Kent Grogan

Alan Kohler: G'Day, Kent. Thanks for joining us.

Kent Grogan: It's a pleasure, Alan. Good to be here.

AK: Now, I can confess as I read the prospectus and I got to the valuation of the business, a hundred and fifteen million dollars, I thought you've got to be kidding.

KG: Well, in, from our opinion, we're probably undervalued based on, the main valuation at the moment is based on our agreements we've got in China. So, if you're looking at the Australian operations and I would actually say our cash flow and turnover has been negligible, and that said.

AK: Well, you lost money.

KG: We've lost a lot of money, but it's a very capital intensive business, mate. So, certainly in Australia what we've been doing is proof of modelling and we've established that our brands have fantastic penetration. So, unfortunately in Australia without a guarantee in a large scale, you know, guarantee of continuity of supply, it's a, you're put in a difficult position for expansion. So, that's what the floats all about and what we're working on at the moment.

AK: So, okay, so it's all about China, right?

KG: Well...

AK: The valuation is based on China. It is not based on Australia.

KG: Yes, correct, yes

AK: Okay.

KG: That said, potential in Australia is enormous for us. We've found that through the stores that we've strategically positioned ourselves in, all of them are independent operators, although they are operating under the biggest brand groups in Australia.

AK: So, that's just another way of saying you haven't gotten into Dan Murphy, isn't it?

KG: No, look. We actually can't get into Dan Murphy's because we can't get the supply that we can actually take the sort of volume levels up. In this sort of industry, the biggest mistake you can ever make it make promises you can't deliver on, so if we go into either of the major two groups at the moment and we have any out of supply issues, then we've just crucified the brands. And we're just not going, we're not prepared to do that.

AK: So, I take it that means that Icon, you're brewing contractor can't do, can't do that sort of volume.

KG: No, and in the immediate future, they can certainly expand out to a level that we're comfortable with without creating any vulnerabilities around the brand or supply issues, but certainly we've been in significant discussions over the last twelve months about building a significant facility in Australia.

AK: Just before we get onto China, we obviously need to focus a lot on what you've got there.

KG: Yeah, absolutely.

AK: But let's talk a little about the business. You started in 2009.

KG: Yes

AK: And I think you...

KG: Completely naively, looking back.

AK: Yeah, it seems to me that you had in mind that you wouldn't just be a little craft brewer, you wanted to take on the big guys.

KG: Yep, absolutely.

AK: And I just feel, it just feels like that hasn't quite worked out as you might have hoped.

KG: No, I think, look, it certainly, not respect to the brands, we certainly know that the brands are mainstream competitive brands. The, how capitally intensive the industry is, and how much is actually required to penetrate, certainly I underestimated it. That said, there's enormous opportunity whenever you've got, it's been proved globally, whenever you've got two major players, there's always an opportunity for a third player, no different from what we've seen in the ALDI scenario with Coles and Woolworths.

AK: But those two players, those two guys, the major players, CUB and Lion came at you, didn't they?

KG: Yes, they did. Yeah. Very strongly.

AK: What did they do?

KG: Lots of things. Lots of things that I would deem unethical, but not, certainly, I want to discuss today. But yes, they certainly took an interest in me, let's just put it that way, yeah.

AK: And, but also there's been since you started a proliferation of craft brands as well.

KG: There has, and it's been fantastic. There's been a hell of a lot of independents and craft brewers establish themselves. Again...

AK: Your contract brewer brews for a lot of them.

KG: Yeah, absolutely. Yeah, that's right, that's right. And it's been fantastic to see. I suppose we differentiate ourselves in the craft area, although we still adhere to the principles of craft brewing which ultimately is no preservatives or no additives, for ourselves we really positioned, not only the way that the brands appears, but also the taste profile. So, we work on a very sessionable lager. And...

AK: What do you mean sessionable?

