much for the purchase, Fosters did a right royal job of stuffing up the integration, from go to woe (whoa). The only people who could not see it were the management of the company, but then that’s not surprising when you consider how much they screwed up working out what it was worth, prior to purchase. Around the time of the takeover, in 2005, I wrote an article about what was likely to happen to and at Fosters as a result of this purchase. You be the judge as to whether I got it right or not!
In a frank admission, Foster’s Chairman, David Crawford said, “The performance of our wine business has been unsatisfactory. In large part this has been the product of poor execution in the Americas and pursuing a multi-beverage model in Australia.”
At last, Fosters has finally realised the need to run the plonk business differently from the piss (beer) business, because whilst the products of both divisions contain alcohol, they are very different markets. Just because someone can sell barrels and pallets of beer to a pub, does not mean that they can sell a case of wine to a restaurant. And these differences go a lot further than just the sales department. The decisions to adjust beer volumes can be made and more importantly, implemented very quickly. Not so with premium wine where many decisions are made years in advance of the bottle leaving the distribution centre.
A critical factor in Southcorp’s decision to purchase Rosemount, and then enter into a reverse takeover with the Rosemount management running the joint, was because Southcorp could not crack the US market and Rosemount had been very successful there. So what happened when the companies were merged? In comparison, Rosemount’s performance in the US made the maiden voyage of the Titanic look like a successful way to take a holiday. But it didn’t stop with the decimation of the Rosemount brand (in the US.) The new Southcorp made a complete pigs breakfast of the rest of their portfolio in the US too.
When the boffins at Fosters took a look at Southcorp they decided that there was:
a. A big opportunity
b. That they could penetrate the all important US market better than Southcorp
Why they had the idea that they could do better than Southcorp, when they had spectacularly failed to do well in the US with Berringer Blass, I could never understand. As history now shows, the penetration into the US with the Southcorp brands after the Fosters takeover was another monumental failure.
The review also said “36 non-core vineyards to be sold and 3 wineries to be closed, reconfigured or consolidated in Australia and California” but this is only the tip of the iceberg because, “Wine brand portfolios (are) to be reshaped over time to focus on attractive segments starting with rationalisation of the Australian tail brand portfolio.”
I wonder what an “attractive segment” looks like? I bet that Jacobs Creek thinks that the low end market in the UK that their wine has been so successful penetrating is attractive. Jacobs Creek have done very well from it, but would Fosters have the nous to crack that segment in a big way? Given the way they treated the Lindemans brand, and no doubt the good Doctor Lindeman is breaking the worlds speed record for grave spinning, I seriously don’t think that at this time Fosters have a hope in hell of doing it. Brands like Jacobs Creek took a long time to become entrenched. You can’t treat a market like this one as a ‘fashion market’. If you want to be successful in that market in the long term, you have to have a long-term plan and a long-term commitment. Short term plans that are heavily influenced by quarterly returns to shareholders, as well as quarterly/annual staff performance bonuses that are tied to brand profitability, just won’t hack it.
In the detail of the announcement it stated:
“Country of origin: Overweight in the Australian export category, relatively balanced in the US domestic category while underweight in smaller, faster growing countries of origin
Brand portfolio: Strong brand portfolio in premium wine versus competitors with a degree of overlap in Australian global brands
Production footprint: Well configured, utilised and outsourced, except for overweight position in lower quality vineyards mainly in Australia and California’s Central Coast”
This will mean that over time, many of the existing small Australian brands will very quietly just disappear from the radar as they are phased out.
Those critter/tail wines were never going to be profitable. It is interesting to note that in 2004, Trevor O’Hoy, the then head of the Fosters wine business stated that low-end winemaking would be contracted out. Fosters thought it would save them money. I am not sure if that ever happened, but if it did, I doubt it saved them much, if anything.
Not only are the low end wines to go, but the lower quality vineyards will go too. That is a good move.
Fosters think they can “save” $100 million per annum in costs by 2011" with the proposed system changes. I am not a financial expert, but frankly, I have about as much faith of Fosters achieving this objective as President Obama and Prime Minister Rudd have of solving their relative countries economic woes by spending their way out of trouble. Based on the (stupid - tautology) bureaucrats advice, it may be possible, but it ain’t bloody likely.
To again quote Brian Finn AO, who was CEO of IBM Australia and then later, Chairman of the Board of Southcorp, “I don’t know of one business in the world today that has managed to save its way to long term profitability.”
With this announcement, Fosters have announced write offs of about a billion dollars from their wine business in the last year. To put that in perspective, that’s about the price of two thousand houses worth half a million each. Imagine what two thousand houses of this quality look like, and then imagine, poof! They are gone. Mind boggling!
But who knows if the fiscal red ink will end here?
Commenting on the Review, Foster’s Chairman, David Crawford said:
“In light of the operational opportunities available to improve performance, the Board has determined that shareholder value will be maximised by retaining the Wine business. The current difficult conditions in debt and equity markets mean this is not the appropriate time to sell or demerge Foster’s Wine business.”
To me, if I translate that from corporate speak into plain English, it means that the wine business is not in good enough shape to flog off now, and when the economy picks up, Fosters will look at selling it. Until that happens, Fosters will try and turn this Titanic Wine Business around, before it hits any more icebergs and takes on even more water, whilst the new captain, and the crew, frantically work the bilge pumps, and hope they can get it to dry land and salvage as much of their shareholders investment as humanly possible. Right now, in this economic environment, given its condition and position, it’s worth scrap value.
Feel free to submit your comments!
From: Brian Miller:
The Australian, 18 Feb 2009:
Copyright © Ric Einstein 2009