 |
Company Profiles |
|
|
Page 1 of 5 |
|
|
| August 27th 2007 |
|
| Fosters: All things to all people? |
by Felicity Carter
Although it began in 1888 as a two-man Australian brewing company, Foster’s is now the world’s second largest wine company, owning icon brands like Penfolds, Wynns, Stag’s Leap and Beringer. As brand equity is more important for a beer company than vines or historic properties, Felicity Carter asks if Foster’s can maintain the legacy.
|
|
|
Foster’s headquarters in the centre of Melbourne, Australia, is a glittering tower of glass and steel, far removed from any vineyard or winery. Yet it’s from here that executives, marketers and sales teams are working to shape beverage markets and convince a new generation of consumers to drink Foster’s wine, or beer, or other beverage. The company’s stated mission is to deliver “a total portfolio of beer, wine, spirits, cider and non-alcohol beverages. Our products inspire global enjoyment and are enjoyed by consumers all over the world”. In other words, to be all things to all people.
Given the scale of the goal, it’s not surprising that the company is a study in contradictions. Foster’s, which began as a brewer, is now the world’s second largest wine company. It owns some of the New World’s oldest and most important wine labels, like Penfolds, Wynns, Stag’s Leap and Beringer, which come with a heritage that needs to be maintained and respected. Yet Foster’s is at the forefront of wine commodification, where brand equity is more valued than long-established vineyards or historic wineries. Foster’s pursuit of global beverage domination has seen it undergo a decade of acquisition, expansion and, most recently, consolidation. What they’ve learned along the way has the potential to shape the global wine market.
Foster’s history
Foster’s began in 1888 as a two-man Australian brewing company. Over the next century, it merged with other breweries in both Australia and Canada, becoming a beer giant whose cheeky commercials convinced the world that Australia, beer and sunshine went together. In 1996, the company moved into wine, first buying Mildara Blass and Rothbury Estates, two notable Australian wine companies. From there, the company went on a spending spree, snapping up international direct mail wine businesses, Beringer Wine Estates in California, and European wineries, among other businesses.
But it was the A$3.2 billion (€2.02b) acquisition of Southcorp in 2005 which truly catapulted Foster’s into the top ranks of the world’s wine companies, giving it global clout. Southcorp brought with it a portfolio of fine wine, wineries and vineyards. Foster’s now owned a portfolio that included famous Australian names like Lindemans, Rosemount, Wynns and — the grand prize — Penfolds, makers of Grange, Australia’s most lauded and recognised wine. Foster’s chief executive officer Trevor O’Hoy told the Australian media he expected the beefed-up company would be well placed to take advantage of accelerating growth in the premium wine market, across multiple global regions.
There was certainly work to do, because some of Southcorp’s major brands, particularly Rosemount, were languishing. Not only that, but Foster’s also needed to implement a large-scale strategy to absorb Southcorp and take full advantage |
|
|
|
|
|
|
|
|
Company Profiles |
|
|
Page 2 of 5 |
|
|
of Foster’s now considerable assets in both wine and brewing. One way to achieve this was to relinquish physical assets like breweries and vineyards in favour of marketing plans and licensing agreements.
Consolidation phase
Late in 2006, Foster’s announced it would sell a number of sites, including the original Rosemount Denman winery in Australia’s Upper Hunter Valley, the French Domaine La Motte business in the Languedoc-Roussillon region, and a Penfolds packaging plant in South Australia. Wine packaging is now done in just three facilities, one in California and two in Australia. In April 2007, Foster’s completed the sale of its wine clubs, letting go of the Foster’s Wine Club and Services businesses. This was a major asset whose direct mail wine clubs had sold more than 2.5 million cases of wine, valued at AU$500m (€313,472m), internationally in 2006. Despite the profitability of many of these clubs, the fit with Foster’s wine business had been an uneasy one. It annoyed retailers to see the wine clubs selling well-known brands direct to consumers, often at a discount.
“We don’t believe the wine clubs and services are a strategic fit with being a global premium wine producer,” as Foster’s spokesperson Troy Hey tactfully put it.
