Foster's has already told the market its wine profits will be down $90 million in the December half. Now the concerns are turning to its $1 billion beer division.
This division has lost market share and there are fears it could lose two lucrative beer licences, Stella and Corona, which contribute more than $80 million a year in pretax profit.
The Stella beer licence is understood to expire this year and competitors have already started lobbying the owner of Stella, Anheuser-Busch InBev, which is the world's largest brewer. The chances of Foster's keeping the licence, which is worth about $15 million a year, look grim.
First, under the Foster's management, Stella has been steadily losing market share and second, since the global merger of Anheuser-Busch and Inbev last year, the new entity's strategy is to appoint one brewer in each region to manage its portfolio of licences.
Right now, its beer licences in Australia and New Zealand are split between the beer duopolies, Lion Nathan and Foster's. But it recently tipped the balance in Lion Nathan's favour when it granted Lion the licence to produce and distribute its Budweiser portfolio of brands in Australia and New Zealand, effective from December.
If Foster's loses the Stella licence, investors would cope, but if it lost the Corona licence, it would be viewed as a terrible blow.
The reason is simple: Corona is the jewel in the crown in the foreign premium beer category. Its market share is growing and the latest figures from AC Nielsen for October show it had an annualised market share by value of 3.7 per cent, compared with Crown Lager at 2.4 per cent.
Industry sources suggest Foster's generates more than $65 million in earnings before interest tax, depreciation and amortisation (EBITDA) a year from Corona. Its total beer EBITDA was $1.05 billion last year, and total group EBITDA was $1.3 billion, which makes Stella and Corona significant contributors.
In a report in December, Credit Suisse valued the Stella and Corona licences at $350 million. Not surprisingly, competitors would walk over dead bodies to snare the Corona licence.
Lion Nathan now holds the licence in New Zealand. What makes it interesting is the owner of Corona is the Mexican beer maker Grupo Modelo, which is partly owned by Anheuser-Busch-InBev.
Grupo Modelo is embroiled in an arbitration dispute with Anheuser-Busch related to the company's acquisition by Inbev NV. The Mexican company claims it was not consulted about the takeover of Anheuser-Busch, which owns 50 per cent of Modelo. Modelo wants $US2.5 billion ($2.6 billion) in the New York arbitration case.
But a recent report from Reuters cites industry sources suggesting that a resolution of the dispute could open the way to talks for Anheuser-Busch InBev to increase its stake in Modelo in what could become the next chapter of the global consolidation of the beer industry. If this happens, the Corona brand would then be in the Anheuser-Busch Inbev portfolio.
Whatever the case, Foster's will work hard to keep it, which could result in negotiating smaller margins. The Corona licence is on a long-standing short contract, and the lobbying has begun. In its favour, Foster's has had the licence with Gupo Modelo for a long time and market share has been growing.
Nevertheless, Foster's will be juggling these pressures as it looks for a new boss for its beer business, following the sudden departure of Alex Stevens in December due to ill health.
The company has started the search for his replacement but it was no doubt a big blow for the chief executive, Ian Johnston, who has had to fill the breach.
But the clock is ticking. The Foster's wine business has long been considered a poison pill against any takeover of the group, and its cash cow is starting to show some cracks.
Over the past decade the stock has hardly done a thing. According to Southern Cross Equities, an investment made in the stock in 2001 has basically generated no capital gain and a 4 per cent yield. After inflation, that's a horribly inadequate return from a company that has few competitors in its core beer business.
After years of flatlining, the overall beer market in Australia is growing – largely at the expense of Foster's. Its current market share is about 51 per cent, after being 53 or 54 per cent a few years ago.
The reason? A lack of production innovation, changing consumer tastes, the rise of private label brands by the supermarket chains, and the entrance of new competitors.
When Foster's releases its interim results next month, they will show the margins and profits of its beer business have held up, while volume has fallen. The question is how long can it keep letting market share go before it has to start buying volume?
In beer economics, less production volume means less recovery of production fixed costs. It's all to do with losing or winning scale economies. And that momentum is moving against Foster's towards Lion Nathan and the supermarket chains.
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