Foster’s considers its options…

Keeping grape and grain apart

There are some drinks that should never, ever be mixed. If you still need convincing that beer and wine should be sold via separate sales teams, take another look at Foster’s today. In the time I have been writing about wine, which is nearly a quarter of a century, nobody has come close to successfully combining a beer and wine sales force. It is a dream shared by accountants in multinational companies and, until recently, by retiring Fosters’ CEO Trevor O’Hoy who, in falling on his gilt-edged sword, has taken responsibility for the latest instance of its failure.

Of course, there has been a lot more behind events that recently led to Foster’s writing down its wine assets by up to $770 million. Some commentators are saying its wine business is still overvalued by something approaching $1 billion. Foster’s paid way too much when it spent $3.2 million buying Southcorp. It did the same when it spent $2.9 billion buying Beringer in 2000.

It’s also arguable that through the location of its premium vineyard resources, Foster’s has suffered more than any other large wine company through the first few years of this current drought/heat cycle which continues to dog it and all significant Australian wine producers. And, like the rest, it has walked into another catastrophe over the strengthening of the Australian dollar, especially against the greenback. It responded to its US disaster, which was actually predicted by a number of observers, by writing between $430 – $480 million from the total value of its wine assets in that market.

Before the Foster’s purchase, the Southcorp management led by the capable John Ballard had not been entirely able to restore to order the residual damage to major brands it inherited in markets like the UK. The Foster’s wine business was not going to have it easy.

So, while Foster’s can take some blame for the mismanagement of its US wine business and for its failed approach to sales in Australia, it has clearly also suffered due to some causes far and beyond the scope of its management to have any effect whatsoever.

Breaking up the farm

Looking ahead, it’s now apparent that all courses of action are being considered by the Foster’s board. People like UBS analyst Lindy Newton estimate that while a demerger of its wine and beer businesses might raise its share value by between 6-23, the costs involved to achieve this are likely to exceed cost savings. Merrill Lynch’s David Errington has estimated that if separated, the wine business would be valued around $6 billion, the beer business at $13 billion. Errington has noted that Foster’s is generating a mere $450 million in annual profits before tax and interest from its wine businesses, which have cost it $7 billion.

Few people with any experience in Australian wine and a love for the industry would want the Foster’s wine division to be broken apart in a frenzied reaction to these difficult circumstances. From Penfolds to Wolf Blass, from Seppelt to Wynns, from Leo Buring to Lindemans, these brands represent a great deal more than a label on a bottle of wine, even in the case of Lindemans where the contents of a bottle might not necessarily come from Australia any more. This stellar collection of brands, whose wines today are generally as good as, if not better than they have ever been before, represent something akin to the pulse of, much of the prestige of, and the engine room of Australian wine.

As far as the wine industry is concerned, whoever owns these brands has a duty of care and respect towards them. You don’t go tinkering about with this sort of tradition – although Foster’s have not been entirely able to do this with Lindemans – for the sake of a few dollars. Clearly this is an emotional and not an economic position, but isn’t this one of the things that stands wine apart from other industries, such as beer, for instance? Please login to post comment