Lion reports progress on alcohol sales but dairy division faces challenges
The recent first quarter trading update from Japanese-owned Australian food and beverage manufacturer Lion shows a volume increase of 14 per cent in the beer, wine and spirits category for the quarter ended 31 December 2012, despite an overall slowing of the category’s market. Lion said the alcohol sales volume increase came because of its acquisition of international premium and craft brands.
But the Company reported that its dairy and drinks category faced challenges in the first quarter, and would continue to do so, in part because of the recent changes to supermarket group Coles’ private label supply contracts.
Australian Food News reported in April that Coles had signed long-term contracts in Victoria, New South Wales (NSW) and South-east Queensland with dairy co-operatives Murray Goulburn and Norco.
“Previous experience demonstrates that changes in these contracts can cause significant disruption for farmers, and we are still in the process of assessing the impact on our business and the most appropriate way forward,” said Stuart Irvine, Lion CEO.
Beer, Spirits and Wine
While the beer market remained challenging, with volumes down 4.6 per cent on an annualised basis, Lion said the decline has started to slow, with quarterly volumes down only 2.8 per cent.
As well as the 14 per cent increase in volume in the category, Lion reported a 26.3 per cent increase in revenue to $634.9 million. The Company said improvements in the beer, spirits and wine category were a result of “portfolio premiumisation”, as well as the addition of international premium and craft brands, and consistent performance from Lion’s pre-existing portfolio.
“While consumer sentiment in our key geographies remains relatively subdued, we have seen good progress in our Australian Beer, Spirits and Wine business, as the beer market decline has started to slow and international brand owners have chosen to partner with Lion,” said Mr Irvine.
Lion said premium brand Corona Extra recorded its strongest performance to date, gaining a share point and growing ahead of the category during the first quarter.
Craft brands James Squire and Little Creatures performed well, with volume for both brands growing ahead of the category and increasing volume share.
Lion’s core trademarks also performed well, with XXXX Gold holding its position as the largest beer brand in the country on an annualized basis both during and since the conclusion of the first quarter. Contemporary brands Hahn Super Dry and XXXX Summer Bright Lager both grew volume and share in the first quarter.
As competition intensified and the total New Zealand (NZ) beer market saw a decline of 3.1 per cent for the first quarter, Lion’s beer, spirits and wine division in NZ saw a volume decline of 5 per cent when compared to the same period in 2012.
Because of growth in wine and cider, and improvements in portfolio mix, Lion said it was able to limit the impact of volume decline on revenue. The Company reported a 7 per cent increase in revenue for the category in NZ, to NZ$217.8 million.
Despite challenging market conditions, Lion said the premium and craft beer segments continued to perform well. Becks, Oranjeboom and Budweiser all performed well, while Speight’s Distinction gained 29 per cent in value in the first quarter.
NPD remained the driving force behind cider growth for Lion, which is NZ’s fastest growing alcohol category. Lion said its new additions, Isaac’s Feijoa, Isaac’s Berry and Speight’s Cider performed well.
Pinot Gris, Pinot Noir and Methode were the fastest growing wine segments in the first quarter in NZ, and Lion said it saw “robust performances” from Huntaway and Saints, while Daniel Le Brun ranked as the second largest contributor to value growth in the Methode segment. In spirits, Lion said whiskey remains the mainstay of growth in the category, with Johnnie Walker growing value by 8.4 per cent, and gaining value share.
Dairy and Drinks
During the first quarter, Lion said the dairy and drinks market remained highly competitive in core categories such as milk, juice and cheese, with continued discounting, production rationalization and expansion of retailer-owned brands. Lion said it proactively exited some unprofitable contract volume, primarily in the convenience channel.
In this environment, Lion reported a revenue decline of 6 per cent to $631.8 million in its dairy and drinks business, saying that it “remains a long way from achieving an acceptable return on invested capital, with revenue pressure offsetting efficiency gains”.
Despite these challenging conditions, Lion reported that its dairy beverages continued to perform well, with the Dare brand growing in volume and value in the first quarter. Lion’s share of yoghurt also grew, driven by the Yoplait brand, which underwent a brand refresh in 2012.
Lion reported that the launch of permeate-free milk across the Dairy Farmers and Pura brands, which launched in June 2012, helped to stabilise branded milk volumes in the first quarter. However lower price realization in grocery and the sustained channel shift from non-grocery to grocery continued to affect margins.
“Our Dairy and Drinks business operates in a highly competitive environment with discounting on white milk, juice and everyday cheese impacting margins,” said Mr Irvine.
“Lion has invested significantly in a range of initiatives and expects to realise the benefits of past site rationalisation during Financial Year 2013, however we are still a considerable distance from making an acceptable return, and this cannot be delivered by a focus on costs alone,” he added.
The Company said it will remain focused on innovation to drive value across its portfolio.