Foster's: "It Takes Time to Turnaround an Ocean Liner"

FILED AUGUST 1, 2009

Dear Client:

Foster’s Group noted that the wine review is “on track” in its full year financial results ended June 30, although “wine returns are not where we want them to be.” Global wine volumes declined 5.3%. A number of international factors influenced those numbers, along with consumers increasingly trading down and drinking off-premise. In a statement Foster’s reasoned that “the wine category is bearing the full brunt of a lack of consumer confidence brought on by global economic conditions.”

“It was just 6 short months ago that we announced plans to transform Foster’s, and I’m here to tell you that we’ve done everything we said we’d do,” said ceo Ian Johnston. “Foster’s is being transformed, not just in a superficial sense but deep down...changes may not be highly visible to outside observers...more visible to customers and suppliers...This will not be a quick fix. It takes time to turn around an ocean liner.”

THE STATE OF FOSTER’S AMERICAS. Foster’s commercial wines boosted the company in fiscal 2009 while higher end wines dwindled. As with other companies in the U.S., a combination of factors took at toll on the business: loss of consumer confidence; retailer and distributor inventory reductions; higher cost of sales; and a poor price/mix. Foster’s noted that inventory levels were at a “historical low,” but claimed they supported distributors in reducing and re-aligning their inventories. Chief financial officer Angus McKay noted that they don’t anticipate inventory levels to decline anymore but that “we can’t control what our customers do...it’s under their control with what they do with inventory levels.”

Overall, U.S. shipments were up 0.7%, and net sales revenue by case declined -5.1% amid increased promotional activity and poor mix in the U.S.

Volumes slowed further in the second half as U.S. consumers “continued to trade down in price points and shift purchasing toward grocery chain and club channels.” As a result, Foster’s wine shipments were in line with the prior period at 17.9 million cases. Distributor and liquor control board depletions, which indicates underlying consumer demand, were 0.9 million cases ahead of shipments.

US distributor depletions of Foster’s California sourced wines (excluding Beringer White Zinfandel) increased 10.3%. Growth was driven by commercial wines such as Beringer California Collection varietals and the re-launched Meridian brand. Chateau St Jean depletions were also solid.

US distributor depletions of Beringer White Zinfandel declined -11.9% with first half depletions impacted by prior period price increases and second half depletions in line with the prior year.
The price increase on Beringer White Zinfandel “has been successful,” they noted, which was raised about 14% on average.

Depletions of Australian sourced wine were down 0.5% with strong growth in Lindemans and the Little Penguin. Later in the call Ian noted that Foster’s “intends to tackle the image challenges facing Australian wines, in particular the reputation of core traditional varietals such as chardonnay.”

Boutique and luxury wines were impacted the most, mainly because they are biased towards the on-premise and were disproportionally impacted by inventory reductions, said the company.

PLANS TO OVERHAUL DISTRIBUTORS IN U.S. Ian noted that they are focused on strengthening their on-premise and independent channels, along with “rethinking our route to market with distributors in the U.S.”

Recall that earlier this summer Constellation concentrated the bulk of its volume in Southern Wine & Spirits, which is Foster’s largest customer. One analyst asked if this puts Foster’s in a disadvantage and how they intend on responding.

“We are just embarking on our own route to market analysis and initiative in the U.S. and that’s really focusing on three areas. One, distributor alignment, second is our own structure and capability, and the third is performance management and the way we work with our distributors to outperform the market. So as I mentioned we’re at the early stages. We expect to complete the initiative at the end of our fiscal and expect the initiative to strengthen our market position relative to the competition in the U.S.,” said newly appointed Stephen Brauer. Recall that Stephen replaced Scott Weiss as managing direct of Foster’s Americas in April. Stephen most recently served as general manager of Pernod Ricard USA.

In all, the full implementation of the distributor initiative is expected at the start of fiscal 2011.

A CHANGING COMPANY CULTURE. Since announcing the results of the strategic wine review, a lot has changed internally at Foster’s. This includes changing the leadership team, revising the management structure, implementing cost efficiencies and separating the wine and beer units in Australia.

Cutting costs involved extensive lay-offs and divestments. Foster’s says it has made “good progress” selling vineyards and wineries in Australia and the US. “In Australia and California an expression of interest phase has been completed and a request for tender process is underway. In California the reconfiguration of the St Helena winery is proceeding as planned and winemaking activity in the Central Coast has been consolidated at the Paso Robles facility.”

