Crikey’s liquor correspondent looks at the latest attempt from Fosters to kick its wine business into top gear.
Blame it on Ted, or the new managing director’s ploy. It’s an old
tactic of incoming CEO’s to clear the decks, write down asset
values, strip out the deadwood (according to the new regime) and
announce big write-downs.
And so it is with Fosters, where new boy Trevor O’Hoy today revealed
write-downs of between $270 and $300 million in its Beringer Blass wine
business here and in the US.
An impressive sounding figure, and subtly sheeted home to the regime of former CEO, Ted Kunkel.
And, if Trev’s arguments have a large element of apparent truth and
belated recognition of the problems the company has got itself into in
the US by missing the Yellow Tail boom.
If Ted had lasted in the CEO’s role, he would have been making this
sort of slashing move, simply because wine industry asset values and
stock levels for Fosters have become too stretched.
In fact you can blame it all on a wine brand called Yellow Tail. It’s
produced from Griffith, in southern NSW and it’s the biggest selling
Australian wine in the US. In fact it’s the biggest selling imported
wine in the US. And it’s the boom Fosters missed.
It cost less than $100,000 to develop the Yellow Tail brand and it’s
made the Casella family wealthy and very successful. And, unfortunately
for Fosters and Mr Kunkel it’s made a mockery of the ‘premium’ brand
approach. Premium brands in the US are growing slowly, if at all at the
The so-called ‘lifestyle segment, where Yellow Tail dominates, is
growing rapidly. It’s where Fosters and its Beringer Blass wine
business has little product, and has looked flatfooted for the past two
Between $135 to $145 million represents the write-down of wine stocks.
That’s a lot of wine, much of it in the so-called premium area that is
not doing well. That’s the impact of Yellow Tail, if you like.
Between $40 and $50 million will be write-down when vineyards, wineries
are sold and bottling facilities consolidated.And a further $95 to $105
million will be written off or written down from the value of so-called
onerous contracts, or in restructuring and redundancy costs.
And what ‘onerous contract’ is referred to in the Fosters release. Why
the ‘onerous oak barrel leases’ which will cost Fosters between $35 and
$45 million to get out of. Oak barrels are heavily used at the premium
end of the market, so Fosters, or rather Beringer must have an awful
lot of oak barrels laying around containing good quality but hard to
move wine. Amazing.
There are a number of supply chain and logistical changes, management
realignments and appointments and a bigger and more focus spend on
marketing and product development.
Unlike the Ted Kunkel regime, which was wedded strongly to the premium
image of Beringer Blass, the new mob under O’Hoy will try and grow the
range of mid range and especially ‘lifestyle’ quality wines, especially
in the US, while maintaining the top end premium image.
Ted Kunkel and his team missed the growth in the ‘lifestyle’ segment in
the US, typified by the huge success of the Yellow Tail. It’s the
biggest selling foreign wine in the US, moving well over five million
cases a year and leaving all other producers behind. Fosters is now
attempting to catch up after being quite sceptical of the Yellow Tail
success for sometime.
Complicating the Fosters’ approach to wine under Ted (and O’Hoy will
have the same problem), is that Beringer is big in the US and Blass is
biggish in Australia. That size is the wine group’s biggest problem.
On the face of it the best of both worlds. But the boom in the US is in
Australian-produced wines, not wines made in the US. For sometime now
at the lower end of the market, US wines have not had much success. The
so-called ‘two buck chuck’ of ultra cheap wine is based on
bulk-imported wine from Argentina and parts of the US.
The rapidly selling Australian wines sit well above that in terms of
price and quality. But they are sold as Australian wines. There is a
market premium in being made and exported from Australia.
Southcorp and Hardy are smaller in the US and have been moving to
follow Yellow Tail. Hardy might be part of Constellation Brands, but
the wine business is run from Adelaide by Hardy’s boss Stephen Millar.
For Southcorp it will be a familiar trek as the company seeks to
recover the market position that was badly damaged by the incompetent
management regime of Keith Lambert who managed to ruin the company’s
leading position in the Australian wine segment of the North American
Fosters has been terribly slow in realising the changes in the US wine
market place and coming up with a strategy to react to this by trying
to produce its own brands without cannibalising sales of the slowing
Beringer operation in the US.
That conflict in the American market place will remain the biggest obstacle to O’Hoy’s plans.