Southcorp - the Inside Story

 

TORB: You have been a director of Southcorp for eight years and Chairman for five months, how do you feel sitting in the hot seat until John Ballard starts?

 

Brian Finn: Well, in the first place I wish the circumstances hadn’t been necessary or appropriate for me to do that, but given that they are I feel very comfortable. I think I’ve got some excellent business experience, which is relevant to Southcorp. Southcorp’s problems, in my view, are not to do with wine, winemaking or our basic technologies; they are to do with the way we have been running our business and I think I have some skills in that area.  Whilst I am not planning to be a long-term executive of the company I think I can adequately hold the fort and help the business along in the intervening period.

 

TORB: OK, if we forget about the problems of the past and look towards the future, although I would like to come back to the running of the business problems that you mentioned a bit later on, firstly do you feel that the company is vulnerable for takeover at the moment?

 

Brian Finn: The short answer is no but perhaps that is trite. Any company that is a listed company is vulnerable to takeover but in fact the depressed share price is a reason why we are not vulnerable to takeover. The company has four shareholders who together account for forty percent of the equity. Question one would be to ask yourself what would be a reasonable multiplier that anybody would pay on today's share price. And question two is, with those investors who are generally classified as value based investors, i.e. long-term investors, would they accept that multiple? No I don’t think so.

 

So are we vulnerable? Of course we are vulnerable. Every one is vulnerable and we are particularly so in theory but in practice I doubt it. Nobody has knocked on my door; they have had five weeks to do it; that tells you something!

 

TORB: I would like to come back to the point that you made about the biggest reason for the past problems you are facing now is because of the way the business was running. Can you expand on that please because that is a very interesting and telling comment?

 

Brian Finn: A couple of things happened. First of all there were some good things. The integration of the two companies was completed very quickly and in fine style. We rationalised a lot of the stock keeping units, which was an important step forward but having said that we took our eye off the main game. Volume became the overriding consideration and in our quest to drive volume we overlooked the need to focus on profitability. That is item number one.

 

Item number two; the organisation is still evolving, this was quite a big merger of two companies and the organisation did not have a good system of checks and balances in place.  If you have a strong leader taking an aggressive view of the market without checks and balances the forecasting can go awry. Quite simply that's what's happened because there were not enough checks and balances in the organisation to be able to say hold on, are these targets really achievable.

 

A couple of other things were also important. Discounting was not well managed and controlling the level of discounting was a big problem for us. Finally, in some cases management of our relationships with distributors was not strong enough to withstand the pressures of a rapidly changing market.

 

If you take the UK for example, we invested a lot in promotions but the actual sales did not match the expectations we had set with the retailers. That’s our problem. I am not trying to blame the retailer but the result is a lot of money spent without the return and therefore you have a financial issue.

 

So, in the main, those were the issues the business was facing, none of them have anything to do with wine or winemaking technology. That’s why I say the issues are business management issues not fundamental to raise on debts with a company like Southcorp which is making top quality wines at all price points.

 

TORB: You mentioned the merger was well integrated in a fairly short period of time. Now, obviously you were able to trim a lot of the costs in that merger because for example, you have got duplicate functions that have now disappeared but what other areas do you think you will be able to save costs in?

 

Brain Finn: We don’t have any significant plans to trim costs, not in a dramatic way. A company is yet to be found that that can save its way to prosperity. The way we are going to be prosperous and to succeed is to make the revenue go up and to eliminate uncontrolled and inappropriately applied discounting. What will improve the profitability of our company is to improve the profitability of the products we sell. It’s also a function of selling the right kinds of products. Obviously some are more profitable than others and it’s a question of having better brand recognition and more demand by the buying public.

 

TORB: Much has been made about the Rosemount supply and demand model. Obviously it hasn’t been quite as successful as you would like because otherwise you would not find yourself in this situation. What sorts of plans do you have to modify and improve the model, and how is that going to impact profitability and supply?

 

Brian Finn: Essentially, Southcorp’s method in a simplistic way was, winemakers made wine and marketing and sales sold the wine the winemakers made. The Rosemount model (so called) is that the people at the front line dealing with distributors and hopefully listening to what the consumer says, this is the wine we want and the winemakers, within reason, go away and actually make it. There is no doubt in my mind that the latter is the preferable model and I don’t think the model was wrong or inappropriate, the management situation surrounding it was deficient.

 

So you don’t throw the model away, you keep to the model and improve the management system. The forecasts were over optimistic. You can correct that by having a different attitude to the way you manage the business. You can put more checks and balances in place so that there is contention and discussion over the achievability of the forecast, but the forecast model is the best way to go and we are not going to change that.

