Bluing about brewing: Will SABMiller bring on an Aussie apocalypse?

I’m not sure which is less surprising: (a) the announcement that the Foster’s Board are now supporting SABMiller’s takeover offer; or (b) the ill-informed hysteria in the tabloid press about the ‘loss of an Aussie icon’.

But let’s have a look at The Hysteria.  The grounds for concern are shaky at best.  The three main complaints are: (i) jobs may be lost; (ii) iconic brands might be neglected, and (iii) profits will head offshore.

Let’s take each complaint. First, will jobs be lost?

I can’t see massive changes to the location of manufacturing . Beer is one of the least international-trade-worthy products due to its high weight-to-value ratio and perishability.  That’s why we see so much licensing of brands across borders, contract brewing, and takeovers just like this one. So brewing jobs won’t be heading offshore (nor packaging, labelling, distribution, engineering). Likewise, technology-wise there are no real gains or innovations that are likely to change labour-capital ratios in this extremely mature industry. So, the brewery jobs should stay.  In anything, if SABMiller can successfully launch and market their deep suite of brands (which will inevitably be brewed locally), then we could actually see some upswing in manufacturing.  Any job losses that might occur are most likely to be in the (old) head-office, with some scope to reduce duplication of tasks.  Even then, I’d predict more turnover than simple shedding of positions, as SABMiller attempts to rejuvenate a pretty moribund mob.

So, will these Anglo-South African-Yankee newcomers tear down long-adored Aussie beer brands?

This is a really curious set of concerns, and based on a number of falsehoods.  Foster’s (and it’s various previous incarnations) has itself been pretty free-willing and cannibalistic in its stewardship of brands for decades. One time icons like Abbotsford Lager/Stout have been demoted, labels have been dramatically altered, sleepy bit-players have been promoted (including VB and Crown Lager) and pushed beyond their Victorian homeland, and even the headline ‘brand’ of Fosters’ holds little-to-no local market relevance (as every Aussie traveller finds themselves having to explain to befuddled foreigners).  Indeed, Foster’s has been making much higher margins on licensed foreign brands such as Corona in recent years than on these supposed national treasures. Yet local ‘Aussie battlers’ haven’t been hitting the airwaves to protest that ‘treachery’.

It is in SABMiller’s interests to maintain and perhaps even revitalise the fortunes of many/all of the aforementioned product lines.  Given Foster’s retreat from foreign beer markets in the past decade, SABMiller taking ownership of these Aussie brands might indeed be the best chance of seeing more than a token blue and white can of Australian ale on overseas shelves.  My personal hope: that SABMiller promotes the much tastier Fat Yak as a higher end export (and maybe also Blue Tongue which I’m guessing comes with the suite of CCAmatil/Pacific Beverages assets that appear to be part of this deal).  That would be doing a lot more to improve Australia’s beer reputation than the currently bland product licensing.

Of course, SABMiller will presumably also increase the availability of its broader range of international brands.  That will test the ‘loyalty’ of died-in-the-wool Aussie drinkers.  But that isn’t SABMiller’s problem or fault.

Finally, won’t profits head offshore?

Firstly, it’s not clear how the average Australia benefitted from Foster’s profits up to now.  Sure, the firm paid taxes, but so will SABMiller.  Shareholders got returns (although pretty paltry ones in recent years given the wine debacle), but they are also getting a decent premium in the takeover.  And if they want to keep getting a piece of the action, SABMiller is listed on the London stock exchange (and in Johannesburg). Again, SABMiller is likely to be making more generous investments in revitalising the Foster’s business in the coming years than the incumbent management have been, so it remains unclear that this is a case where the business is going to be ‘taken offshore’.

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So, in conclusion, I’m arguing that this particular foreign takeover is likely to be one the least harmful we see in Australia in the near future. The nature of the industry is one that doesn’t lend itself to offshoring of key functions, and we should be more interested in what it might do to resurrect a dull duopoly market.

 

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Fosters’ splitting headache

In one of the least surprising and most long awaited shock announcements, Foster’s is to split into two separately listed beer and wine businesses.

This pretty much brings to an end the financial carnage emanating from Foster’s purchase of Southcorp Wines for $3.7b back in 2005. This was a classic case of overestimating synergies (and commitment bias, whereby the firm paid $400m than their initial offer rather than walk away from the deal). The firm’s original estimates were for $270m-300m in efficiency gains within the first three years.  These never seem to have eventuated, and the firm got hit with a further whammy in terms of the Aussie dollar heading in the wrong direction (and rendering the export business much less competitive).  The firm has written down a huge chunk of the value of it’s wine assets (including another $1.1b yesterday).

One valuation has put the value of the wine business at around $2.1b – which isn’t a great outcome given Foster’s also bought Berringer Wines for $2.5b back in 2000. The devaluation is no shock given the glut in grapes and weaking competitiveness of Aussie plonk.

So much for diversification reducing risk!

