Foster’s Stumbles in the U.S.
As expected, Foster’s wine business underperformed in fiscal 2008, but its beer unit “remains robust” and generated solid earnings. Recall that things came to a head in June when Foster’s ceo Trevor O’Hoy unexpectedly resigned and the company issued a $700 million write-down of its global wine business.
Foster’s acting ceo Ian Johnston and chairman David Crawford both said the wine results did not meet expectations and were unacceptable. David admitted the company underestimated some things, such as currency, when it purchased Beringer and Southcorp several years ago.
“None of us estimated the extent the dollar would move and we are not the only industry that has suffered there,” he commented during Foster’s fiscal report.
However, Crawford believes the global industry is undergoing a structural change rather than a cyclical transformation.
So how did Foster’s get in the position it’s currently in? For starters, there are currency issues with the strong Aussie dollar and weak US dollar, not to mention an economic slowdown. In addition, the 2008 Australian vintage was larger than expected, and has coincided with a decline in popularity of Australian wine in the U.S. Lower volumes and higher grape prices also took a toll.
WINE REVIEW. The wine review, led by Crawford, was put in place to give Foster’s a long term wine strategy. Whether the company decides to sell some assets or hold on to everything, Crawford stated that “all options are on the table.”
“We will emerge from the wine review with a very clear strategy and very clear focus on what management has to do to ensure we do produce acceptable returns across the company as a whole,” said Crawford.
Johnston listed a number of initiatives to help get the company back on track. First, he said there has been too much focus on EPS as a metric. Now, “volume and value market share and cost reduction is our new focus...if we got that right EPS will follow.”
In addition to building volume and gaining value share, Johnston aims to reduce business costs and continue building business capability. He also remarked that Foster’s had not had enough “big innovation” in the past.
As far as employees are concerned, Johnston wants to strengthen individual performance and offer more support to customers.
“I want to put a much stronger link between performance, individual delivery and reward structure...changing some behaviors in business such as putting people in sales force and putting specialist in the wine and beer area. I think we can do a better job at serving and supporting our customers out there that have perhaps been a little left behind in what wasn’t a well implemented strategy after the acquisition.”
“No one can promise anything, but despite the things we’ve done to shoot ourselves in the foot, we’re still holding share, we still have fantastic brands. We’ve got wines that win medals and that’s important to a point, but it shows it has high quality and we’ve got to transfer that to sales.”
In addition, the ceo search is progressing according to plan and Foster’s hopes to have a new chief by the end of the calendar year.
The company said it would not provide any specific earnings guidance for fiscal 2009 due to wine review currently underway.
When asked if the group could write-down the value of its wine business further, Johnston, said: "We certainly will not be expecting to have very significant [write-downs] like the ones this year."
FOSTER’S IN THE U.S. The Americas was hardest hit by an unfavorable exchange rate, a realignment of distributor inventories and lower volumes. As a result, wine net sales revenue in the Americas declined -8.9% in constant currency terms.
“The wine category in the US continued to show positive value, volume and revenue per case growth in fiscal 2008. However growth rates have moderated in the second half, particularly for wines sold on-premise,” Foster’s said in a statement.
Overall, Foster’s volume declined -9.6% in the U.S. and was impacted by a 0.9 million case reduction in distributor inventories and lower sales of Australian sourced wines. Distributor depletions declined -2.5%.
Foster’s said its California wines performed “in line with expectations” with strong growth in Chateau St Jean and Beringer Third Century.
Following a 20% price increase in January, volumes of Beringer White Zinfandel dropped as the company expected, but was partially offset by the successful release of the Beringer Californian Collection Chardonnay.
Distributor depletions of Foster’s Californian wines, excluding Beringer White Zinfandel, increased 5.3%. Distributor depletions of Beringer White Zinfandel declined -5.8%. In the second half, the brand declined -15.8% following the price increases in January.
On a constant currency basis net sales revenue per case increased 0.7% and included the benefit from price increases on Beringer California Collection which include Beringer White Zinfandel, and selective Californian and imported luxury products.
