Australian giant announced last week its decision to demerge the wine and beer businesses into separate listed entities. With the wine market at its low ebb and no possibility of a takeover or sale to any major player, the company defended the decision as the "logical next step" while their global beverage peers feel that the logic had been established a long time ago.
No decision has yet been made on the structure or timing of the demerger, but it is unlikely to be implemented for a year. By announcing the plans without committing to a definite structure, Foster's could also be signalling its willingness to entertain takeover bids for either of the business divisions.
It’s not too long ago that one saw surrogate ads on Indian television, claiming ‘Austra.a.a.lia for Beer’ with Foster as the champion label. This was when Foster beer had been just introduced in India in the nineties- first as an import and then as the Indian brew made from Australian hops. Then suddenly, one stopped hearing about these ads. Foster had also got into wines!
When Foster's made its first wine purchase, the A$482 million acquisition of Mildara Blass in 1996, the industry was in the middle of a boom, with Australian wine exports growing from $200m to more than $1 billion. It went on the buying spree and in 2000 spent A$2.6bn to buy the Californian wine group Beringer.
A massive wine oversupply in the US market in 2004 necessitated a $300m write off on assets and inventory. But the following year, it went ahead and wholly acquired the assets of Southcorp which owned brands like Penfolds, Lindemans and Rosemount, for A$3.2b, to become Australia’s biggest wine producer.
But in building its drinks empire, Foster's apparently didn't consider the crucial difference between the model it was pursuing and the operations of those it aspired to count as peers.
None of the world's largest liquor companies- InBev, Constellation, Diageo and Pernod Ricard, have significant assets in wineries and breweries. Interestingly, Diageo has not done well with its imported wine brands in India and their Indian wine Nilaya is more or less extinct, though Shivaji Aher, owner of Renaissance Winery where the wine was being bottled, insists it is only a temporary phase.
Pernod Ricard has been successful in marketing Jacobs Creek in India, riding on the popularity of Chivas Regal. But the Indian winery project, Seagram’s Nine Hills uses only the name of the well-known whisky label, with the production as well as marketing channels kept independent; it does take occasional help from Orlando Wines, producers of the ubiquitous Australian label.
Although they may appear to go well together, beer and wine have little in common in terms of supply chain, production, costing, price or marketing. Attempts to manage the portfolio of hundreds of wine and beer brands by streamlining sales and marketing functions were a disaster for Foster, alienating customers who felt beer salesmen were not the best people to sell premium wines.
There was a glut of wine, the boom that initially attracted Foster to wine was over and there was a billion-litre lake of unsold wine that has remained largely so as a result of currency valuation of Australian dollar and continuing oversupply, slashing profitability across the industry.
Foster's core business of beer also started going down because of the mix of grain and grapes on their hands. From a dominant position in the domestic beer business and a global market presence, the company reportedly withdrew during the last 10 years from all international markets while the share in the domestic market fell from about 55 per cent in 2005 to less than 50 per cent this year. In India, SABMiller brews and markets the Foster beer.
It has also admitted that it had perhaps paid too much to acquire its wine assets- an action which in the hindsight also costed the erstwhile Indian leader Indage very heavy and was one of the factors that caused their downfall in 2009.
With the global financial crisis making sale of winery assets all but impossible, Foster's instead announced in February last year a structural separation of wine and beer sales and marketing teams. It also exited from 40 slow selling brands and sold 36 vineyards and 3 wineries.
While it may not be relevant to directly compare Kingfisher’s case with that of Foster’s, the Indian counterpart seems to have hedged by forming a separate wine division selling imported wines as well as Indian made Four Seasons. It may be a gamble by the astute businessman Vijay Mallya who feels that it would be easier to convert beer drinkers into drinking wine through the popular beer brand Kingfisher which is being sold through the beer division.
Though the wine industry gives little chance of success, it is a gamble that might well pay off in favour of increasing the wine consumption and helping the wine culture. Once they try the Kingfisher, the beer-to-wine converts might be willing to try experimenting with better and different wines- and add to the numbers of wine drinkers. Abhay Kewadkar, the Business Head of Four Seasons Winery, who also heads the imported wine sales division, refuses to be drawn into the debate, however.
The decision by Foster might prove to be an advisory to Kingfisher. |