Global Economics

Foster's: The Bitter Truth


When it comes to beer and wine, few companies can match the eclecticism of Foster's Group. The Melbourne-based company is the world's No. 2 wine maker, behind only Constellation (STZ) of the U.S. Foster's' labels include wines from Australia, the U.S., and Europe such as Beringer, Lindemans, Wolf Blass, Penfolds, and Rosemount. Foster's is Australia's biggest maker of beer and is quite popular in Britain as well.

The company boasts that Foster's is the No. 1 beer in London and the second most popular throughout Britain, with British beer drinkers downing 2.5 million pints of Foster's every day. That has helped make Foster's one of Australia's best-known brands. Or, as the company's advertising puts it, "Foster's: Australian for beer."

Maybe. But the wine business has been struggling to overcome a big overcapacity problem in Australia. And beer is shaky too. Indeed, thanks to a series of sales over the past few months that have seen the company lose the rights to its beer brand in most places outside of its home market, Foster's actually isn't even Australian for Foster's anymore.

ASIA DEALINGS. In April the company sold the Foster's brand in Europe to Edinburgh-based Scottish & Newcastle (SNCWF) for $750 million. That was just the first in a series of disposals. In June, it got rid of a Shanghai brewery and a Chinese brand, Guangming, selling them to Suntory of Japan for an undisclosed price.

On Aug. 4, Foster's made another sale, with the company giving up rights to the Foster's brand in India. SABMiller (SBMRF) paid $120 million for the local rights as well as a Foster's brewery in the city of Aurangabad. And at the same time, Foster's sold its Vietnamese business—including two breweries and some local Vietnamese brands—to Asia Pacific Breweries for $105 million.

Those deals represent an acknowledgement by Foster's that the beer business is too competitive for the company to be successful beyond its home base in most countries. After the Indian sale to SABMiller, Foster's CEO Trevor O'Hoy said in a statement "While the Foster's brand has enjoyed great success in India, the opportunity for us to continue to grow the brand profitably from a small production and distribution base in a challenging market structure was limited.

"The value we have achieved through the outright sale of the Foster's brand, together with the brewery and local brands, far outweighs the potential future value of retaining Foster's and continuing to own and operate the business, or pursuing a license agreement."

TAKEOVER RUMORS. The sales have helped boost Foster's earnings. On Aug. 29, the company reported that profits for the year ended June had increased 27%, to $885 million, with sales up 23%, to $3.9 billion. Foster's stock price, which had gone nowhere most of the year, soared 9% following a report in the Sydney Morning Herald that InBev (IBRWF) and SABMiller were thinking of launching bids for the company.

But the next day, Foster's issued a statement to the Australian Stock Exchange, saying that the company was "not aware of any proposals that might lead to a takeover, and no approaches to that end have been made to the Company." The stock price gave up some of its previous day gains, dropping 2%.

One reason companies might be wary about going after Foster's is the sorry state of the Australian wine industry. Wine accounts for about 40% of the company's business. About three-fourths of that wine is Australian, and most of the rest is from the U.S. Australia's wine industry has grown dramatically, up 18% on a compounded annual basis since 2000. Australia exported 660 million liters of wine last year.

EXCHANGE RATES. The country produced 1.9 million tons of grapes, up 60% from the start of the decade, according to statistics from Australian Wine & Brandy, a government organization based in Adelaide, South Australia. Australian wines are now the No. 2 imported wines into the U.S., behind wines from Italy, and they're No. 1 in Britain.

But that's not necessarily translating into juicy profits for wine makers such as Foster's. While Australian wine exports as measured by volume have increased by 10% over the past 12 months, in dollar terms they've only gone up a measly 1.3%, to $2.1 billion, says Simon Birmingham, director of stakeholder relations at the Winemakers Federation of Australia. The high Australian dollar has hurt the industry's competitiveness, especially as wine drinkers in the West are looking at wines from other new markets such as Chile.

The problem isn't likely to go away quickly—Australia simply has too many grapes. Worsening the overcapacity problem, vineyards that were planted during a burst of optimism in the late 1990s have now become mature. That's created a big gap between supply and demand: The WFA's Birmingham estimates that farmers left between 100,000 to 200,000 tons of grapes unpicked this year.

BETTER TIMES AHEAD. "There is clearly a surplus of wine here in Australia," says Gary Baldwin, a consultant for the Wine Network Group near Melbourne. "Ten years ago, the industry absolutely went mad in planting new vineyards. They needed more grapes to satisfy the huge export boom, but the export growth has slowed down."

Still, Foster's is betting that the wine business will turn around. Last year it acquired a major Aussie wine rival, Southcorp, and some analysts say that Foster's is making good progress in cutting costs as it digests the Southcorp acquisition. Stuart Jackson, an analyst with J.P. Morgan in Sydney, believes that Foster's and other wine makers are in for better times ahead. "This is as bad as it gets," he says. "The cycle will start to turn."

California vineyards already are emerging from a longtime oversupply situation and Aussie growers will too as some vineyards go out of business and the effect of the late 1990s plantings wears off. "There is not going to be significant growth in supply for the next four or five years," Jackson predicts. "And with demand growth in the U.S. of 3% to 4%, we will see shortages emerge."


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