New year to bring cheap cheer to drinkers

The decision to announce the new board and chief executives of Foster's beer and wine divisions - eight days before the company closes its books for the December half - is more about pepping up the rock-bottom staff morale rather than accelerating the demerger.

That the boss of the group, Ian Johnston, won't have a position in either of the proposed businesses will boost morale and give staff some clarity as to who will be leading both entities and how the board of directors will be divvied up.

But Foster's needs to speed up the demerger rather than string it out in the hope of getting a knockout bid for all or part of the group.

The chief executives of the wine and beer business, David Dearie and John Pollaers, are seen as excellent choices, but the choice of directors appointed to each of the two boards is less obvious. For instance, the only person with any alcohol industry experience is Paul Clinton, who will be a director on the beer company. While this is good for the beer business it will be a blow to the wine unit given his deep knowledge of the North American markets, where much of the business operates.

David Crawford will become chairman of the Foster's beer company with Michael Ulmer as a director, and Max Ould is slated as chairman of the wine business with Lyndsey Cattermole also on the board. These boards are crying out for directors with marketing, alcohol and finance skills.

In a memo to his executive team yesterday, Johnston said the global economy and consumer sentiment continued to be challenging. "I trust you are looking forward to a well deserved break, and wish you a safe and relaxing festive season. Enjoy whatever time you have away, and I look forward to seeing you return in 2011 refreshed and ready for an exciting year ahead."

He is right. In the wine sector alone, more than half of the industry is potentially for sale as speculation mounts that Constellation Brands is on the brink of selling its Australian wine business, which includes Hardy and Banrock Station, and Foster's wine business will be either hived off into a separate listed entity or sold to the highest bidder.

This is against a backdrop of unprecedented levels of parallel importing in the beer, spirits and champagne market, and a strong Australian dollar which has seen a number of wine companies dump stock into the market after suffering cancellations in some big export orders. All of this has been a boon for the supermarket chains whose modus operandi is to screw the best price out of producers.

This, coupled with heavy price discounting as Foster's tries to regain some of the market share it has lost in the past few years, has made it a good time to be a consumer. For instance, brands such as Crown Lager can be bought for less than $40 a case, which is the cheapest it has been for five years. Three years ago Foster's was wholesaling a slab of Crown for $43.80.

Parallel importing is also hurting business as supermarket chains and some of the bigger independent bottleshop chains bypass Australian brand licensees and import from third parties in countries including Brazil, Malaysia and the US.

Parallel importing hit record levels in the past year as the dollar continued to strengthen and retailers, looking for ways to drive prices down and exert control over their suppliers, became more aggressive in importing.

Parallel importing allows retailers to bring in batches of cut-price beer or other alcohol independently of the official distributors. It occurs where companies set different price points for their products in different markets. For instance, Moet might be sold in France at one price, in Asia at another and in Australia at a different price again. Parallel importers source the cheaper product and undercut what it ordinarily would cost in Australia.

For liquor suppliers such as Foster's, Lion Nathan and Coca-Cola Amatil, which hold various licences, they lose revenue each time their customers, who include the big retail chains and independent liquor stores, source products such as Corona, Stella, Becks and Peroni from third parties.

Foster's generates more than $70 million a year in profits from its licence to sell Stella and Corona. If more than 20 per cent of product is being leached by parallel importing, this is conceivably costing Foster's tens of millions a year in sales.

In premium spirits, where the margins are juicier, parallel importing is rampant. In spirits, which represent an estimated $3 billion of total alcohol sold in Australia, it makes sense to source premium spirits because the same amount of duty is paid regardless of the quality. For instance, Christmas some liquor outlets are selling Chivas Regal for less than $36.90 a bottle, when it normally sells for about $48.

Where the discounting and margin crunching ends is anybody's guess.