The Australian portfolio began to gain traction in the June quarter following the restoration of merchandising and promotional activity. In the December and March quarters, Foster’s had reduced merchandising and promotional activity in the U.S. which had an immediate impact on sales, the company. Performance was also impacted by lower growth in the Australian category. Depletions of Australian wine declined -6.1%.
“There wasn’t a conscience decision to load distributors because that’s a dumb move,” said Johnston during the conference call. “But we find ourselves where management decided not to deliver to a lot of these customers at a big cost,” he continued.
Johnston also acknowledged that “Australian exports to the US has slowed considerably.” However, he said demand in the US market “is holding up quite well” and that Foster’s is not “overly concerned” about its share although the company would “obviously like to do better.”
VINTAGE UPDATE. Despite rampant droughts, the Australian 2008 vintage was larger than expected, approximately 25% above the 2007 vintage. Total grape production was 1.8 million tons. As a result, the Australian wine industry is once again over supplied.
“Most wine companies expected the last [Australian] vintage to be modest...unfortunately, it was a bad move to buy water and increase quantity and cost, so we ended up with stronger vintage than we expected,” said Johnston.
Foster’s said it expects the upcoming 2008 California vintage to be of similar size or slightly higher than the 2007 vintage with further incremental increases in grape prices as supply tightens. Recent frost events in California are not expected to have a material impact on company owned vineyards.
IMPACT OF SOUTHERN/GLAZER’S. When asked if the Southern/Glazer’s joint-venture would impact Foster’s, Johnston said the following:
“That’s quite a big development and that new company is our distributor in 4 of the 5 biggest regions in the U.S. So it has to be something that will impact us.”
“Our relationship with these people is pretty good. We don’t see it has a big risk or threat to us.”
NO QUICK FIXES FOR FOSTER’S
Andy Kovacs of Macquarie Securities suggested in two research notes that there are no straight paths in Foster’s future. Here’s a recap of what Andy had to say.
FINDING A CEO
“Finding a CEO couldn't be easy given the uncertainty in what the job will entail (as the structure of the business is to be determined by the Wine Strategy Review). We continue to believe that there are no quick fixes.”
STZ AS A POTENTIAL ACQUIRER
“The performance of FGL’s wine business remains weak and FY09 will be another challenging year. While a takeover remains a hope it is very hard to find an acquirer – which means FGL is likely to have to go through the extremely difficult and risky process of trying to fix the business.”
“Constellation Brands (STZ) has been the only real acquirer of large wine assets over the past few years. However, we don’t believe it a likely acquirer of FGL for a number of reasons.”
U.S. WHOLESALER DE-STOCKING
“While the US wholesaler destocking activity hurt 2H08, we expect there is more to come in FY09. Other headwinds will include the global economic slowdown, reduced popularity of
Australian wine in the US, variable core wine brand health, and continued Australian oversupply.”
RESTORING PROMOTIONAL ACTIVITY:
“We are not convinced that this is a short-term hiccup for the Australian category. Nor that it can be solved (at least in a sustainable fashion) by simply ramping up promotions.”
“Our ACNielsen data doesn’t show a significant improvement in FGL’s Australian brands performance.”
BREAKING UP THE BEER AND WINE UNITS
“While a break-up is worth considering, it is also important to note that this wouldn’t be an easy process in practice. After spending three years combining the businesses (Beer + Beringer + Southcorp), a break-up is likely to lead to another round of pain.”
TIDE NOT TURNING FOR CASUAL CHAINS
There could be more bad news for on-premise wine and spirits sales as casual dining chains continue to suffer. According to the WSJ, Darden Restaurants (owners of Olive Garden and Red Lobster) reported a less than stellar first quarter that could continue struggling in the fall after undergoing a tough summer.
“Investors were spooked because, until now, Darden had been one of the few sit-down restaurant companies to withstand an industry slump that started more than two years ago,” said the article.
In an interview, Darden ceo Clarence Otis said he’s not expecting the overall industry to get “a whole lot better” in the next few months.
Restaurants have not been able to raise prices to cover higher ingredient, labor and energy costs as much as supermarkets because they are perceived as a better value than restaurants.