 

TORB: The model is there but how do you achieve profitability because obviously you have an enormous trade off; you have to have a certain volume at a certain price that has to be achieved, how are you going to do that?

 

Brian Finn: I think its fairly straight forward. Sales forces when properly motivated and understanding the direction, will give you an honest and generally a very capable assessment of what can be sold. For example in the US we are in very good shape. None of the problems that we have been talking about have occurred in the US because it was differently managed and differently operated.

 

The UK and here in Australia we are working hard to build a stronger working relationship with the people who distribute our products. We have got reality into the forecasting and most importantly of all; we are cutting back on inappropriate discounting where the discount philosophy was applied on a volume only basis. We need to get it targeted on individual products. Our products generally are competitive but we have to repair the system and we are in the process of doing it quickly.

 

I was in the UK last week. I met with five of the major retailers that very clearly want to do business with us. They see a strong future for the Australian segment and for our company. We are quite appealing, we make wines across a spectrum from $3 to $300 and that’s very powerful armour to go to market with to a distribution channel. We can move very quickly, much more quickly than most. Those retailers want to us see working in a much closer business partnership so that we don’t have forecast misses. If we do that then all of the extraneous cost will be gone out of the system. It will be self healing.

 

TORB: With the demand being skew-whiff, for the wines you got back, were they mainly at the lower end?

 

Brian Finn: We didn’t get any wine back; we have never taken any wine back; that is a popular myth that is out there.

 

TORB: Yes, but that (taking wine back) was actually reported in the press very heavily.

 

Brian Finn: Don’t believe everything you read in the newspapers. It’s not true; we have never taken any wine back. The wine that was in the UK was owned by the retailers. It’s not on consignment; the retailer owns it. The retailers have never ever asked us to take that wine back. We are practical people so we have made a reserve in the second half because there was some wine, in total, equivalent to about a month’s supply (in the UK.)

 

As problems go it’s not huge and whilst we would like not to have it we are not stupid, we know it’s in every body’s interests to quit that stock. We don’t like wine lying around, some wine deteriorates over time; it isn’t all of a quality that will keep for twenty years.

 

So we made a financial reserve of twelve million dollars to enable us in a mixture of ways to quit that inventory. A mixture of ways meaning we might actually buy some back. We might temporarily increase the level of discounting to quit the stock. Or we might do a mixture of all of the above and say, Mr. Retailer we will do this for you. Let’s do this promotion and we will spend this amount of money on it, let’s do this TV advertising and by the way at the same time why don’t you buy some of our more profitable product and generally what is profitable to us is more profitable to them too.

 

So we are not going to ruin our business but we are realists and we need to quit that stock over a period of time; not a panic measure so we made a financial reserve. I assure you, and I have just been there (UK) and I have fronted all of the major retailers, not one of them at any time has said it’s your problem, you take this stock back.

 

TORB: You mentioned building and improving your relationships with the distributors and retailers. Over a period of time, particularly in Australia and I guess in the US and UK more so, more and more stock is moving through the supermarkets and large chains, how do you see that impacting you organisation?

 

Brian Finn: I am a realist, I don’t subscribe to the theory that I need to be part of a business that is a victim of its environment. If that’s your attitude towards life you had better get out of business. The environment is always changing and you have got to see those changes as opportunities because that’s what they are. If we have got big and more powerful retailers I will welcome that. My view is we should be able to deliver excellent products to customers at lower prices more of the time. If I can get more of my product in front of more people more of the time I can win from that situation.

 

TORB: That’s true, at the low end, but do you think that applies at the high end as well? Do you think the high end products need specialists?

 

Brian Finn: Of course they do, and you will never ever and nor should you, drive specialist retailers out of business. But what does somebody like me do? What we should be doing is to try to nurture both. Will there be structural change? Of course there will, that’s why we went from the horse drawn carriage to the jet engine. You can't hold that kind of progress back whether you like it or not; so what you have got to do is to capitalise on the opportunities, so you have got to be playing in every part of that market.

 

Do I think that in five years time people will go and buy Grange by and large out of the multiples, no I don't think so.  When I'm buying wine I sometimes buy it out of the big store, but I also like to go into a specialist store where I can have a browse around, see what's new, talk to the guy, there is room for all. What I really want to do is to try and avoid taking sides, we have got big customers that are important and we will treat them well and we have got small customers that are important and we will treat them well too. Do they all get the same price, no they don’t, but neither do they give the same service, that's the nature of the businesses they are in.

 

TORB: What sort of changes in your marketing strategy will the end user see because of this change in distribution?

