Foster's to Unload a Crown Jewel

On the 29th of June Foster’s Wine Estates announced the consolidation and proposed sale of a number of winemaking assets. The least significant of these is the sale of Rosemount's Denman site in the Hunter Valley; but the other two announcements are a lot more significant.

Approximately three quarters of the Penfolds site at Nuriootpa will be sold and the white wine making operation will be transferred to the (Wolf Blass site) Bilyara winery. According to Matt Schmidt, Corporate Affairs Manager of Foster’s Wine Estates, “We all know that winery has produced some of the best red wines in the country and we believe that we can continue to increase the quality of the output from the Penfolds site. We also recognise the community and historical value of that site, and it is important we keep the cellar door and red wine making facility there, and we will continue to be actively involved with regional wine tourism.”

The most significant of the announcements made was the proposed sale of the Seppeltsfield site and the associated fortified brands. Why is this so significant? Well, this story starts in 1851 when Joseph Seppelt convinced thirteen families to leave the ravages of Europe and head into the unknown, a journey that by today’s standards would be about as dangerous as travelling to the moon. Four hundred and eleven people go onto the boat but fifty one did not get off the boat alive; such was the enormity and danger of the journey.

Joseph wound up settling in the Barossa Valley intending to grow tobacco, but one thing lead to another and he wound up in the grape growing and wine making business. As Joseph got older, his eccentric son, Benno took over managing the family business. Now Benno wasn’t just eccentric because he rode around the Barossa on a white horse, dressed in clobber that he had designed himself, always carrying a violin and umbrella; he was a real innovator and forward thinker. People shook their heads in amazement when he started to blend wines from different regions, an idea the smart people of the day thought would never catch on.

Benno had another weird idea; today people think about putting down a few bottles for their children’s 21st birthday but Benno had a grand plan; why settle for 21 years when you are dealing with top port? Much better to think long term, (in those days there were no bean counters worried about maximising quarterly stock market yields;) let the great, great, great grandkids have something incredibly special to celebrate their family heritage. So in 1878 Benno decided to make 100 year old port! The winery now makes the largest range of quality fortified wines in Australia and has a mind-boggling and irreplaceable inventory of aged material.

The fortified Liquor Tokay, Muscat (and Para Port) wines are unique to Australia and one of the most special products we produce. The Seppeltfields Winery in the Barossa is steeped in over 150 years of history and is arguably, if not the most important, one of the most important historical wine site in Australia. Seppeltsfield is not just history like an old heritage listed building; this is a living, breathing shrine for the Australian wine industry and a completely unique place that should be treasured. If you want proof that last statement, last year I toured the site and found that it was not just “impressive;” it was awe inspiring, but don’t just take my word for it, you can see for yourself why this place is so special if you read the story.

When Seppelts was sold to the Penfolds group and then subsequently to Southcorp, both of the new owners realised the responsibility involved in maintaining this historic site and the associated fortified wine business. There is no argument that corporations have a responsibility to their shareholders to make money, but they also have a social and moral responsibility to the wider community and the industry they represent. Both Penfolds and Southcorp were morally responsible enough to leave Seppeltsfields alone, and when I first read the first brief news report, it looked as though Foster's had no social conscience whatsoever, but when I read their media release it said, "The decision to sell Seppeltfield, one of the most beautiful and historic sites in the Barossa Valley, came as Foster's concluded that it could not realise the full potential of the magnificent property in the way that a specialist wine and/or prestige tourism interest could.”

Having come from a marketing background, I read media releases with a certain amount of scepticism, knowing that many of them contain vaporous promises and flatulent rhetoric; so in order to get a complete picture I decided to conduct a phone interview with Matt Schmidt and ask a few tough questions.

By their own admission, Foster's understands the significance and importance of the Seppeltsfield property, and Matt also made positive noises about the historic importance of the old Penfolds site, so why are they different; why are Penfolds being partially retained and the Seppeltsfield being flogged off?

As far as the Penfolds site is concerned, Foster's recognises not just the historical significance of the site, but by their own admission, the red winemaking facilities there are first class and can be effectively utilised. In their press release, Foster's stated “it could not realise the full potential of Seppeltsfield,” so I asked Matt, if they didn't think they could do it, what makes Foster’s think anyone else could?

Matt said, “It is a beautiful, magnificent facility, and clearly THE jewel in the Barossa wine industry, and possibly the Australian wine industry; but we are unable to provide the attention it deserves. It needs a prestige tourism operator, who is prepared to invest heavily, so that they are able to do the site the justice it deserves. It does not fit in with our business model; we are about building consumer relevant brands and continuing to promote our wines globally, and it is not inline with our global business direction.”