DOMAINE ALFRED TO SOON JOIN CRIMSON WINE GROUP
Crimson Wine Group says it hopes to complete the acquisition of Domaine Alfred Winery of the Central Coast by tomorrow, August 28, according to the San Francisco Business Times. Domaine Alfred specializes in high-end pinot noir and chardonnay, while Crimson is a new unit of New York investment group Leucadia National Corp. The price of the deal was not disclosed.
Crimson also owns Pine Ridge Vineyards in Napa, Archery Summit Winery in Dundee Hills, and Double Canyon Vineyards of Washington's Horse Heaven Hills.
WSD BRIEFS:
MICHAEL MONDAVI is introducing a new Cabernet Sauvignon this fall called “M by Michael Mondavi” through Folio Fine Wine Partners. The 2005 M by Michael Mondavi is made from 100 percent Cabernet Sauvignon sourced from Michael's Animo vineyard in the Foss Valley of Atlas Peak.
THE TOM MOORE DISTILLERY, home of 1792 Ridgemont Reserve, has joined the Kentucky Bourbon Trail and will begin offering tours on Oct. 1, the Kentucky Distillers’ Association announced today. This is the first time the Trail has expanded beyond its original seven members. The Bardstown landmark is owned and operated by Constellation Spirits.
TOURISM IN SONOMA COUNTY reached a record $1.32 billion last year. Hotels were receiving higher average daily room rates than the previous year and room occupancy was also higher. For one, baby boomers are increasingly vacationing in wine country. Also, the weak American dollar is encouraging more Europeans, Canadians and Britons to venture to the United States
ABSINTHE MATA HARI recently struck a distribution agreement with Young’s Market in California and Arizona, Johnson Brothers in Nebraska, Wisconsin and Rhode Island and Stoller in Illinois. Mata Hari now has distributor agreements in 32 markets in the U.S. including the 7 largest spirits states of CA, FL, NY, TX, IL, NJ, and WI.
KENTUCKY GOV. STEVE BESHEAR designated September “Bourbon Heritage Month.”
Until tomorrow, Megan
“Be courteous to all, but intimate with few; and let those few be well tried before you give them your confidence.”
George Washington
--------- Sell Day Calendar ----------
Today’s Sell Day: 19
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
Foster’s acting ceo Ian Johnston and chairman David Crawford both said the wine results did not meet expectations and were unacceptable. David admitted the company underestimated some things, such as currency, when it purchased Beringer and Southcorp several years ago.
“None of us estimated the extent the dollar would move and we are not the only industry that has suffered there,” he commented during Foster’s fiscal report.
However, Crawford believes the global industry is undergoing a structural change rather than a cyclical transformation.
So how did Foster’s get in the position it’s currently in? For starters, there are currency issues with the strong Aussie dollar and weak US dollar, not to mention an economic slowdown. In addition, the 2008 Australian vintage was larger than expected, and has coincided with a decline in popularity of Australian wine in the U.S. Lower volumes and higher grape prices also took a toll.
WINE REVIEW. The wine review, led by Crawford, was put in place to give Foster’s a long term wine strategy. Whether the company decides to sell some assets or hold on to everything, Crawford stated that “all options are on the table.”
“We will emerge from the wine review with a very clear strategy and very clear focus on what management has to do to ensure we do produce acceptable returns across the company as a whole,” said Crawford.
Johnston listed a number of initiatives to help get the company back on track. First, he said there has been too much focus on EPS as a metric. Now, “volume and value market share and cost reduction is our new focus...if we got that right EPS will follow.”
In addition to building volume and gaining value share, Johnston aims to reduce business costs and continue building business capability. He also remarked that Foster’s had not had enough “big innovation” in the past.
As far as employees are concerned, Johnston wants to strengthen individual performance and offer more support to customers.
“I want to put a much stronger link between performance, individual delivery and reward structure...changing some behaviors in business such as putting people in sales force and putting specialist in the wine and beer area. I think we can do a better job at serving and supporting our customers out there that have perhaps been a little left behind in what wasn’t a well implemented strategy after the acquisition.”
“No one can promise anything, but despite the things we’ve done to shoot ourselves in the foot, we’re still holding share, we still have fantastic brands. We’ve got wines that win medals and that’s important to a point, but it shows it has high quality and we’ve got to transfer that to sales.”
