Wine glut hits Foster's hard
could have been a magnificent turnaround by a poor showing from its
wine trading division during the 12 months to June 2004. A glut of
wine in the US - and the subsequent raft of low-priced competitors
- hampered the company's efforts to bolster the performance at its
Beringer Blass unit, writes Sibonelo Radebe.
The lacklustre wine performance in the US was compounded by a poor performance in the Australian wine market, meaning that total Beringer Blass revenues dropped 18.1 per cent to A$1.5 billion, in turn sending operating profits spiralling 32 per cent lower at A$291.7 million.
But stronger performances from the group's core beer business, and gains from its property portfolio, meant that the drop in group revenues was pegged back to a more modest 6 per cent to A$3.6 billion, while net profits declined 12.4 per cent to $789.5 million.
What is perhaps most worrying for Beringer Blass, and indeed for many wine companies with a strong US presence, is the fact that the industry has reacted incredibly slowly to the rising stock levels seen over the last few years.
Californian wineries, for example, have been increasing their output over the last 10 years, taking advantage of growing demand - and rising prices. But the arrival of good quality, but lower priced, imports from countries like Spain, Chile, South Africa and Australia (as well as cut-price local rivals such as Charles Shaw, more commonly known as 'Two-Buck Chuck') meant that US consumers had a wider choice of wines from which to choose - and with the US economy in recession, the cheaper competitors gained considerable ground.
US wineries were forced to cut their prices to compete - by as much as 15-20 per cent in some cases - and Beringer Blass suffered along with the rest of its rivals.
"We recognise that the overall performance of the Beringer Blass business has been unacceptable," said Foster's CEO Trevor O'Hoy - somewhat belatedly. "An urgent priority will be to restore the financial performance of this part of the business to ensure total group earnings grow above 10 per cent from 2006," he added.
The wine division has been under review since the end of last year, and Foster's has drawn up a plan to realise cost gains of A$60 million per annum by 2007, increasing to about A$85 million per annum by 2009, with half of these gains to be redirected into the substantially increased investment in brand building and new product development - an acknowledgement that this has been a weakness for the company in an increasingly competitive market.
The wine operation is also likely to see massive write-downs, mainly due to excess wine inventory.
The beer arm, Carlton and United Beverages (CUB), which has also been subjected to a fair amount of restructuring over the last few years, performed much more in line with expectations, lifting profits by 9.5 per cent to $520.1 million.
