Foster’s profit up 4%, beer leads way

Posted by Daniel Palmer on 25th August 2009

Foster’s Group, Australia’s largest brewer, has announced a 4 per cent rise in profit for the full year on the back of a strong result in their beer division.

The company, which continued to report wine as a laggard, saw sales up 2.7% to $4.5 billion as CUB led the way.

Ian Johnston, Chief Executive Officer of Foster’s, said the company’s transformation progress had been strong – with the separation of their wine and beer divisions going to plan.

“In the six months since announcing a major transformation program, Foster’s has put in place a new strategy; a new company structure; and is embedding a new culture across the business,” he advised. “Organisational renewal is accelerating with new operational leadership in the Americas, Australasian wine and Carlton & United Breweries. This year’s result includes $21 million of efficiency benefits and Foster’s remains on-track to deliver $100 million of benefits in 2011.”

Mr Johnston said the result showed the strength of Foster’s given economic environment they were faced with.

“The Australian beer, cider and spirits business, now known as Carlton & United Breweries, returned an excellent result,” he noted. “Australian beer volumes were up in a good domestic market and we continue to leverage our leading innovation program for strong earnings growth.”

“Overall, our brands are in very good shape, holding their own in a tough consumer environment.”

Separation of beer and wine in Australia

In the June quarter Foster’s restructured and separated Australian beer and wine sales activities following a review of their wine operations. The company decided not to pursue a sale of wine assets, which analysts believe would have made them an attractive takeover target.

“Customer call frequency and coverage have increased and customer feedback on the new structure, sales call quality and execution of the transition is very encouraging,” the company reported in a statement. “Significant overhead efficiencies have been realised through centralisation and simplification of processes and elimination of low value adding activities.”

Beer
Beer sales were up by 5.3 per cent in the Australia, Asia and Pacific region, with volumes in Australia driven by new products.

The brewer reported that their beer portfolio in Australia currently includes 7 of the top 10 brands, 3 of the 5 fastest growing beers and, in value terms, 3 of the 5 largest new products released in the past 12 months.

“CUB is Australia’s leading beer business and work is underway to reinforce its strong market leadership notwithstanding increasing competition, including from retailers,” they advised. “CUB’s competitive advantage is being further enhanced with increased brand investment translating to improvement in brand equity and focus from an expanded beer sales force.”

Wine

Global wine volumes were down by 5.3 per cent as demand remained weak.

“Recessionary economic conditions in Americas, EMEA, Asia and the Pacific have significantly impacted consumer purchasing patterns and customers’ inventory management practices,” Foster’s explained. “The key factors negatively impacting fiscal 2009 volume were the exit from the cask category in Australia; 1.1 million cases of customer inventory reductions, more pronounced in premium and luxury wines; a 0.6 million case reduction in shipments relating to the transition to direct distribution in key Nordic markets and a 0.4 million reduction in shipments relating to increased in-market bottling in the UK.”

Following their strategic review of wine operations, deletion plans are in place for 17 brands, divestment of 1 brand has been completed, a sale process is underway for 6 brands, and an “optimal exit strategy” is sought for another 13 brands within the next 6 months.

“Wine Review related initiatives are on track and there is an extraordinary amount of activity underway. However the wine category is bearing the full brunt of a lack of consumer confidence brought on by global economic conditions,” Mr Johnston said. “Wine returns are not where we want them to be, but it remains a profitable business, producing exceptional quality wines and continues to generate solid cash flows.”

Outlook

The transformation process will continue throughout the coming year and reap substantial cost benefits, Foster’s noted, but wine markets are forecast to remain challenging.

“Foster’s business strength, change momentum and strong brand health give me the confidence that the business is in good shape now, and that better is to come,” Mr Johnston concluded.