Over the years, I have spoken to most of the highly regarded fortified wine makers in Rutherglen about the motivation and financial aspects of making fortified wines and all of them have said much the same thing, but Andrew Buller of R.L Buller and Son Winery summed it up best.

“Some companies like ours have the historical good fortune of having wines from a previous era that have been made by our fathers and grandfathers. More often than not, in these situations, there is a philosophy that flows through the generations, and each generation has a keenness or a love of fortified wines.

You have to be practical too, wine is a financial institution, you make wine, you sell wine, you have to make a profit, and that allows you to do the things you want to do. Every now and again you see a particular vintage that you think is worthy of hanging onto, but its like land or shares, you have to ask yourself how is it going to repay you in the future. With fortified wine, it transcends actually making profit; it allows you to do something in the future that you cannot do in the present. Your parents and grandparents have set aside stock that they perceive can be used in the future for a better purpose than they can at the time, and that’s where the strength lies.

However, at the end of the day the bank manager is the one that tells you how to run your business. If your business is short on cash flow but strong on stock, the bank manager will tell you that the days of holding stock are over, and you need to turn your stock into cash. Most small wineries face that problem every day of the week. We make the fortified wines because its something we love to do but the rest of business has to support it.”

I outlined a synopsis of Andrew's comments, emphasising the difficulty of making fortified wine a profitable business and asked Matt “If you guys can’t operated it profitably what makes you think anyone else will be able to; and are you concerned that the inventory might wind up being sold in a fire sale eventually?”

Matt answered, “In terms of fortifieds not being profitable, that's not the reason we are selling; it's about a site that does not fit into our core business model. That site is a tourism destination; it's not just about the wines there. It needs somebody that is specifically focused on tourism and can effectively leverage the consumer experience within the Barossa.”

When I asked Matt if Seppeltsfield was profitable, as expected, he declined to answer the question; but he did state the sale of fortified wines was dropping by 10 percent per annum and that as sales drop, businesses need to reassess their operations.

The business is being sold lock stock and barrel. It will include the winery, the inventory and the surrounding vineyards. The purchaser will be able to utilise the name “Seppeltfield” for their fortified wines so there will be brand continuity, and the Para name would also be made available.

Although Matt stated Foster's are not selling Seppeltsfield for reasons of profitability, he also stated the sale of fortified wines are declining over time, and given that the operation needs an injection of capital, it is not surprising that Foster's would prefer to be rid of it. Given all the comments made by fortified wine makers in Rutherglen about “the need for the rest of the business to support the fortified side of the operation,” it is no wonder Foster's see the salvation of Seppeltfield in revenue generated by tourism. When I asked Matt who are the sorts of people that would qualify as potential buyers, he readily admitted that as it had just been announced, they had not thought that far ahead, but it would be advertised globally, and they were in no desperate hurry to sell. Matt went on to say, "It is important to us to find the right organisation that will be able to continue the tradition. We will look for somebody who is passionate about fortified winemaking and understands tourism; someone who can weld the two together and can bring a new lease of life to the site.”

The reality is that finding that combination will not be easy to achieve so I asked Matt what would happen if they couldn't find the right buyer at the right price. He responded “We want to move as quickly as possible to reduce the impact on our employees and the brand, but we have an obligation to deal with this responsibly, and we certainly will.”

Let’s hope Foster's are able to find a buyer that is well versed in tourism, understands the long-term implications and thinking that is required to make world-class fortified wine; as well as being smart enough to make it profitable, so that Seppeltsfield will remain an icon. Whilst I don't doubt Foster's good intentions for one second, if this exact combination cannot be found, and it won't be easy, if push comes to shove and they can’t find the right buyer, then Foster's will be responsible for the destruction of over 150 years of tradition and heritage. The final result will unfold in the goodness of time.

The rationalisation of winemaking assets and sale of wineries is nothing new; Southcorp embarked on a program called Verasion to reduce the number of its winemaking assets and some time ago Berringer Blass announced the intention to sell Jamison’s Run in Coonawarra and Rothbury Estate in the Hunter Valley. During my conversation with Matt, he informed me that after eighteen months the Rothbury sale has now been completed, and the winery has been purchased by Michael Hope of Hope Estate Wines.

As far as future rationalisation is concerned, whilst Foster’s is continually reviewing its assets and its options, it is not anticipated that any further announcements regarding disposal of assets will be made within the next 12 months. In terms of brand rationalisation, “the company has a stated priority of growing sales and the individual brands are constantly being reviewed.” The industry is undergoing massive change and the only constant will be change itself; let’s just hope Foster's can deliver and that change does not result in the destruction of an icon.

Copyright © Ric Einstein 2006