Foster’s wine woes
The Foster’s Group, the world’s second-largest wine company, announced on 26 August 2008 that its annual net income fell 88 percent, owing to a large write-down on its global wine operations. Net profit fell to AUD 117.7 million (EUR 67 million) from AUD 966.2 million a year earlier, the company said in a statement. The firm, whose assets include seven of the top ten selling brands of beer in Australia, said it was taking a write-down of AUD 602.9 million (EUR 346 million). This is the first loss Australia’s biggest beer and winemaker posted in 16 years.
Following the outcome of the strategic review, Chairman David Crawford may decide to exit the wine business that Foster’s spent AUD 6.8 billion and ten years creating at a time when the Australian dollar is at a 25-year high and increased competition cuts earnings.
Board member Ian Johnston stepped into the role of acting Chief Executive in July 2008 to stem market-share losses after the departure of Trevor O’Hoy, who oversaw a doubling of the brewer’s wine assets in his four years in charge.
With the demerger of Foster’s wine and beer assets, Foster’s attempts a strategic u-turn. Wine once looked the ideal complement to beer. A decade ago when wine consumption increased rapidly in developed markets, it looked like a good idea for Foster’s to buy into wine. Unfortunately, wine did not live up to its promises. It provided a big nose, yes, a great body, but left a nasty aftertaste.
Wine’s and beer’s cultures proved an uncomfortable mix, if not to say incompatible. Wine is after all an agrarian business that ties up enormous amounts of capital in land and inventory and depends too much on weather and harvests. Add to that an oversupply of grapes and decent returns prove unobtainable. Pouring cash from the beer business which returns more than 25 per cent on capital into wine that earns less than 5 percent just destroys value.
Many market observers have argued that maintaining the status quo would be an undesirable outcome of the strategic review Foster’s is now conducting and the results of which are supposed to be released towards the end of this year.
However, selling off wine may prove impossible. Who in his right mind would buy Foster’s wine brands and vineyards? Listed wine companies have seen their share price decline over the past year. That’s why it is believed widely that Foster’s wine business will not raise anything near even the AUD 5 billion book value to which Foster’s has written it down – let alone recoup its outlay plus interest.
That makes a demerger into separate wine and beer businesses, allowing investors to decide where they want to invest, the logical way forward. Unfortunately, Foster’s has already had to sell off most of the family silver. It has sold the European and American rights to its international Foster’s beer brand to Scottish & Newcastle in Europe (now Heineken), to Miller in the U.S. and Molson in Canada. Its other brands are domestic brands only that provide Foster’s with a 50 plus market share of Australia’s beer market which is low-growth, small and isolated. Hardly likely that global brewers will try to beat each other to Foster’s door.
On a positive note, Foster’s still trades on more than 14 times forward earnings – similar to Diageo – and thus at some premium to the global brewers at 11 to 12 times. No need to whine, really.
