The albatross around Lion’s neck
The parallels between Lion, Australia’s major brewer, and the former Foster’s are becoming harder to ignore. As many will remember, it was Foster’s ill-fated decision to build up an international wine company that proved its eventual downfall. For years, Foster’s beer division provided the profits that went into the bottomless barrel which was its wine division. Following rising criticism from investors, Foster’s in 2011 spun off its wine business and offered itself up for sale to SABMiller.
Kirin-owned Lion group, which unites a beer, a dairy and a juice business, may be spared this fate because it was Kirin that decided to bring its diverse Australian and New Zealand businesses under one umbrella. But its non-beer interests have turned into an albatross that is causing the beer division a hell of a lot of problems ever since Australia’s supermarket chains Woolworths and Coles started a brutal milk price war in January 2011, while pushing up sales of their private label dairy brands.
Observers say that for years Lion’s dairy business has not performed to the expectation of Kirin, which seemingly paid over the odds for this business and has since the acquisitions written off large amounts of value from its books.
Lion’s first half results (to the end of March 2013), which were released in early August, confirm this view. Lion posted a sharp fall in first-half earnings for its non-alcoholic drinks and dairy business that was fortunately offset by a strong result in its beer business.
Despite weak consumer sentiment, Lion reported a strong increase in earnings in its key division – beer, spirits and wine – on the back of its AUD 380 million (USD 347 million) acquisition of Australian brewer Little World Beverages (June 2012) and a suite of new brands, including Corona Extra , Budweiser and Stella Artois.
Earnings before interest and tax (EBIT) rose 21.7 percent to AUD 410.5 million (USD 347 million/EUR 282 million) in the six months to 31 March, from AUD 337.3 million in the previous corresponding period. Revenues in the division rose 20.7 percent to AUD 1.5 billion, from AUD 1.2 billion year-on-year.
However, its dairy and drinks division took an 11.6 percent fall in EBIT to AUD 44 million in the period, from AUD 49.8 million year-on-year, on a 5.5 percent fall in revenues to AUD 1.243 billion.
Lion’s chief executive Stuart Irvine, an ex-Nestlé executive who succeeded Lion’s long-serving CEO Rob Murray last year, was quoted as saying that the group had been hit by low consumer sentiment and subdued discretionary spending.
"This environment is exacerbated in our dairy and drinks business, where we face heightened competition and margin pressure in price-driven categories such as white milk, everyday cheese and juice," Mr Irvine reportedly said.
"We expect this to intensify in the latter half of our financial year, due to increased milk input costs."
On the Australian beer market, Lion said it remained challenging but premium and craft brands had driven volume growth of 12.1 percent.
