Could Yellowtail ales be Blue Ocean brews?

While Australia’s largest brewer slowly tears apart its less than successful attempt to also run a wine empire, one of our most internationally competitive (and innovative) winemakers is stepping into the beer business.

Casella Wines, who have grown extremely fast off the back of the game-changing Yellowtail wines (see this short case study for a sense of this success story), are advertising for a head brewer (see the ad here), and intend to brew “probably a few million litres a year” from a new facility at the Griffith, NSW winery site.

The firm’s wine brand has been lauded as a classic example of a Blue Ocean Strategy.  The central contention of Kim & Maurborgne is that:

“Casella created a social drink accessible to everyone. By looking at the alternatives of beer and ready-to-drink cocktails, Casella Wines created three new factors in the US wine industry – easy drinking, easy to select, and fun and adventure. It eliminated or reduced everything else. [Yellow tail] was a completely new combination of  characteristics that produced an uncomplicated wine structure that was instantly appealing to the mass of alcohol drinkers.

The result was an easy drinking wine that did not require years to develop an appreciation for. This allowed the company to dramatically reduce or eliminate all the factors the wine industry had long competed on – tannins, complexity and aging. With the need for aging reduced, the working capital required was also reduced…

In July 2001, Australia’s Casella Winery introduced [yellow tail] into this highly competitive US market. Small and unknown, they had expected to sell 25,000 cases in their first year. In fact, they had sold nine times that amount. By the end of 2005, [yellow tail]’s cumulative sales were tracking at 25 million cases.  [yellow tail] soon emerged as the overall best selling 750ml red wine, outstripping Californian, French and Italian brands.”

While the winery has made no claims that it is adopting such a strategy in its entry into beer production, it does raise some challenging questions:

What characteristics of beer are holding back new customers? Could Casella remove some?

The taste? The big name brews (think Bud, Miller, VB, Stella etc) tend towards the bland, but there is a lot of variety in the second tier (think wheat beers, stouts etc).  Certainly there are gains to be made in explaining such options in clearer language to neophytes, but a simply “this is beer message” doesn’t necessarily seem the best option. I will be very surprised if Casella if can stumble upon a clearly communicable alternative taste that is an inoffensive entrée into beer-drinking. Bitterness (i.e. ‘hopping heavy’) has become a big fave of craftbrewers, but that tends to play towards those already enamoured with beer’s dominant characteristic. Casella could perhaps go down the sweeter, more malted path… or, more courageously,  the fruity flavoured path (e.g. radler, kriek etc).

The fizz? Certainly the big name brews (think Bud, Miller, VB, Stella etc) have been reluctant to make non-gaseous product. Reductions in bubbles would match up with exploration of less typical styles of beer.

The overtly male/working class associations? Now, this might well be a possible target market.  Brewers have really struggled to ‘feminise’ their product (not helped by an obsession with perpetuating some other-beers-makes-you-fat-but-ours-doesn’t myth). De-rednecking has been the effective message in both the ‘imported’ and ‘craft’ segments, but that tends to have just pushed beer down wine’s snobbery path.  Targeting a more youthful market might require soft-drink/spirits type marketing (and, again, perhaps a sweeter/fruitier palate).

Is beer as confusing as wine? As snobby?

Again, there is some bifurcation here.  Major beer brands are typically presented as simply ‘beer’. Meanwhile, craft-brews tend to play up nuance and complexity, although to varying degrees. I guess if some of the current associations of non-beer drinkers can be overturned then confusion might decline.

What are the big element along which beers and brewers compete?

The Blue Ocean idea is that there are big gains to be made in making the normal battlegrounds less relevant and/or alleviating your firm of the ‘burdens’ of your competitors.

Despite all the discussions above of what’s in the bottle, most folks in the beer business will tell you it’s about access to drinkers (i.e. distribution), and finding a cost-effective production method to suit your intended price-point.  Beer’s core ingredients (malt/sugar, hops, yeast, water) are costlier when chasing more exotic/substantial flavours. Currently the big cost-savings come from large scale in bottling, packaging, trucking, marketing etc  Getting product on shelf and on taps is tough in the face of existing brand loyalties. Finding alternative delivery mechanisms that don’t cost much more is very, very hard (and even tougher given the legal constraints in multiple domains).

Might this just be diversification?

It is possible this is just old-school diversification, and Casella will ‘simply’ aim to leverage some of their current capabilities (in brand management, packaging, distribution, etc). They’re far from the first Aussie winery to go down this path (precedents include Moorilla, De Bertoli and Knappstein), but they’ll be the first with real international muscle.

What Blue Ocean opportunities (if any) can you see here?