 

Brian Finn: It’s interesting.  There are three markets that have all the appearance of looking the same; they are not.  If you have a look at the US, the channel of distribution is quite unique.  It's mostly family run and we do not sell to retailers in the US because of the liquor licensing arrangements.

 

I don't see any tendency in the US towards heavy discounting for the kinds of wine we sell.  Is there discounting, of course there is, there is Two Buck Chuck. You get a halfway decent bottle of wine for two dollars but that's not the market we are in.  I see no strong evidence of discounting and I think the US is a quite mature market and wine is a value-based product, it’s not a cost based product. 

 

Really would you buy a bottle of wine because of what it cost to produce and therefore what it costs to buy? If it's a value based product you buy it because of your perception of its quality and that can be everything from the packaging through to the taste and so on. The US market has figured that out. There is a fantastic future for the Australian sector and its going gang busters because we have excellent quality and generally much better wines than the Californians and certainly at much better and more realistic prices.  The punters out there know that and that's why they buy it.

 

If you have a look at the UK, it has temporarily, and I do think its temporary, turned into a special offer market. Unless things are on promotion 70% of the time they won't sell but I think that will change. What is difficult and what we haven't reacted to well is that in most cases; in the UK wine is a secondary purchase.  People actually go into the grocery store and buy food and on the way out they buy wine. Very rarely do they go in and buy wine as the primary purchase.

 

We haven't invested in our brands. We don't have strong enough brand recognition and we haven't managed the promotional activity as well as we should have. For example one of the things that happened was we paid for gondola ends in a promotion. We went into the store (which we were not doing) and actually found it wasn't on a gondola end at all. The wine was somewhere off on a shelf; that’s not the retailers’ fault; it’s our problem. We have got to get with this method of marketing and we have got to make it work and we will.

 

We have to spend less money on discounting and more money on establishing the brand in the minds of the consumer so we can pull, instead of what we have at the moment, which is push.  People go in and they buy whatever is cheap and whatever is at the end of the aisle. We have got to change that, and we can.  Secondly, across all of our markets in my opinion, we have not paid anything like enough attention to what the consumer thinks.

 

We're picking up the pace but we have not paid enough attention to the consumer. We have a mindset that says the distributor is the customer. I don't buy that; the distributor is extremely important and an absolute vital channel in the route to market, but the customer is the person who actually pays the money for the bottle and takes it away and drinks it. So we have to pay more attention to what consumers think and that will help us with the retailing. Retailers want to know what consumers think and we aren't telling them enough. We have to pay more attention to developing the brand recognition and we have to spend less promotional money on promoting volume and more on promoting the products that we want people to buy.

 

Australia is a different market again. People say it’s going the same way as the UK. Well, in my opinion, and you will have yours, I think we are a long way off from selling alcohol and food in the same premises and that does make a difference. 

 

We took to an extreme this question of volume.  We just didn't pay enough attention to selling the right kinds of products. In reducing the number of SKU, which incidentally I think was the right thing to do, we perhaps in retrospect did it a bit too quickly and created uncertainty in the minds of retailers and in the minds of the consuming public. That kind of uncertainty isn't healthy so we pulled back and stopped any further culling of the SKU’s.  We certainly cut back on the unbudgeted discounts which were totally out of hand.  We are redirecting our promotional spending rather more into targeting particular products as opposed to driving volume for volume’s sake. The theory was if you drive volume ultimately you'll get the right profitability but that doesn't work. 

 

TORB: If we can come back to the US market, according to your last set of published figures the US market is more than twice as profitable per bottle as the Australian market.  And even the UK is more profitable than the Australian market, so does this mean in the future you are going to rely more on the US market than Australia? Does that mean in the future the limited icon type brands like Grange, 707, and even down to Bin 389 and 128 will be increasingly exported and as a result there will be less available for domestic consumption?

 

Brian Finn: By definition yes it does and it's a difficult equation. First of all let’s pick the US market.  The US market has some very important characteristics. It’s very large, it’s very sophisticated, it's got a high disposable income, the penetration of wine is very low relative to the population, there are a lot of pluses, why wouldn't you take advantage of the market opportunity.  Our brands are recognised there, they are established so it is not as though we are going knocking on doors anymore. We have two brands in the top twenty, Rosemount and Lindemans. Penfolds is now forty seventh having come up from a hundred and some and that's through the introduction of products like Hyland and Rawsons. That's very attractive and we are in business to generate profits for our shareholders and although we haven't done too good a job in recent times we are still acutely conscious of that, so this is an important market opportunity.