In addition, the ceo search is progressing according to plan and Foster’s hopes to have a new chief by the end of the calendar year.
The company said it would not provide any specific earnings guidance for fiscal 2009 due to wine review currently underway.
When asked if the group could write-down the value of its wine business further, Johnston, said: "We certainly will not be expecting to have very significant [write-downs] like the ones this year."
FOSTER’S IN THE U.S. The Americas was hardest hit by an unfavorable exchange rate, a realignment of distributor inventories and lower volumes. As a result, wine net sales revenue in the Americas declined -8.9% in constant currency terms.
“The wine category in the US continued to show positive value, volume and revenue per case growth in fiscal 2008. However growth rates have moderated in the second half, particularly for wines sold on-premise,” Foster’s said in a statement.
Overall, Foster’s volume declined -9.6% in the U.S. and was impacted by a 0.9 million case reduction in distributor inventories and lower sales of Australian sourced wines. Distributor depletions declined -2.5%.
Foster’s said its California wines performed “in line with expectations” with strong growth in Chateau St Jean and Beringer Third Century.
Following a 20% price increase in January, volumes of Beringer White Zinfandel dropped as the company expected, but was partially offset by the successful release of the Beringer Californian Collection Chardonnay.
Distributor depletions of Foster’s Californian wines, excluding Beringer White Zinfandel, increased 5.3%. Distributor depletions of Beringer White Zinfandel declined -5.8%. In the second half, the brand declined -15.8% following the price increases in January.
On a constant currency basis net sales revenue per case increased 0.7% and included the benefit from price increases on Beringer California Collection which include Beringer White Zinfandel, and selective Californian and imported luxury products.
The Australian portfolio began to gain traction in the June quarter following the restoration of merchandising and promotional activity. In the December and March quarters, Foster’s had reduced merchandising and promotional activity in the U.S. which had an immediate impact on sales, the company. Performance was also impacted by lower growth in the Australian category. Depletions of Australian wine declined -6.1%.
“There wasn’t a conscience decision to load distributors because that’s a dumb move,” said Johnston during the conference call. “But we find ourselves where management decided not to deliver to a lot of these customers at a big cost,” he continued.
Johnston also acknowledged that “Australian exports to the US has slowed considerably.” However, he said demand in the US market “is holding up quite well” and that Foster’s is not “overly concerned” about its share although the company would “obviously like to do better.”
VINTAGE UPDATE. Despite rampant droughts, the Australian 2008 vintage was larger than expected, approximately 25% above the 2007 vintage. Total grape production was 1.8 million tons. As a result, the Australian wine industry is once again over supplied.
“Most wine companies expected the last [Australian] vintage to be modest...unfortunately, it was a bad move to buy water and increase quantity and cost, so we ended up with stronger vintage than we expected,” said Johnston.
Foster’s said it expects the upcoming 2008 California vintage to be of similar size or slightly higher than the 2007 vintage with further incremental increases in grape prices as supply tightens. Recent frost events in California are not expected to have a material impact on company owned vineyards.
IMPACT OF SOUTHERN/GLAZER’S. When asked if the Southern/Glazer’s joint-venture would impact Foster’s, Johnston said the following:
“That’s quite a big development and that new company is our distributor in 4 of the 5 biggest regions in the U.S. So it has to be something that will impact us.”
“Our relationship with these people is pretty good. We don’t see it has a big risk or threat to us.”
NO QUICK FIXES FOR FOSTER’S
Andy Kovacs of Macquarie Securities suggested in two research notes that there are no straight paths in Foster’s future. Here’s a recap of what Andy had to say.
FINDING A CEO
“Finding a CEO couldn't be easy given the uncertainty in what the job will entail (as the structure of the business is to be determined by the Wine Strategy Review). We continue to believe that there are no quick fixes.”
STZ AS A POTENTIAL ACQUIRER
“The performance of FGL’s wine business remains weak and FY09 will be another challenging year. While a takeover remains a hope it is very hard to find an acquirer – which means FGL is likely to have to go through the extremely difficult and risky process of trying to fix the business.”
“Constellation Brands (STZ) has been the only real acquirer of large wine assets over the past few years. However, we don’t believe it a likely acquirer of FGL for a number of reasons.”
