Oh Dear Me

Oh Dear Me (1 Sept)

Recently Foster's announced their year end financial results. In an article in the Sydney Morning Herald some of the issues facing Foster's were discussed.

In relation to the takeover of South Corp the article said, "Clearly execution was far more complex than anyone inside Foster's had imagined. But O'Hoy would admit also that there were plenty of mistakes made.

The latest problem was in logistics when the group merged the sales teams from wines (many at the premium end of the market) with beer and ready-to-drink products. The trouble was that the blokes who could sell truck loads of beer slabs couldn't sell Rosemount wines. But this is only one of a litany of problems that beset Foster's in the integration of Southcorp.”

This is an interesting admission by their CEO. As soon as the restructuring of the sales force was announced, I pointed out the ludicrous nature of the change. And it wasn't just mean you thought it was ridiculous. Quite a number of people on the wine forums could see how stupid the changes were, and a few bottle shop proprietors that I spoke to at the time, also shot dead in wonder at this move.

And if I could spot the stupidity, as well as the bottle shop owners, not to mention many dedicated wine lovers, how is it that Foster's could possibly fail to see the stupidity of this move. The only conclusion that I can make, is that in their quest to gain savings due to the merger, rational thought was blinded by the overwhelming want to increase profit. The old adage, penny wise and pound foolish comes to mind.

As far as O'Hoy's comments are concerned, it wasn't just Rosemount wine to sales reps couldn't move. It was all wine. Whilst on the subject of Rosemount, the brand was well and truly in decline by the time Foster's took over Southcorp.

In a different article in the Sydney morning Herald, another item was mentioned that bears examination. It stated, “The company, which has 60 wine brands in 100 countries, said it was focusing on its "lead categories" of beer and wine where it dominates the market.

The chief executive, Trevor O'Hoy, said the result was driven by the success of the top eight global wine brands, which had grown in volume and revenues faster than other wines held by the company.”

Given the size, structure, intended focus and direction that Foster's has made abundantly clear it wishes to pursue, these comments are not really a surprise; but it's what these comments mean for the future that are worth thinking about.

For whatever reason, profit was more important than maintaining ownership of the iconic Seppeltsfield site, the jewel in the Barossa Crown, which Foster's has recently sold. The following is a list of wineries owned by Fosters in Australia.

Andrew Garrett	Killawarra	Seaview
Annie's Lane	Maglieri of McLaren Vale	Seppelt
Black Opal	Matthew Lang	Shadowood
Blues Cartwheel	Metala	St Huberts
Coldstream	Minchinbury	T'Gallant
Devil's Lair	Penfolds	the Little Penguin
Edwards & Chaffey	Pepperjack	The Rothbury Estate
Glass Mountain	Queen Adelaide	Tollana
Greg Norman	Robertson's Well	Wolf Blass
Half Mile	Rosemount Estate	Wynns Coonawarra Estate
Jamiesons	Rouge Homme	Yarra Ridge
Kaiser Stuhl	Saltram	Yellowglen

Given Fosters stated objectives, one can only wonder how long it will be before some of the smaller volume brands cease to exist. As time goes on, it is my bet that the money and resources will be thrown behind the large brands like Rosemount, Wolf Blass, Penfolds and Lindemans etc. Some of the smaller ones like Leo Buring, Tollana, St Huberts, etc will wither and die on the vine. We can look forward to an increasing level of industrialised McPlonk wines being sold through large supermarket outlets. Foster's will make money. In Australia the two supermarket giants will make money; and the average wine buyer, who either drinks Chateau Cardboard or bottled wine that costs less than $10, won't give a damn. For wine lovers, it will be a different story.

Feel free to submit your comments!

From: GraemeG

09/02/2007 18:58:57 Brands owned, presumably Ric, not wineries? You should add Lindemans to the list! Also, Secret Stone is a Marlborough SB that Southcorp invented a few years that still appears on the shelves (can understand you missing that one...)
Graeme

From: TORB

09/03/2007 00:23:07 Hi Graeme,

I thought I had Lindemans on the list; I must have dropped in during the cut and paste. Re the Secret Stone, the list is a list of Oz wineries; they own a stack more all over the world.

From: Muzz

09/03/2007 16:55:43 Profit is NOT a dirty word!

I know that you don't mean it to sound that way, but recent threads certainly have that implication. It is axiomatic that without profit there is no incentive to invest - and few of us have the wherewithal to have a hobby vineyard. Where the majority of bean-counters miss out is that they have a blinkered perspective - combined with a short term outlook. It is this that destroyed the Southcorp/Rosemount merger (!), not the profit motive.

However, where one door closes another opens. It is beyond reason to believe that even the most myopic bean-counter does not appreciate the huge asset value contained in many of the labels listed. The historical brand image of the likes of Buring, Rothbury, Coldstream et al, will have them salivating at the cash in-flow. Think what a focused and dedicated group of investors could do with these labels!

Kilikanoon have proven that it is possible to blend profit and wine - with an EBITDA in excess of 20% and a yield on funds in the order of 15%.

No, Ric, it shouldn't be a disaster - just a challenge.

From: Steve Knight

09/04/2007 06:30:22 Ric,
I could not resist this one either, so here goes.

Maybe the idea, in the initial stages of the merger, was to be loyal to the existing sales force at Fosters. The ultimate result was to alienate the beer reps who had absolutely no understanding of wine, and lose a generation of wine specialists. Discount the Rosemount brand? Hell it was dead in the water from the previous management. But it seems the same discount philosophy that killed Rosecorp has formed the underlying approach of Fosters, so we see silly prices (and apart from the odd gem) lack of wine-making integrity overtake most of the portfolio.

It was a bit amusing late last year to hear that Fosters management had a brilliant idea to hire wine specialist reps (they had already ditched most of them, and there was little chance that they would rejoin the company at the whim of the directors who had already proven to be some-what fickle-to say the least).

We now see the situation where those wine specialist reps that the company has managed to retain are being ambushed by the 'Head Office' group coordinators that deal with the major chains, with prices so way out of kilter between the general trade (what is left of us) and the chains that it is hard to know what the true cost of a product is (not to mention the hidden "marketing funds" that add an extra 8% to 10% gp on the bottom line of the chains). Complain at the huge disparity in cost and it becomes an auction, which must leave the sales teams a little bewildered.

Did anyone notice the $30 a bottle increase in the price of Grange in August. The reps were told it was CPI. When I pointed out that wine was not linked to CPI (as are spirits and beer), and mentioned price gouging, and the fact that COG's had not changed on an 02 product overnight, there was a stunned silence at the end of the phone. No one had told the sales force that CPI was not applicable to wine, and Fosters had just decided to 'GO FOR BROKE' in the middle of a vintage, something not done by most reputable wine companies (another nail in the coffin).

It is all rather sad, as there are many of us in the business who still have good friends in the company, and fond memories of a reputable company. It is also sad that Fosters have chosen not to listen to you and others could offer some advice based on years of industry experience. Sad, because arrogance at the upper levels, and a real lack of understanding of our industry will always mean that well intentioned advice will be ignored.

Of course, the brands will continue to do well overseas, and at the lower end of the local market, but, as an independent wine retailer, I would hesitate to commit myself to any major purchase for fear that the group coordinators had offered the chains a cost that would leave me high-and-dry.

So, Coles and Woolies, can consider Fosters their own realm and play-ground, at least until someone from the company can come and explain the rationale behind some of the really silly things they have been doing, and promise to take on board some of the advice that you, Ric, and others have been offering.

Cheers,

Steve