On 21 July Foster’s Group Limited changed the name of its global wine business from Fosters Wine Estates to Treasury Wine Estates. The change followed Fosters decision in May to split its beer and wine divisions into two separate companies to be listed on the Australian Stock Exchange in 2011.
Despite the name change, the stench of failure hangs over Fosters wine assets. It’s a sad story, tragic for some participants, involving a near decade long destruction of wealth. On glug.com.au, David Farmer cites an estimate of around $8 billion to build Foster’s wine assets but a current value of just $2.5 billion.
Fosters moved into wine in 1996, acquiring Mildara Blass – a highly profitable business driven by the big volume Yellowglen, Jamiesons Run and Wolf Blass brands. Headed by Ray King, Mildara Blass was seen in the industry as a model for return on investment.
Ironically, at about the time of the Fosters acquisition, King detailed to a masters-of-wine gathering the wine industry’s history of dispersing wealth. It wouldn’t happen under King’s watch, but the same fate awaited Fosters.
In 1997 Fosters acquired Cellarmaster Wines, a highly successful, vertically integrated direct marketing business, based at Bondi Junction, with winemaking, packaging and distribution assets in the Barossa Valley.
Then in 2000 California’s Beringer Wine Estates joined Fosters wine business and the name changed to Beringer Blass Wine Estates (shortened in 2004 to Beringer Blass). By then the difficulty of running a wine business had become apparent. In the year to June 2004 the wine division returned just four per cent on its $4.4 billion of assets – compared to the beer division’s 25 per cent on $2.2 billion of assets.
But the wine headache was set to grow bigger, ultimately sweeping Chief Executive Trevor O’Hoy away.
As Foster’s ran into rough weather, another disaster had unfolded at Southcorp, owner of many of Australia’s greatest and oldest wine brands, including Wynns Coonawarra Estate, Penfolds, Seppelt, Lindemans, Leo Buring, Coldstream Hills and Devil’s Lair.
In 2001, the Oatley family engineered a merger of its highly successful Rosemount Estate business with the much larger Southcorp Wines. The Oatleys held a sufficiently large stake to control management, installing Keith Lambert, Bob Oatley’s son in law, as head. Catastrophe followed.
Poor management decisions saw market share decimated in the UK and Australia. And an unworkable arrangement saw John Duval, Southcorp chief winemaker, and Philip Shaw, Rosemount chief winemaker, appointed as joint chief winemaker. A holy trinity might work, but not an earthly duality. As the debacle unfolded both departed for their own reasons, making John Duval the first Grange maker not to see the job through to retirement.
In Australia, wine retailers large and small detested the merger and instantly changed their buying habits – much to the delight and profit of medium sized companies like McWilliams and De Bortoli.
No retailer likes to be controlled by a supplier. If, before the merger, purchases from Southcorp and Rosemount equalled, say, 50 per cent of a retailer’s total, after the merger, they’d likely fall to 30 per cent. The merged Southcorp-Rosemount learned the hard way that they were the tail, not the dog. And the big retailers would wag them, not the other way around. Lambert duly departed and John Ballard stepped in to repair the damage.
In 2005, before Ballard could complete the job, Fosters moved in, paying top dollar for Southcorp. Bob Oatley walked away with cash and the destruction of wealth gathered pace.
Fosters first major blunder after the acquisition was to funnel all sales across it vast beverage portfolio through a single sales force. Friends in the trade at the time said it was farcical. And the loss of market share experienced by the merged Southcorp-Rosemount was repeated by the merged Southcorp-Fosters.
After repeated write-downs and then a major review in 2009, Fosters structurally separated its wine and beer divisions. In May this year they went a step further, announcing the split into two listed companies.
This sets the scene for further shake-ups in the global wine and beer businesses. The beer business could easily be gobbled up by a larger player when the wine albatross is cut free. And it’s anybody’s guess as to where the wine business ends up. Will it prosper as a single entity? Or will it ultimately be carved up.
It’s a disparate group of brands, some of them now severely damaged. But there are some great gems with huge international potential, including Wynns and Penfolds. What a pair they’d make for the right private investor!
For the moment, though, there’s no talk of a carve-up. David Dearie, Foster’s wine boss for Australia and New Zealand, launching the new Treasury Wine Estates brand, said, “the new name and business identity reflect the wealth of treasured wine brands including global favourites Beringer, Matua Valley, Penfolds, Lindemans, Wolf Blass and Rosemount to regional labels such as Coldstream Hills, Devil’s Lair and T’Gallant”.
Dearie also talked of “a cultural change for of us working in the wine business as we return to a dedicated focus on viticulture and winemaking”.
This gets to the heart of great wine brands – the compelling stories of regions and vineyards and the people behind the wines. Marketers in large companies have largely failed at this, so we have reason to remain sceptical. As well, the treasury comes with dross as well as gold dust.
Separated from the brewery, Treasury Wine Estates will have to perform in its own right. Shareholders are unlikely to stomach more write-downs. And if there are any more, where will new capital come from? For the sake of our great old brands, let’s hope for success. But I suspect that would be more likely with a carve-up.
Copyright © Chris Shanahan 2010