KG: Well, sessionable... with the craft beer sense, you'll quite often have people drinking a couple of stubbies, but we're sort of in that field where, you know, ultimately…

AK: You can get stuck into it?

KG: Well, you can get stuck into it, but you can still wake up and mow the lawn, so you know, we still don't put any preservatives in there.

AK: Right. And which of the, which is the biggest seller of your two brands, Broo or Australian Draught?

KG: To be honest, they're probably similar at the moment. We've been, but the take up was a hell of a lot faster through the focus group and the store network that we have for Australia Draught. So, I think the differentiator there was not necessarily the beer, but more the brand itself. People are familiar with the term draught on a label and that sort of accounts for the faster take up and mainly probably the acceptability of the consumers with that brand rather than Broo, you know.

AK: So, when did you decide to go into China?

KG: That was the end of 2011, we had the first chats. And it was completely by chance. I was actually doing a tasting at one of the golf clubs down at the peninsular at Moonah Links and I met a retired farmer down there. And we got along really well, had a you know, had a chat for a couple of hours, and all things probably but beer. It was mainly politics and farming. All my family are farmers. And then we, then he contacted me about twelve months later and said are you interested in going to China. And then it, sort of, the conversation started from there, and then three and a half years of trips, consecutive trips in and out of there, ongoing, building the relationship and rapport, we sort of finally got there, but...

AK: So, this bloke. Did this guy introduce you to…

KG: He introduced. Yes, he introduced me to an intermediate who was, she was originally ex-central government. She was bakery items for the government, for all of China. So, her record in FMCG was quite outstanding, and her contacts and network. So, it was really, firstly building the relationship and rapport with her, and then her feeling accepting of me and trusting of me to then actually escalate it to the introductions that she ultimately made and help me build those relationships.

AK: So, you've got a contract with a brewer, [unintelligible]

KG: Yep.

AK: Okay. And then you've got a contract with a distributor.

KG: Yes.

AK: [unintelligible]

KG: Yes.

AK: It would seem to me, as an outsider, that the distributor is more important than the brewer, but is that correct?

KG: Well, absol... look, on two steps, well, yes and no. The producer is equally as important because ultimately again the irony is that we've got unlimited supply over there. So, they're, they're one of the major brewers in China and China is no different than anywhere else in the world, there's been a consolidation of the beer industry over there. So, they are literally the last independent over there that has any scalability. So, they're in the process now, they're about to commence the construction of a brewery that is going to have the capacity of ten million tonne of beer per annum. So, in terms of scalable breweries, that would be one of the biggest breweries in the world. So, that's incredibly important for us, because not only do we get the efficiencies and the power of that guarantee of continuity of supply, but it means that we can go into negotiations with any of the distribution network or retail programs in China and be confident that we're able to supply, and it also gives us the ability to quite, well extremely competitive with pricing and rebate structures.

AK: And are you confident that they're going to get the recipe right?

KG: Absolutely. Yeah, no shadow of a doubt. We've had extensive discussions obviously with their master brewer who looks over their twenty-eight breweries. And we've got no problem whatsoever. Our brewer will spend a significant amount of time over there. But fortunately, the breweries around the world, depending on the technology they've got at hand, it's not one of the old days where you would be dragging it from a river bed and then, you know, the purification process for water now, you can pretty much blend it out for basically, for the layman, you wouldn't pick any difference.

AK: Because it's interesting and I would have thought important that a lot of the, there's a lot of Australian product going into China and a lot of companies here are doing well out of that, but it's all exported from here to China. And the Chinese people want to buy Australia made products.

KG: Yeah, absolutely.

AK: So, I would have thought that them knowing that it's a Chinese made beer, even though it's going Australia Draught on it doesn't matter, they're not going to want it.