 

By definition there is a finite quality for products like Grange, 707 and the Rosemount special labels that you can produce and our attitude has always been one of fair share.  So if you look at Australia, the way we divided up those products was based upon the way other people did business with us, modified slightly by the need to give the specialists, in a sense more than their fair share. That's what we will go on doing in the future and we don't know any other way to do it.  I think it would be iniquitous to say while we are Australian we are going to keep seventy five percent of all Grange here because we choose to. I don't think that's a reasonable way to conduct the business relationship with people in other countries. So by definition more will go but not on the basis of saying, look the US is a great market we can get three times for Grange what we can get here so the heck with Australia, we’ll send it all to the US; that's not what we’re about.

 

TORB: Are you happy with the penetration and acceptance of new Penfolds brands and are they doing as well as expected?

 

Brian Finn: Rawsons is doing great; Thomas Hyland is too early but the indications in the US are good. We brought out some new brands made in a joint venture in with Mondavi but I don't think they have been released here yet. They have done very well in the US, we are really pleased and they have got good marks from the wine critics, between 87 and 95 which are pretty good marks for a new wine.

 

There are things that have not been as successful as we would have wished.  We put some of the Lindemans Bin series into what we call convenience packs and they have not been as successful as we thought they would be. They were a good deal for us and a good deal for the retailer but they were not that good a deal for the consumer. The consumer said why should I buy that instead of buying ‘n’ bottles and do I want to buy ‘n’ bottles so this gets back to not enough consumer research or understanding.  The wine itself is excellent; it’s the same as what's in the bottle. The second reason was it got put on the shelves with cheap low end casks. So you see a cask at $29 and you, a cask buyer, are used to paying eight bucks so you think there is no way I'm forking out that kind of money. It shouldn't have been with the casks, it should have been with the bottles so our execution was not great; and that’s why it wasn't very successful.

 

Our sparkling is an enigma, we have got some good sparkling wines but they are not doing as well as they should be, they are not doing as well as the competition and I have got some people in our company working on what we are going to do to fix that problem.

 

TORB: With the sparkling wines are you talking about the lower end or are you talking about the more expensive end?

 

None of them are doing as well as well as we would like them to be from Salinger at the top right through.  Fleur De Lyse is doing well, we put some extra work into it but the rest of them are not doing as well and we really have to get the problem fixed.  We have got Great Western which is a unique facility and we should be doing better with it.

 

We had some past issues at Wynns with the quality of the wine but we have put in some good work in the vineyard to improve the situation. The vines have been taken right back and have been retrellised.  As a result the quality of the wine is improving and coming back to the level expected by the market. The Black Label Cabernet does have a loyal following and while some people may have found alternatives we are well on the way to re-establishing it and we have high hopes that it will be a very good upmarket restaurant wine in the United States.  We are getting it sorted out and we just have to deliver quality consistently which we have the wherewithal to do. 

 

TORB: Total change of topic, what do you think are the major challenges that face the Australian wine industry in general, in today's environment?

 

 Brian Finn: I think that we have to be careful that we are not the victims of our own success. Southcorp was tinged with a little bit of that.  We thought we were invincible and we weren’t and at the end of the day superior quality and value for money are what people are interested in and I think that's what you got to be all about, all of the time, you can't let up.

 

Fortunately I genuinely don't believe that we have damaged our brands because I think we have been about quality and value, yes we have had a few upsets but not on the whole portfolio. You look at something like Lindemans Bin 65 which I do profess to at least know a little bit about, it’s been a superb wine - value for money for twenty years now.  In my opinion the wine that we sell today is appreciably better, markedly better than the wine we were selling a year or two years ago which was perfectly acceptable in its class then and commanded a leadership position.

 

We and the industry have to remember there are a lot of smart people out there, we have got to consistently deliver on quality and value for money, that's all we have got to do and I think it's as simple as that.

 

There is a bit of scamming going on in the industry and there are some incredibly high expectations of being able to get premium prices for wines that are, in my view, not worth the premium prices being asked. We should look to model off the Californians who are in deep trouble for the same reason. What they did was get lots of fancy names, lots of fancy labels, the stuff in the bottle was not all that good and they were asking US$20 and the punters figured that out and say forget it, I am not playing that and come to Australian wine. If we repeat that performance they will go to Chile or they will go to wherever people are making nice product at reasonable value, so I think it's just about quality and value.

 

TORB: Interestingly enough that goes right through to the very top as well with the $60, $70, $80, $100 plus labels for first vintage and wines that no one has ever heard of.

 

Brian Finn: Absolutely, absolutely some of the expectations in my opinion are unrealistic.

