The De-Wining of Fosters

The impending demerger of Fosters Group’s global beer and wine businesses has been long expected.  The general consensus of the financial community has long been that the wine strategy was flawed, especially in terms of the mismatch of assets with beer and the resulting overexposure to wine assets at the top of the market.  Most seriously of all, whether deliberately or not, it bought its wine assets just prior to the big beer merger binge of the last few years, effectively denying its shareholders the ability to materially benefit from a period of high beer business valuations.

Above all, timing has run against Fosters on at least three counts: the wine acquisitions were made in the lead up to the global financial crisis and recession; regardless of whether its acquisitive behaviour contributed to the “asset bubble”, Fosters acquired its Australian assets at the top of the market shortly before the market fell out of love with mass market Australian wine styles; and the Australian dollar has moved immensely against it during the same time period.

On a different level, there are grounds to argue that the execution of the wine strategy has also been flawed, and that this is at least as significant in terms of its implication for values.  In particular there is a sense that the acquisition of Southcorp was heavily predicated on cost savings, rather than market opportunity factors (and to a certain extent Fosters only ended up repeating some of the costly mistakes made by Southcorp after the Rosemount merger), while the response to currency pressures and the pressures from large offshore supermarket purchasers was also to try and drive down costs. 

This cost focused approach ultimately sacrificed quality, and in particular the unique aspects of many of the brands collected through the various mergers, increasing the market sense of a collection of largely indistinguishable fruit driven carbon copy wines and a loss of the sense of substance that had been associated with several of the key brands over their respective histories.  Names such as Wolf Blass have been devalued and simply no longer have the cache associated with them 10 or 20 years ago.

An arguable exception is Penfolds, the one brand that has not lost the ability to leverage off the reputational power of its icon labels such as Grange, St Henri and Bin 707.  What has happened, however, is that through the series of mergers of the last decade Penfolds has ended up as an ever smaller portion of the overall company portfolio, such that the quality of icon-leverage branding has been progressively diluted even when the quality of its wines has remained strong.

The market imperatives of the Australian wine industry have changed, thanks to changes in global consumer tastes.  The cost-driven approach, which implies that Australia’s goal is to compete with South American producers or, worse, California Central Valley producers, is doomed even before taking into account its reliance on hot climate irrigated grapes when the water that produces them is not reliable at all.

This leads to the key question.  Analyst reports have pinned an enterprise value of A$2.1 billion on the wine business.  Is this based on the assumption that the wine business can, or even should, be maintained as a single business?  Would this value be different if the brands and assets were instead further separated?  The rationale for doing so would be that for all that might be lost in terms of synergies, including global marketing channels, the freedom for individual brands and their winemakers/marketers to properly focus on quality and to sell their own stories without the compromises implicit in big brand portfolios, might actually create more value and reverse the value destruction of the policies of the past.

As an aside, from a New Zealand perspective there will be intrigue as to the future position of Matua Valley, which has grown under Fosters to become one of the six largest producers in the country.

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