The sell-off included Cellarmaster Wines Europe, one of the largest direct marketing wine clubs in Europe, operating in six countries, Pallhuber in Germany, and Windsor Vineyards and International Wine Accessories in the United States. Finally, Foster’s sold businesses in Australia, New Zealand and Japan, including their associated vineyards and wineries.
This rationalisation wasn’t confined to wine. Foster’s sold its beer brand in Europe, Russia and eight former Soviet states and also exited from brewing in the Asia Pacific region, selling both its Vietnamese and Indian breweries. Hey says the company now prefers licensing agreements to holding physical assets like breweries.
The consolidation hasn’t always gone smoothly. Foster’s main winery in South Australia became responsible for producing more wines, with a resulting cost blowout. And the domestic ‘multi-beverage’ strategy, which involved using one salesperson to sell the whole portfolio quickly ran into trouble. The on-premise market resented dealing with salespeople who knew little about wine, resulting in a 10% drop in domestic wine sales. As a result, Foster’s had to hire up to 70 wine specialists, to reconnect with its core wine customers. But the consolidation has brought financial results, as Foster’s reported that its first half earnings to February 2007 were up 11%.
“Strengthening global sales revenues drove a solid first half result for Foster’s,” CEO O’Hoy told the media. “Reported net profit increased 90% to $554m (€349m) on the back of solid underlying business performance and |
|
|
|
|
|
|
|
|
Company Profiles |
|
|
Page 3 of 5 |
|
|
a $190 million (€120m) profit from divestments.”
The overall numbers look good: the Australia Asia Pacific region earnings before interest and taxes (EBIT) increased 2.5% to $442.2m (€278.7m), though wine earnings were disappointing. In the Americas, EBIT increased 16.6% to $143.1m (€90.19m). In Europe and the Middle Eastern markets, EBIT increased 9.9% to $38.7m ($24.39m). And the company expects the numbers to do even better before the end of the Australian financial year on 30 June 2007. In the major markets of Australia, Great Britain and the United States, Foster’s see the premium wine category continuing to grow, with Australian, Californian and Italian offerings driving the growth.
Four of the world’s biggest wine brands, Lindemans, Rosemount, Wolf Blass and Penfolds, also now belong to Foster’s. All of these are Australian, which means that Foster’s continues to generate the majority of its revenue from Australian brands, even while it’s positioning itself as a global powerhouse. Those brands are not all equally strong: Rosemount continued to slump during the first quarter of 2007, with Australian sales falling 30%, despite a major brand relaunch.
According to spokesperson Hey, the company is also led from Australia. “Each of the regions is run as a stand-alone business,” he said. “The main shared parts are the supply chain, which is global and includes everything from procurement, logistics, production — whether that be beer, wine, spirits or other — and packaging. It’s all run as a single global integrated entity, whereas sales, marketing and customer relations are devolved to regions.”
The benefit, he said, is that the many winemakers and viticulturalists all over the globe are part of a single group, which can share insights into best practice. In a media statement, CEO O’Hoy said that future growth would come from “sustained brand investment, improving route-to-market models and operating efficiencies”.
This brand investment strategy, which includes a global advertising and promotional spend of about 9% of net sales revenue, is what Foster’s intends to use to drive growth. It’s a strategy that puts marketing, not winemaking, into the driver’s seat, as the Lindemans story demonstrates.
An old name becomes a new brand
In August 2006, Foster’s took what it called “a major step forward in the evolution of Lindemans as a global wine brand”. The Lindemans brand range would expand to include a group of ‘country of origin’ wines, which would initially include a South African Shiraz and a Chilean Chardonnay. These wines were destined for sale in the USA and Europe. “We saw equity in the Lindemans brand, and it wasn’t tied to a region,” said Hey.
Lindemans, established in 1843, is a very old label by Australian standards. The Lindemans Bin |
|
|
|
|
|
|
|
|
Company Profiles |
|
|
Page 4 of 5 |
|
|
65 Chardonnay, launched in the 1970s, went on to become Australia’s biggest selling white wine globally. Yet Foster’s research showed that even though international consumers recognised the brand name, they had no idea where it came from. This prompted Foster’s to extend the brand to include wines from other countries. It was a move that attracted considerable criticism within Australia, which was experiencing a grape glut at the time, with grape growers asking why an Australian company would choose to put international wines into an Australian-branded bottle. Hey says the strategy grew the overall Lindemans brand, including the Australian elements. The key point is that this new global wine represents a push to make the brand more important than the wine itself.
