Foster's Talks Big Challenges and Plans for 2010

FILED OCTOBER 1, 2009

Dear Client:

Foster’s Group chief Ian Johnston struck a similar tone to other industry leaders at the company’s shareholders meeting today. Foster’s beer business is still strong but wine is another story. Like other company heads, Ian said global sales were “heavily affected by challenging global financial conditions.”

Those “conditions” prompted consumers to stay home and trade down, which eventually led distributors and retailers to reduce stock. This negatively affected Foster’s because the company “is skewed toward higher margin premium bottled wine,” said Ian. Lastly, Australia’s “structural grape and wine surplus” is also impacting the business.

[Ed note: It’s hard to believe that Ian has been ceo for over a year now. It seems like just yesterday when Foster’s announced the departure of Trevor O’Hoy seemingly out of the blue and acknowledged it paid too much for Southcorp and Beringer. But that’s neither here nor there].

CHA-CHA-CHA-CHANGES. Ian admitted that although the company has made several changes – such as appointing new leadership, striking agreements to sell Australian vineyards and dividing the sales teams – after completing its strategic wine review in February, “this change is not yet fully evident in the share price.”

“The quality of the new leadership team is outstanding and provides the platform to implement the strategies we have identified and to drive the high performance we expect in each of our markets...One benefit is that we are on-track to deliver $100 million of cost savings in the 2011 financial year.”

A LOOK BACK AT FISCAL ’09. In the 2009 financial year, Foster’s was “one of the minority of companies which delivered growth in sales, profit, cash flow and dividend,” said Ian. Net sales rose just under 3%. However, Foster’s Americas had a rather tough year. If you’d like to take a look back, click here.

CHALLENGES AND OPPORTUNITIES IN 2010. One challenge they anticipate is the rising Australian dollar against the weakening US greenback, which will make it more difficult to compete in export markets. Foster’s is also working to restore the image of Australian wines, particularly chardonnay. Recall that Foster’s held a round-table last week on that vary issue.

“From a global perspective, we are addressing head-on the image challenges facing Australian wine and, in particular, the image of core traditional varietals such as chardonnay. We are working hard at building our reputation for outstanding quality and repositioning our portfolio for diversity and terroir,” said Ian.

PLANS TO OVERHAUL US DISTRIBUTORS IN 2011. Recall that Foster’s said in its full year results that they are “rethinking our route to market with distributors in the U.S.” We anticipate consolidation similar to what we saw with Constellation and perhaps similar, widespread changes. The full implementation of the distributor initiative is expected at the start of fiscal 2011.

Here’s what Foster’s Americas managing director Stephen Brauer said during Foster’s financial results conference call at the end of August: “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.”

STE MICHELLE WINE SHIPMENTS GAIN 2% IN Q3

In the three month period ending September 30, Ste Michelle Estates saw wine shipment volumes grow 2% to 1.5 million cases, due primarily to higher off-premise channel sales, said parent company Altria Group. [Ed note: Recall that Altria acquired UST and all its assets last year, including Ste. Michelle.] Volumes of Chateau Ste. Michelle rose 8.5% in Q3 and 5.7% in the 9 months. Columbia Crest saw volumes declined -6.8% in the quarter and -8.7% in the 9 months. Other wines belonging to Ste Michelle gained 5.8% in volume in Q3 but declined -2.1% in the 9 months.

Ste. Michelle’s off-premise volume as measured by Nielsen U.S. food and drug scan data increased 9% in the third quarter of 2009 and 11% in the first nine months of 2009, versus the prior-year periods. The total wine industry’s retail volume for both the three- and nine-month periods increased 2% versus the prior-year periods.

19% OF AMERICANS CUTBACK ON ALCOHOL WHEN DINING OUT

Zagat’s annual “America’s Top Restaurants” survey revealed that the average meal cost rose 1.2% from last year to $34.62 in 2009. This year, the national percentage of meals eaten out or taken out declined from 50% to 48%, and the national average of restaurant meals per week dropped from 3.3 to 3.2. As 22% are skipping appetizers and/or desserts, 19% are cutting back on alcohol. On the bright side, 54% of surveyors said they’re finding better deals at restaurants, 40% feel their patronage is more appreciated and 22% of surveyors feel that service has improved.

Italian food is America’s favorite cuisine, followed by American food, Japanese, French, Mexican and Thai. Lastly, 61% of surveyors around the country are willing to pay more for "green" products and menu items, up about 5% from last year. When it comes to their health, 69% consider low-carb, low-fat, heart-healthy menu items to be important, while 65% say trans fats should be banned from restaurants. Zagat’s survey covers thousands of restaurants across 45 US markets and about 145,000 consumers.

WSD BRIEFS:

SUPERVALUE PLANS ON DOUBLING ITS SAVE-A-LOT STORES to about 2,400 in the next five years, says chief Craig Herkert according to WSJ. Although those stores are currently underperforming, he expects consumers to continue trading down for years to come. Save-a-lot mainly sells private label brands, which we assume could include alcohol in the future.

GOV ARNOLD SCHWARZENEGGER signed a new law last week that allows wineries to offer consumers wine by the glass or bottle in a second tasting room in California. This is especially helpful as more wineries are opening second tasting rooms in other locations, particularly cities.


Until tomorrow, Megan

“I despise the pleasure of pleasing people that I despise.”
Lady Mary Wortley Montagu

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