U.S. WHOLESALER DE-STOCKING
“While the US wholesaler destocking activity hurt 2H08, we expect there is more to come in FY09. Other headwinds will include the global economic slowdown, reduced popularity of
Australian wine in the US, variable core wine brand health, and continued Australian oversupply.”
RESTORING PROMOTIONAL ACTIVITY:
“We are not convinced that this is a short-term hiccup for the Australian category. Nor that it can be solved (at least in a sustainable fashion) by simply ramping up promotions.”
“Our ACNielsen data doesn’t show a significant improvement in FGL’s Australian brands performance.”
BREAKING UP THE BEER AND WINE UNITS
“While a break-up is worth considering, it is also important to note that this wouldn’t be an easy process in practice. After spending three years combining the businesses (Beer + Beringer + Southcorp), a break-up is likely to lead to another round of pain.”
TIDE NOT TURNING FOR CASUAL CHAINS
There could be more bad news for on-premise wine and spirits sales as casual dining chains continue to suffer. According to the WSJ, Darden Restaurants (owners of Olive Garden and Red Lobster) reported a less than stellar first quarter that could continue struggling in the fall after undergoing a tough summer.
“Investors were spooked because, until now, Darden had been one of the few sit-down restaurant companies to withstand an industry slump that started more than two years ago,” said the article.
In an interview, Darden ceo Clarence Otis said he’s not expecting the overall industry to get “a whole lot better” in the next few months.
Restaurants have not been able to raise prices to cover higher ingredient, labor and energy costs as much as supermarkets because they are perceived as a better value than restaurants.
DOMAINE ALFRED TO SOON JOIN CRIMSON WINE GROUP
Crimson Wine Group says it hopes to complete the acquisition of Domaine Alfred Winery of the Central Coast by tomorrow, August 28, according to the San Francisco Business Times. Domaine Alfred specializes in high-end pinot noir and chardonnay, while Crimson is a new unit of New York investment group Leucadia National Corp. The price of the deal was not disclosed.
Crimson also owns Pine Ridge Vineyards in Napa, Archery Summit Winery in Dundee Hills, and Double Canyon Vineyards of Washington's Horse Heaven Hills.
WSD BRIEFS:
MICHAEL MONDAVI is introducing a new Cabernet Sauvignon this fall called “M by Michael Mondavi” through Folio Fine Wine Partners. The 2005 M by Michael Mondavi is made from 100 percent Cabernet Sauvignon sourced from Michael's Animo vineyard in the Foss Valley of Atlas Peak.
THE TOM MOORE DISTILLERY, home of 1792 Ridgemont Reserve, has joined the Kentucky Bourbon Trail and will begin offering tours on Oct. 1, the Kentucky Distillers’ Association announced today. This is the first time the Trail has expanded beyond its original seven members. The Bardstown landmark is owned and operated by Constellation Spirits.
TOURISM IN SONOMA COUNTY reached a record $1.32 billion last year. Hotels were receiving higher average daily room rates than the previous year and room occupancy was also higher. For one, baby boomers are increasingly vacationing in wine country. Also, the weak American dollar is encouraging more Europeans, Canadians and Britons to venture to the United States
ABSINTHE MATA HARI recently struck a distribution agreement with Young’s Market in California and Arizona, Johnson Brothers in Nebraska, Wisconsin and Rhode Island and Stoller in Illinois. Mata Hari now has distributor agreements in 32 markets in the U.S. including the 7 largest spirits states of CA, FL, NY, TX, IL, NJ, and WI.
KENTUCKY GOV. STEVE BESHEAR designated September “Bourbon Heritage Month.”
Until tomorrow, Megan
“Be courteous to all, but intimate with few; and let those few be well tried before you give them your confidence.”
George Washington
--------- Sell Day Calendar ----------
Today’s Sell Day: 19
Sell days this month: 21
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Fri.
YTD sell days Over/Under: +1
WINE & SPIRITS DAILY
Subscribe or check back issues at: www.winespiritsdaily.com
Send news and comments in confidence to: megan@winespiritsdaily.com
© 2008 Wine & Spirits Daily, all rights reserved. May quote with attribution.
posted at 1:41 PM
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