What will be fascinating is what happens to Foster’s Beer Arm when this split finally comes to fruition. The Aussie beer market is a very appealing, low risk, consistent margin market (at least for the two big players).  It is very possible we’re going to see Foster’s under the acquisition microscope, with almost every big brewer other than Kirin (who own Lion Nathan) possible suitors.

As I’ve said before, Moors Colson, SAB Miller and Anheuser-Busch Inbev could all squeeze Fosters’ into their global portfolios quite nicely.  Asahi may also want access to the profit taps of their Japanese rival (and presumably won’t cop too much grief from the regulators about their existing soft-drink assets down under).

The dark horse in all this might still be Coca Cola Amatil, although their announcement this week that their young Aussie beer business is in the red might reduce their enthusiasm.

Interesting times indeed.

More action brewing?

The moves in the usually dormant Australian brewing sector just keep coming. A month or so after Lion Nathan made a play for Coca Cola Amatil (discussed in this post), we see another takeover, this time from Japanese brewer Asahi.

Asahi look have puchased the Australian Schweppes business from Cadbury. This gives them access to various soft drink, bottled water and cordial brands, including the bottling and distribution rights to Pepsi and Gatorade stables down under.

On all accounts, Asahi outbid fellow Japanese beer giants Suntory and Kirin, as well as Coca Cola Amatil (CCA). It is still possible the US Coca Cola Company (CCC) could scupper the deal with a counter offer (due to a “last rights” arrangement dating back to the late 1990s). It is unclear whether CCC will exercise this right, nor is it clear how Australian competition regulators would view a greater Coca Cola presence in the market. Also CCC would need to offload the Pepsi business thus reducing the gains from any purchase.

While soft drinks (and other non-alcoholic beverages) are undergoing such a shakeup, the big questions remains whether Asahi are planning to also expand into brewing down here. Currently, their beers are distributed through Fosters in Australia. It is conceivable that Asahi could expand into their own brewing and distribution using the Schweppes facilities and value chain. Asahi have been innovators before. Their launch of the Super Dry product is much studied, as it launched from a minor to a major player in the Japanese market.

Or perhaps they are just going to bombard our market with a huge range of soft drink products from Japan. Canned coffee anyone?

More beer shake-ups down under

As I flagged in yesterday’s post, the Australian beer industry looks a prime target for takeovers by international players, as it highly profitable and fairly isolated from the major international brewers. There has been much talk about a potential takeover of Foster’s by one of the big global players, such as Molson Coors (who have recently taken a 5 percent holding). Well, today, we’ve seen the other big player in the Aussie market, Lion Nathan make a bid for Coca Amatil.

This is a rather complex international business scenario (please bear/beer with me).

Lion Nathan were originally a merger of New Zealand’s two biggest domestic brewers. They subsequently became a major presence in Australia in 1990 via the acquisition of the nation’s second largest bundle of brewing assets (principally Tooheys and Castlemaine Perkins). Their brands currently represent just over 40 percent of the Australian beer market. Over time, the major shareholder of Lion Nathan has become Japan’s second largest brewer, Kirin (itself part of the Mitsubishi group). Kirin currently hold a 46 percent stake in Lion Nathan. Kirin also own National Foods, Australia’s largest dairy and juice company (acquired via Kirin’s holding in Filipino brewer San Miguel.

Coca Cola Amatil (CCA) are the bottlers and distributors of the ubiquitous black fizzy stuff in Australia, New Zealand, Fiji, Indonesia, Papua New Guinea, and South Korea. They also have their fingers in the bottled water, juice, canned fruit and coffee markets down under. They recently entered a joint venture with global brewing giant SAB Miller to distribute a couple of major labels in Australia (Peroni and Miller), and also took over a fledgling craft/microbrewer Blue Tongue. The major shareholder (at around 30 percent) in CCA is The Coca Cola Company back in the US (the folks who own the Coca Cola brands)

So is this the consolidation and acqusition play we expected? And is it all about beer assets?

That’s the tricky question here. The CCA/SAB Miller joint venture was supposed to see some competition for Foster’s and Lion Nathan, as CCA’s distribution network into retailers should have overcome the typically high barriers to entry in the market (alas, beer vending machines were fairly unlikely under Australian liquor licensing laws).

If Lion Nathan were successful in acquiring CCA we would be back to square one in terms of competition in the Australian beer market. It is hard to imagine Lion Nathan placing too much emphasis on the minor Peroni, Miller or Bluetongue brands. They may find some use for the CCA distribution network however.

It is more likely that this is a bigger food and beverage story. Kirin would be building a very considerable holding in the non-alcoholic beverages segment if it ended up owning both CCA and National foods. The extent of complementarities of assets across the alcoholic and non-alcoholic beverage segments is still unclear, but market power is market power, and this new beast would be wielding a hell of a lot of it with Australian retailers.

This tale highlights the complexity of telling (and researching) single-industry stories, at either the domestic or international level. The reality is that firms often reach across markets, in terms of both products and countries (I have not even mentioned the additional burden of wine holdings for the Australasian brewers). Trying to untangle motives is a real challenge for scholars (and competitor firms).

It will be intriguing to see the next move in this chess game. The big international brewers are surely still circling.

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