Commentary |
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Comment |
If you pay too much for a good asset, it becomes a bad asset. That’s what happened to Foster’s and its unfortunate CEO Trevor O’Hoy when the company paid $6.7 billion for two good wine businesses.
The result was that O’Hoy had to run Southcorp and Beringer to cut costs, disastrously. He came up with the “multi-beverage” strategy, with plonk and grog going out on the same trucks, and he forgot the old boozing maxim: never mix the grain and the grape.
But chairman David Crawford has turned over Foster’s new leaf this morning with a confession that is a model of candour, and one that other chairmen could usefully follow.
To say, as he did, that “we must … recognise and acknowledge that we paid too much to acquire wine assets” is a remarkable admission – the sort of thing you can only say while also announcing the departure of the CEO.
Crawford has also flagged an “impairment charge” of $600-$700 million to the carrying value of the global wine assets, plus a further impairment charge of $430-$480 million in the “Americas cash generating unit”.
It won’t be anywhere near enough. Wine is generating earnings before interest tax and depreciation of about $350 million a year. The business cost close to $7 billion. To cover the cost capital it should be earning 11 per cent, preferably after tax, but certainly about $800 million EBIT.
So O’Hoy paid twice as much as he should have for wine. The write-offs should be in the billions, not hundreds of millions.
The only thing beer and wine have in common is that you drink them out of a glass and they get you drunk.
That makes them seem similar, but they’re not. Wine is a boutique fashion industry in which the product is made once a year and then stored for a while.
It is actually an agricultural business; a product of the earth; a lovingly and subjectively fermented juice – it is not manufactured and therefore never tastes the same from one year to the next, or from one vineyard to the next.
It is also an incredibly crowded market with thousands of individual labels which ebb and flow with the whims of fashion, almost entirely outside the control of the marketers. And that’s partly because so many ex-city vintners are happily losing money doing it.
Beer, on the other hand, is certainly manufactured and must always taste exactly the same. It is produced 360 days a year out of a factory in or near the CBD and trucked to pubs and bottle shops to be guzzled.
It’s true that a thriving boutique beer business has sprung up that more closely resembles the wine industry, but it’s not quite the same and it’s certainly not the history or culture of CUB, Foster’s beer subsidiary and dominant culture.
Bashing the wine and beer businesses together inside Foster’s instead of retaining their separate cultures and identities was all about cost reduction, not about better serving customers.
The result is that the sales growth strategy that Southcorp and Beringer needed was never properly applied.
So where to now for Foster’s? Well David Crawford has a conference starting right now...
Foster's CEO resigns ...see what readers and experts are saying in The Conversation.
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