Foster’s reported its 2003 result today – revealing it is one big cash
machine, especially in its CUB beer operations, however, what does the
future hold for beer in the Australian market place?
Despite all the attempts to “sex” it up by the company and some
commentators, Foster’s is the Telstra of its industry. A big, slow
moving alcohol manufacturing and marketing machine, exhibiting all the
characteristics of a utility with big cash flows, slow growing or
contracting market shares and a need to maintain a capital management
program to underpin the share price and keep investors happy.
has a couple of other things though that makes it a bit different. It’s
still more than half-owned by the Federal Government. The sale of that
is a distant, but still held hope – and Telstra operates in a far more
competitive marketplace, an industry with a host of competitors of all
sizes snapping at its market share.
reported its 2003 result today, is just a cash machine, especially from
its CUB beer operations where it’s in a comfortable duopoly with Lion
Nathan. Competition is fitful and there are signs of some pricing power
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Foster’s earned $549.2 million after adjusting
for the sale of the Australian Leisure and Hospitality Group and the
valuation of the company’s wine assets. That was a small one and a half
per cent higher than a year earlier. Dividend is up 2.7% because of a
higher interim. The final is unchanged on 10.5c a share making a total
of 19.25c for the year.
The powerhouse remains CUB, with a
new CEO in John Murphy in place who succeeded Trevor O’Hoy who in turn
succeeded Ted Kunkel as CEO. It’s no wonder O’Hoy got the gig. CUB is
flourishing with operating cash flow of $586.1 million, up 8.3% and
earnings before interest and tax of $520.1 million, up 8.5%.
2003 it looked as the Beringer Blass Wines business would at last equal
CUB. Wine EBIT in that year was $428 million, not far short of CUB’s
$478 million and Ted Kunkel’s dream of a balanced liquor business with
strong operations in beer and wine, was within sight. Alas, for like
Ted, that dream is no more. Beringer’s EBIT this year slumped 32% to
291.7 million while CUB had that nice 8% plus rise. Who says you can’t
get solid inflation plus growth in beer. Beer rules, OK!
there’s a change in that mix. Foster’s is a bit like a casino if you
think about it. Just as casinos have two classes of earnings stream,
one the “grind” from the pokies and the standard tables. The second,
the high rollers, the premium businesses. It’s that top end dream that
gives casinos a bit of a push in earnings projections and PE multiples.
And so it is with beer.
Both Foster’s and Lion Nathan have
the “grind” or the regular low margin cash flow rich streams coming
from the bulk beers and the ordinary standard brands like Fosters and
Toohey’s new. Then there are the premium beers (or the brewing
equivalent of high rollers). Higher margin small run products that are
growing more than twice as fast as the bulk market.
launching and re-launching those products while maintaining strict cost
controls is the key to success in Australian beer these days. And no
one does it better than CUB, and of course their “bitter” competitor,
Foster’s and the future of beer in Australia
it the start of a new trend? Appointing a human resources executive as
head of marketing, sorry of the “consumer and customer solutions
division” of CUB? The cash powerhouse of Foster’s and the one thing
that keeps the company growing.
Where are the Irish-looking
sales people with the gift of the gab, the beer drinking capacity of
giants and with that ability to sell beer to Australians?
Judging from a couple of developments, a thing of the past!
first straw was the announcement by CUB CEO, John Murphy (a Queensland
Irish chap with a beer-lovers look) that the CUB marketing department
was being restructured and renamed.
The new boss is Steve
Arthurson, formerly Vice President for Human Resources at Foster’s. A
high powered, important role. But is there any synergy or experience
The second, more worrying give away were
the terms used in the presentation to analysts of the Foster’s results
by CEO Trevor O’Hoy and his financial people. A slide said the
following about CUB’s marketing efforts.
strong pricing outcome” and “brand management, effective marketing
spend” and “customer relations focus”(You notice no mention of selling
more beer to people who drink beer).
And when you consider
the relationship between this new mantra and the new name for the
marketing department of “consumer and customer solutions division” you
start to wonder if this is CUB, McKinseys, or an indifferent but large
The needs of customers and consumers are vastly different, especially when it comes to pricing.
concentration in the presentation on margin, pricing and “effective
marketing spend” gives the suggestion that CUB is into the most
worrisome trait of a company making and selling FMCGs (fast moving
consumer goods). It is becoming process-driven.
industry segments in consumer goods are characterised by big slow
moving companies trying to appear nimble and move consumer durables
with speed to consumers. That becomes impossible after a while.
look at the way Richard Branson with great marketing ideas and lots of
marketing panache and style and clever ads, has been able to disrupt
music, airlines and now mobile phones in his time (and a few other
product categories as well).
What CUB is really saying in
the re-organisation of its marketing department and the new mantra in
the results presentation is that we are in a safe, cosy duopoly with
Lion Nathan, who thinks like us and there’s no need to be witty, clever
or nimble when its two relative giants tangoing through the beer market.
is out and process and bureaucratic certainty is in. So it is probably
no surprise that the most important executive, John Murphy has named
since taking control of CUB is a human resources executive to run the
market, sorry, the “consumer and customer solutions division”.
this new division, with its solutions focus, have picked Paul Hogan (at
big cost yes) to market Fosters, as the John Elliott mob did back in
the 80s? Don’t think so, do you?