THE DISTILLERY: Storm in a can

Storm in a VB can? Or just another bottle of Penfolds panic, hic? The beer wars that have seen flying quads of Fosters operatives raiding supermarkets and grog shops leaves the impression of a Mack Sennett silent movie, or perhaps, the legendary Untouchables from the 1930s. You'd never see these secret agents from Fosters shopping at David Jones (except for a snack in the food hall?) or flying Virgin Blue when they go interstate to raid Coles and Woolies. Perhaps they should, it would help boost sales at the former and profits at the latter. Anyway, you choose from the reports and analysis this morning. But do it with a cup of coffee or tea, it will steady your nerves..
 
The Sydney Morning Herald reported this morning: "A parliamentary inquiry into the milk price wars between the supermarket giants Coles and Woolworths will unofficially be extended to beer when the two retailers front up for a grilling in Canberra next week. The milk wars inquiry was called amid fears for dairy farmers' livelihoods. Senator John Williams, who is a member of the inquiry, said when Coles and Woolworths appear next Tuesday he would raise questions about their motivation for trying to move the pricing war into beer." Grandstanding again, led by Senator Nick Xenophon.
 
AAP reported: "Retailers Coles and Woolworths have denied that they are selling some beer brands at below cost in a cut-throat beer war. Coles said in a statement today that "contrary to today's media reports, there was no plan to sell Victoria Bitter at $28 a carton in 1st Choice outlets, or any other Coles liquor business". A spokesman for Woolworths today rejected any suggestion that Woolworths was engaged in a beer war with Coles or selling beer at below-cost prices."
 
The Herald Sun's John Beveridge looked at the numbers behind the beer market and asks: "Would you buy a home brand beer from Woolworths or Coles?  At best the answer is probably a qualified "maybe" which is the reason Foster's has for now comprehensively won a brief and undeclared beer and separate wine battle against the big retailers Coles and Woolworths. It is a very rare victory against the giant retailers and comes about because there is no large volume home brand beer, and unlikely to be one. Foster's own figures show regular beer sales are shrinking by 4 per cent a year while craft, new style and premium international beers sales are growing. Milk has headed in the opposite direction, with the big chains successfully introducing their own brands." Good point.
 
The Australian's Tim Boreham said: "Your columnist can't decide who's the villain in the Great Beer War – interrupted – which makes the current bread and milk price skirmishes look like a Spanish civil war-style entree to the real thing. Foster's this morning confirmed a report that it turned back supply of the amber fluid to a number of customers for a short period. We're not talking about a couple of zealous liquor merchants at the periphery, but Coles' 1st Choice and Woolworth's Dan Murphys. But the skirmish demonstrates just how sluggish the $14 billion beer market has become – and the courage of one supplier not to be pushed around by the Big Two retailers. If Foster's stance fosters a Middle East-style spread of rebellion, then Coles and Woolies have some thinking to do."

John Durie said on The Australian's website yesterday: "Foster's wine chief recently raided Coles liquor outlets, buying as much Penfolds 389 as he could as part of its campaign to protect his brands from retailer discounts. The raid was successful with Foster's staff buying 60 per cent of the Coles allocation at the advertised price of $37 a bottle, which compared to the wholesale price of $44 a bottle. The move follows several shutdowns by Fosters beer division dating back to February 1, when the beer giant stopped supplying independent outlet Getwinesdirect.com.au. Under the Trade Practices Act, when a product is sold at below cost the producer has the right to withhold supply for a few days if it believes the retailer is using the product as a loss leader. Foster's has done this several times to protect its brands. It has also targeted Coles and Woolies and other independents who have sold below a certain price. Woolworths rejected any suggestion it was in a beer war with Coles or selling beer at below-cost prices." Sounds like a case (or three) for the Undrinkables, a team of 'dry' executives, dedicated to preserving the Foster's way of life. Can we get Sean Connery to play Elliot Penfold?
 
Still in retailing, but away from grog, Fairfax's Liz Knight saw the gains in the David Jones interim figures, but not the light: "For David Jones shareholders there was one vital ingredient missing from today's profit announcement – any glimmer that trading has picked up over the past couple of weeks. Instead the company inferred the opposite. It pointed to the Japanese earthquake and tsunami, and trouble in the Middle East as part responsible for the poor consumer sentiment that the high end department store group is experiencing. Shareholders will appreciate the strong profit numbers David Jones produced in the first half of 2011. The 5.2 per cent  improvement in earnings before interest and tax is quite an achievement in the depressed retail environment where sales are flatlining. It is certainly a far better outcome than its main competitor, Myer – whose profit has been falling."
 
Stephen Bartholmeusz wrote on Business Spectator yesterday: "Paul Zahra will take some comfort from the fact that while David Jones has reported an apparently modest 5.2 per cent growth in earnings it was a record for first half earnings and compares more than favourably with the experience of its bigger competitor. In the circumstances that confronted retailers in the six months to end-January the David Jones result was actually more than creditable. Any result with positive earnings growth for a retailer of discretionary items – but particularly for an up-market retailer dependent on fashion – is impressive in the conditions. Last week, of course, Myer announced an 8.8 per cent decline in first half earnings on a 3.5 per cent smaller sales base. David Jones kept the fall in its sales to 0.2 per cent."
 