 

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Starbucks could be onto a corker of an idea

In the past I’ve been pretty scathing of some of café giant Starbucks’ strategic choices.

They under-estimated the sophistication of the Australian coffee market, leading to large numbers of store closures.

They have since embarked upon a pretty risky expansion into the instant coffee market, that I have argued could be cannibalisation.

But, their latest move I can see a lot of merit in.

According to this story, Starbucks is experimenting with offering wine, boutique beer and hors d’oeuvres in their cafés:

“After 4 p.m., customers will be able to order wine chosen from Pacific Northwest vineyards …and local craft brews with prices … only slightly more than a Venti specialty coffee. Appetizer inspired platters ranging from Mediterranean plates to artisan cheese plates (brie, Gouda, cheddar, almonds) and Italian selections (prosciutto, mixed olives whole wheat crackers)…will be brought to your table.”

This has only been rolled out in one store thus far, but it seems a logical and complementary fit.

It addresses a particular weak spot in their retail model – that fewer people want coffees late in the day, and thus the firm’s valuable real-estate is underutilised at a time when many shoppers are still out and about.

It also plays to the firm’s strength as a provider of  a ‘third space’ where customers feel at home. Wine and beer are clear complementary products that appeal to some of the same customers, and in group situations, will bring in some new patrons also.

The interesting challenge/opportunity for the firm, is build some sense of community and excitement around the wines and beers on offer. The focus on local producers is logical and a nice way to overcome some of the growing distrust around their ‘big business’ status (e.g. in Australia). Such a buying policy also aligns well with the fair-trade coffee approach (smaller local beer and wine labels will have lower food miles and are more likely to offer organic fare also).

Exciting  also is the prospect that some brewers and wineries might be able to substantially boost sales through signing on as suppliers to what in many locales is a vase network of stores.

Much is made of Starbucks ‘education’ of US palates – perhaps wine and beer will be next…

Fostering a Chinese wine giant?

While we all wait eagerly to see who might buy up the soon-to-be-untangled Foster’s beer business (see this piece for a recent update of the contenders), it is possible that the more fascinating and globally significant acquisition might actually occur on the wine side of the company’s separation.

An Australian article last month got me looking into the prospect of a Chinese takeover of some or all of the forthcoming wine business (renamed as Treasury Wine Estates).  The article mentions that China’s Bright Foods, failed bidder for CSR’s sugar business, has sounded out Foster’s about the firm’s “Hunter Valley operations focused on the blue-chip Rosemount brand”.

I was a little unclear on the size and scale of China’s wine market.  I have certainly heard the usual extravagant claims that it could be an enormous untapped opportunity for Australian exporters, but what I was unaware of was the actual scale of existing domestic production.

According to this academic study China is already the 6th largest producer of wine in the world (at 13,005m hectalitres in 2008).  That’s more than Australia (11,700m), South Africa (9,890m), Chile (7,860m) and NZ (1,700m).  Chinese production grew 17% between 2004-8, while pretty much all ahead and around them on the list experienced pretty hefty declines in volumes (e.g. Australia fell 20%, France 25%).

Certainly China is not currently a significant exporter of wine (unlike most of the other major producer nations), and the initial focus of any foreign acquisitions will likely be on servicing the Chinese market with higher quality imports.

The longer-term picture is where it gets interesting, however. Picking up a firm with strong international brands (which Bright Foods would certainly be doing if they secured some/all of Treasury) would allow the Chinese firm to build up much-needed expertise in marketing and distributing beyond Chinese shores.

This could well be the birth of a new wine giant.

(As an aside, there is an unfortunate irony to the possibility of a big chunk of Foster’s shifting into Chinese hands, as the firm had a very torrid time from 1993-2006 trying to build a beer presence in the country).

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.

Feeling lucky?

This story from yesterday’s paper is a nice reminder of the considerable role that luck can play in firm success.

It seems stalwart McLaren Vale wine producer d’Arenberg is experiencing a nice upswing in demand, all because of an appearance in a Japanese comic book.

This is the sort of good fortune that firms can’t spend too much time hoping for, and really chasing. Sometimes you can just be in the right place at the right time.

There are numerous tales of firms finding themselves swept up in a demand spike not of their doing. Chris Anderson tells a comparable tale of Hush Puppies’ reemergence as fashionable footwear on the back of their rediscovery by New York hipsters – to which the shoe manufacturer was oblivious.

The challenge for firms in such circumstances is to make hay while the sun shines, but to not forget why such fortune was possible – because there was a product worth sneezing about.  Changing to better suit the new faddish customers will be a recipe for disaster.