OUTLOOK FOR FISCAL 2010. Foster’s expects that “trading conditions in key wine markets will remain challenging in 2010 due to the ongoing impact from recessionary economic conditions, however, initiatives in 2009 toward improving Foster’s route to market capability, the reduction of customer inventories, and portfolio reshaping will translate to compounding improvement and leave Foster’s well placed for when economic conditions improve.” Ian stated that restaurant traffic would be a good indicator that the economy is turning around, particularly during the week opposed to Friday and Saturday nights.

DIAGEO FILES COMPLAINT AGAINST WHITE ROCK DISTILLERIES

Diageo is joining the likes of Pernod Ricard USA in filing a complaint against White Rock Distilleries for trademark infringement. This time, though, it’s concerning Smirnoff Vodka in the Southern District of Florida. Diageo alleges that the label of White Rock’s Orloff Vodka was made to resemble Smirnoff’s classic red and silver color scheme. In the complaint, Diageo states that “‘the Classic Smirnoff Trade Dress’ has achieved secondary meaning among relevant consumers, in that it serves as a source-identifying trademark of Diageo’s Smirnoff vodka products. As evidence of its secondary meaning...Smirnoff 21, is often referred to as ‘Smirnoff Red.’” Diageo also uses other color schemes in connection with its flavored vodka products, such as yellow and silver for “Citrus” and green and silver for “Green Apple.” Diageo has also trademarked its “various shield designs” in connection with Smirnoff and its flavors.

In 2006 Diageo said it “became aware that Defendant was distributing, marketing, offering for sale, and selling bottles of vodka” at various retailers in Florida “that bear confusingly similar imitations” of Smirnoff’s flagship brand and flavor extensions.

Diageo claims that its counsel contacted White Rock’s counsel, who assured the company that “the infringing designs” were merely being test marketed in a limited number of stores in Florida and that it would soon be pulled off shelves. However, Diageo claims that it later discovered that the defendant was advertising the “vodka bearing the infringing designs” on its website, and again selling the vodka in Florida. Like Pernod, Diageo is also accusing White Rock of placing Orloff Vodka in the same shelf space next to Smirnoff to confuse customers.

“Defendant’s actions demonstrate an intentional, willful, and malicious intent to trade on the goodwill associated with Diageo’s marks and trade dresses to the great and irreparable injury of Diageo,” the company said in its complaint.

DIAGEO ENDS DISCUSSIONS WITH UNITED SPIRITS

Diageo has ended talks with India’s United Spirits (USL) to purchase a stake in the company. Talks began in November 2008 but the two companies apparently couldn’t agree on USL’s valuation. In all, United Spirits was reportedly open to selling a 15%-35% stake to Diageo, while local media reports say the deal also involved board representation for Diageo as well as a distribution deal for the Indian market.

USL recently sold treasury stock owned by associate company Shaw Wallace & Co. in June for about 10.3 million shares in the open market. The company then used the funds to pay off part of its debt, which ultimately took some pressure off the company in selling a stake to Diageo.

"What we decided to do was deleverage the company, for which we raised funds through the treasury sale etc. and look at this (strategic stake sale) when the whole economic environment has improved. There's no hurry to do it," said Ravi Nedungdadi to Dow Jones.

USL said it will start looking for a new strategic partner next year.

WSD BRIEFS:

STOLI LAUNCHES NEW CAMPAIGN AIMED AT GROWING 100%. SPI Group is replacing Stolichnaya’s “Authenticity” marketing initiative with a new 360° campaign “focused on the cutting-edge stylish modernity of ‘new’ Russia.” It has a heavy focus on the US market, with plans “to grow Stolichnaya by 100% in the next four to five years,” said minority shareholder Andrey Skurikhin. It is complete with new advertising, packaging, and on- and off- trade activity.

PAPA JOHN’S HIRES FORMER B-F EXEC. Papa John's International has named Andrew Varga senior vice president and chief marketing officer after 21-years with Brown-Forman. Andrew most recently served as senior vp and director of marketing for B-F in North America.


“The secret of happiness is to make others believe they are the cause of it.”
Al Batt

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