KG: Not at all, Alan. Yeah, not at all. And in fact, it's no different to here. There's a lot of premium brands obviously produced in Australia, the lines of Heineken. It's more the, more the emotive feeling when people are drinking an international label and being seen drinking an international label irrespective of where they're actually produced from. And certainly, in the Chinese market, in respect to beer, you'll be looking at, imports generally account for genuine imported beer probably accounts for one or two percent of the entire consumption over there for international labels. So, when your likes of your Budweiser or Heineken, they're actually produced there. That said, we also have the ability through Australia Draught that we will bring in as a premium import as well, which has been demand for. Yep.

AK: You've got your deals with [unintelligible] five years plus five.

KG: Correct, yep.

AK: So, that's fine. The five years I get, but the plus five seems to be a little loose in the sense that it may or may not happen. Is that correct?

KG: After five years time?

AK: Yes, after five years.

KG: Well, that's absolutely correct. No one's got a crystal ball, but certainly, our relationships are incredibly strong with our partners.

AK: But it doesn't seem to be your option. It seems to be their option.

KG: Yeah. What I can say is that our relationship's incredibly strong and I see that even, you know, being forged in a stronger capacity over the years, you know, we've, we're extremely fortunate to be in with the partners that we are.

AK: So, can you tell us what your business plan is and how you, on the basis of the business plan, the sales profile that you're expecting, can you justify the hundred and fifteen million valuation?

KG: Yeah, certainly. We've actually said what would be deemed the most aggressive rebate in China in respect to our pricing for any international label. There's also, as you said, there's a consumer demand over there for Australian products, and no different to an Australian label. So, our expectation for first year, once we've activated, which will be this side of Christmas is five million cases. We're very comfortable in saying we're very confident of it too, in our first year. That alone, the types of margins that we're going to achieve through that have more than justified our actually price point or valuation that we're going to market on. And that doesn't take into account the expansion that we're planning also in Australia.

AK: Five million cases, so what are you going to make on, what do you make per case?

KG: We're going to be making significant, we haven't disclosed in the prospectus, so I don't think it would be credible for me to quote that to you now, but significant enough to more than justify where we've sat the valuation at.

AK: Can you tell us, okay, I notice you haven't got that in the prospectus, but can you tell us what the price of case in China is going to be?

KG: I can tell you a hundred and fifteen Yuan is our wholesale point and I can tell you there is sufficient rebates and margin in there to incentivise both our distributor and make us quite happy and [unintelligible] happy at the end of the day.

AK: Right, okay. Interesting thing about your business is that you're giving a lot of money, twenty-five cents per case, to Commando Welfare and the SAS Fund.

KG: Yes, yeah. That's...

AK: Is that because you used to be a commando?

KG: No, not at all, not at all, but I have a lot of friends in both the SAS regiment and the second commando regiment and I've got a, my family history, we've got three generations of veterans. And it's really just something through the time that I've spent with these guys, unfortunately there's not a lot of help for them at the moment, certainly in respect to I don't feel the government's doing enough for the returned soldiers. And it's just something I'm passionate about, about giving back, not only to them, but being a contributor to Australia. So, everything we do, we try to ensure we're contributing back to the community. So, yeah, I mean, it's something we've had formalised there for some time and we're looking forward to, you know, really being an enormous contributor to soldier welfare programs and defence force programs.

AK: You're retaining sixty-five percent of the business, you're not selling into the float.

KG: Correct. No.

AK: How long are your shares escrowed for?

KG: Two years.

AK: And what's your intention after that?

KG: For that to continue, you know, I've got, this is not just a short term view and, if we were looking at an exit strategy, we would be looking at a lot different figures within the prospectus because I would have played it a lot differently. I mean, we've, we have got the ability through, we could even spread out contract manufacturing, but it's a short term vision because, again, we make our brands vulnerable to third parties. We're not going to do that. My intention is to see this the rest of my days. I've got a vision in what I want to see and it's about creating a really strong foundational Australian business that's proud about what they do and how they contribute and equally as proud as the products they produce, and you know, be a contributor well into the future.

KG: Thanks very much, Kent.

AK: No worries, Alan. Thank you for your time.