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Trouble brewing in Foster’s split

Australia's biggest brewer Foster's Group has done an admirable job growing its margin on earnings before interest and tax (EBIT) at its prized Carlton & United Breweries beer unit.
The two-fifths increase since 2004 – from 27 per cent to around 38 per cent in 2010 – has come despite falling market share and growing price pressures and might help to explain why the brewing business features at the top of the list in speculation about takeover bids once the Foster's wine and beer businesses are split.
But it's worth pondering just how long Foster's can hold on to or even grow those margins when sales for many of its flagship brews like VB are falling and it has few, if any, growth levers outside the domestic beer market.
Its market share slipped 5 percentage points to 50 per cent between 2005-10 as CUB failed to respond quickly to the popularity of craft and premium brews.
Sales of VB are down more than 10 per cent and the Pure Blonde low carbohydrate brew fell 20 per cent in the year to February.
Some viewed Foster's halting of VB supplies to Coles last month to prevent its sale at what it believed would be below wholesale cost as proof that Foster's was in control.
Coles and Woolworths may command the majority of liquor sales in Australia but the real power, they argue, is still held by Foster's and Kirin's Lion Nathan (which has margins similar to Foster's), which share 90 per cent of beer sold in Australia. The cosy relationship has helped underpin price increases above the consumer price index for most of the past decade. But for how long can it last?
Foster's shareholders vote to split Foster's in two on Friday week (April 29). With a much talked about CUB takeover still just talk, the focus for investors is likely to shift to how well Pollaers has been able to execute his "Urgent Action Agenda" and resuscitate its long- term fortunes.

19 Apr. 2011

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