“We’re trying to let winemakers drive production, but let the consumer and marketing side drive what people want,” explained Hey. If the market reveals that consumers want Product X — such as a South African Shiraz — than it’s easier to source the wine and pour it into a Lindemans bottle than spend marketing dollars building a brand from scratch. This is a reversal of the traditional way wine is created. Historically, a wine’s reputation rested on what was in the bottle. Now, it is the brand itself that will determine what goes into the bottle.
Yet Hey claims Foster’s respects terroir and origin. “If you want a South African Shiraz, then obviously you don’t want Australian Shiraz transplanted to South Africa,” he said. “You have to have the winemaking staff work with [producers] to produce an authentic product.”
This is one of a number of strategies that Foster’s has to connect consumers with its brands. Another is to do extensive taste research and then create a brand of wine that fits what consumers say they want. When research showed, for example, that women often disliked the high acidity associated with sparkling wine, Foster’s created a wine with lower acidity and backed it up with a female-oriented advertising campaign. The result, Yellow, was so successful it created a boom in the Australian sparkling wine market and lifted sales in the overall category. Hey says Yellow has also been introduced successfully into the US and UK markets.
Another option is to identify a gap in the market, and create a new brand to fill it. “We’ve introduced a brand called Bohemian Highway,” said Hey, about a US$6-8 entry-level wine created for the US market. “It’s a segment where you pick a price point and choose a style.”
Clearly, marketing and brand strategies are of primary importance for Foster’s, at least when it comes to entry-level and commodity wine. But these same strategies would offend consumers in the more sophisticated fine wine market, which Foster’s is also targeting, so a very different approach is required.
|
|
|
|
|
|
|
|
|
Company Profiles |
|
|
Page 5 of 5 |
|
|
/>
The fine wine strategy
Within Foster’s portfolio is a significant group of fine New World wines, including Stag’s Leap, Chateau Souverain, Wynns and Penfolds. To treat these wines as commodities would irrevocably damage their reputations. But although they may be premium wines, they are often unknown outside their home country, which means they still need to be heavily promoted. To make it even more complex, these labels may have different tiers within them. So a brand like Penfolds has Australia’s most iconic wines, Penfolds Grange, at its apex, but also includes the commodity wine Rawson’s Retreat at the bottom of the pyramid.
“We have incredibly high brand recognition inside Australia,” said Sandy Mayo, global brand director for Penfolds. “As soon as you step outside, our awareness is quite low, though it’s high amongst real wine appreciators and connoisseurs.”
Foster’s bring brands like Penfolds to market using a ‘top down’ approach. Winemaker Peter Gago will be sent to old, new and emerging markets to hold luxury wine dinners and events for key media and trade, as well as for connoisseurs — even when Foster’s know a particular market is more likely to buy wine from the entry level range. “It’s important that the consumer doesn’t only see the lower tier,” said Mayo. “It’s important people see the whole depth and breadth of it.”
Mayo said it’s all about focus, so the company chooses two or three key wines with which to enter a market, ensuring there is something from the very top to attract market attention. This is the approach used by luxury fashion brands, which will use haute couture to generate a flurry of media attention, in the hope they can sell ordinary consumers a lipstick.
Into the future
Foster’s is now focusing on the USA, where executives see enormous potential, Mayo said she also sees potential in Asia, particularly in China, and eastern Europe. “Although it’s tiny quantities, there’s big potential in Russia.”
Private equity have also recognised Foster’s potential growth and have been circling since 2006. Hey said that Foster’s, like the CIA, will neither confirm nor deny the rumours of private equity takeover bids. But perhaps the real question is whether Foster’s will stay as one company, or split into two: one for beer and one for wine.
What is certain is that Foster’s has its sights firmly set for the moment on the burgeoning USA market and that consumers there can expect plenty more brand and marketing activity to come their way.
|
|
|
|
|
|
|
|
|