 

TORB: You mentioned Chile for example. Do you think that Chile and South Africa as well as the other New World countries pose a threat to the Australian wine industry over the next ten years?

 

Brain Finn: I honestly don't know enough is the truthful answer but I don't think so, I don't think they pose a particular threat for us. We have got established brand names internationally. 

People do know Lindemans, Penfolds and Rosemount and if we continue to build on that, it's hard to get knocked off. It's very difficult to get a brand-name established, especially in this industry, which as I said before, is not a cost based industry.  It’s not a case of somebody coming along with a bigger faster widget cheaper, it's the consumers’ perception of value and quality; when you are established it’s very hard to knock you off. So unless we are stupid and mortgage the brand name or allow the quality to drop in a ridiculous manner then we will be OK. I think the South African and Chilean segment have a long way go to achieve what Australia has achieved.

 

How long has Jacobs Creek been going?  It's over 20 years with the same consistent hammering away at quality and the advertising has been consistent, they have done a terrific job.  We should be conscious of competition, look at what Yellow Tail did, it's a remarkable story, so it can happen, but on the other hand our business has grown successfully in spite of Yellow Tail. There is room for us all if we do good things.

 

 

TORB: The share market is an interesting problem that businesses face today particularly in relation to analysts.  In today's environment a wine company can be totally sound, completely

profitable and doing very well but they are at the mercy of the elements and the vintage conditions so all you need is a report of yields being down and the share prices are almost guaranteed to drop. As a result, share prices are chased around by knee-jerk reactions, what sort of problems do those knee-jerk reactions cause you?

 

Brian Finn: Well you get a lot of shareholder pressure and that's discomforting but at the end of the day that is part of the reality that we live in, it's kind of the obverse of my comments about retailing. These things are a fact of life; you can't become a victim of your environment you have got to live with it.  Consistent performance over time and you will win; but we in Southcorp have not done a great job and neither have many in the industry but there have been some exceptions. 

 

The industry is still finding its feet and despite its age, as an investment vehicle it's not mature. People haven't learned to live through these cycles but they will. When we got this company back where it ought to be we will get the share price to where it was; I don't ask for forgiveness. You could say it’s climatically affected, it can be affected by diseases and so on but at the end of the day I think the market can figure that out and the price gets fixed accordingly.

 

TORB: What do you see as the major change in your strategic direction over the next five years? 

 

Brian Finn: I am always uncomfortable talking about strategy because it means different things to different people. In some respects there are not going to be any changes at all. We are going to continue to make a wide range of wines with a heavy emphasis on what I call premium, super premium and luxury wines because we have the assets, the skills and the capability to do that and we have established brand-names. We are not going to abdicate from the entry levels in the marketplace because we need to be there because we absolutely know people move up the curve; and we are going to continue to be forecast driven.

 

We are going to continue to put more effort in to enhance the acceptance of the brand names and move ahead with retailers. We have to learn more about category management and inventory management in the retail outlets. We are going to do all of those things; our strategy is fundamentally no different.

 

In terms of implementation, we are certainly going to have to learn how to work with checks and balances and how to use them to run our organisation efficiently. We have come from being two different kinds of companies to a big-time company that operates in three major geographies of the world. You have got to learn how to do it through delegation, accountability, job objectives and basic business management. Now if that’s strategy that’s strategy, but I don't know what strategy is really.

 

TORB: You mentioned the consumers moving up the chain from the bottom end wines towards the icon wines as the taste of the consumer matures. What do you think the role is for major companies in Australia in increasing customer wine education?

 

Brian Finn: I think it is important for our well-being; it's just not that easy to do. We invest quite heavily in cellar door activities; I think we do a tolerably decent job but there is room for improvements.  I don't know how to do it well and I don't know anybody who does in any area of consumer goods. 

 

In part, one of the reasons I don't know is because we don't know enough about consumer attitudes and that's where we have got to get smarter; the more you understand the end consumer the more you understand how to deal with that kind of problem.

 

Based on those comments do you see the advertising and marketing of wine changing over time?

 

Brian Finn: Yes I think it will. I am uncomfortable about some of our advertising and we will have a look at that later this year. About two years ago we did a major piece of work which we didn't really deploy properly.  It was all about consumer attitudes and we are now spending between one and two million to update that work. You have to start with the end consumer and find out what they are thinking. Then you have to move back to say how will our advertising and promotion fit into that knowledge.

 

I would like to thank Brian Finn for his time and honest and forthright answers, and hope that you the reader have gained some useful knowledge about the real situation at Southcorp today and where it is going in the future.