And this morning John Durie opined: "Paul Zahra at David Jones can claim to be better at cost-cutting than his department store peers but he suffers from the same disease of consumers' total unwillingness to spend. The issue is just how much that can be blamed on cautious consumers still paying back debt in the wake of the GFC and how much can be blamed on his charging too much for products. If you ask Zahra he will clearly opt for the former but a niggling doubt remains whether one reason consumers aren't buying is because prices are too high and David Jones, Myer et al have resurrected the concept of self-serve department stores. Arguably more money on promotion and sales and less into the pockets of shareholders will produce better sales and profits."
 
This morning Ms Knight combined comments on David Jones and Virgin Blue: "David Jones has had negative sales growth over the first six months of its financial year and nothing to date suggests the situation has improved...like David Jones, Virgin highlights the less-quantitative issue of consumer confidence. If the leisure market remains weak, the airline will struggle despite a number of cost-cutting initiatives. There is every chance the consumer who has put off the purchase of a lipstick has also cancelled her family's plan to travel to Port Douglas."
 
That saw Fairfax's Ian Verrender join the issue: "If you blanch every time you fill the tank at your local petrol station, spare a thought for John Borghetti. As the price of crude oil marched higher this year, the Virgin Blue boss watched in despair as his potential profits were whittled away to nothing and then slipped into the red. Just one year into the job of retooling the airline, and after successfully overcoming a series of regulatory obstacles to expanding its international services, Borghetti was forced yesterday to issue the company's fourth earnings downgrade in 12 months."
 
And Bartholomeusz also wrote: "John Borghetti was on the money when, in announcing Virgin Blue's second earnings downgrade for the year – and foreshadowing a slump into the red – he said the market conditions validated the group's strategy of reducing its dependence on the leisure sector. Unfortunately they have also complicated that strategy. The Queensland floods and cyclone, the Christchurch earthquake, soaring fuel costs and subdued discretionary spending by consumers were always going to hit Virgin Blue hard. Having already downgraded expectations of its earnings ahead of the first half results, where it reported pre-tax earnings of $37 million, it has now forecast pre-tax losses of between $30 million and $80 million for the full-year. In the context of a group of its size (it has a market capitalisation of about $680 million) the potential second half loss is sizeable."
 
And The Australian also reported that at least one analyst has Metcash winning Franklins and the ACCC losing: "Metcash has an "event opportunity", given a likely court approval of its $215 million plan to acquire Franklins, says Credit Suisse. The investment bank today upgraded grocery wholesaler Metcash to neutral from under-perform, given the court's "likely" approval of its acquisition of the Franklins grocery business after recent court proceedings revealed the competition watchdog held discussions with Woolworths after blocking the deal."
 
The Australian Financial Review predicted this morning: "Banks and other deposit-taking institutions will be allowed to issue a new class of bonds to investors that will diversify and reduce the cost of funding, under proposed laws to be unveiled today by the federal government."
 
Fairfax's Malcolm Maiden says "The ASX, the Singapore Exchange and their advisers are working on the assumption this week's reports that their merger has a snowball's chance in Saudi Arabia of being approved does not mean their time to sell the merits of the union has run out. They really have little option but to do so. According to the leaks from Canberra, the exchanges are flogging a dead horse: the board might block the deal; if it doesn't block it, the government probably will; and if the government does give it a tick, there aren't the numbers in parliament to pass enabling legislation, with key independents and the Nationals opposed, and the Liberals sitting on the sidelines."
 
Fairfax's Insider, Ian McIlwraith, looked at the results of the first round of financing of the $4.1 billion marriage in the Kerry Stokes' corporate household: "...only 4300 of WAN's 27,000 investors put their hands up for the CULS - even though they carry the right to be bought back by WAN at a premium if the merger deal with Seven falls over. No doubt Kerry Stokes, chairman of both WAN and Seven, will be making reassuring noises at a breakfast in front of about 1000 people in Perth this morning. After all, the money is in the bank because the deal is underwritten, and sub-underwritten."
 
The Australian's Nabila Ahmed noted this morning: "Investors keeping a close watch on negotiations between the government and the pathology industry over funding arrangements for the industry have no cause to be optimistic just yet. The industry is relying on its own forward estimates for pathology funding growth to help it negotiate a "saving" or "cut" that may be palatable for operators such as Primary Health Care and Sonic Healthcare."
 
Is this a worry? The AFR reports that: "News that Westfield Group is scouting sites in Western Europe, including mixed-use developments, will come as a surprise to some observers of the group." The group has cut its exposure to Britain and is looking to sell poorly performing malls in the US, but Europe? And the AFR also reported: "Australian property investors are once again looking for opportunities in the US – investing up to $1 billion – just as the casualties of the last property plunge across the Pacific return home so much the poorer."
 
Changes in takeover law coming? The Australian's Bryan Frith reports this morning: "Britain's Takeover Panel is proposing, except under limited circumstances, to abolish break fees in takeovers and schemes of arrangement and other deal protection measures such as "no shop" and "no talk" restrictions. The panel also wants to prohibit bidders and targets from signing contractual implementation agreements and to amend rules to limit the ability of parties to make "bluffing bids" and for potential bidders to apply "bear hugs" to target companies (announcing proposals rejected by the target board in the hope that major shareholders will force the target to capitulate). The panel is concerned that market practices in recent years have made it too easy for hostile bids to succeed, in part because they are "influenced unduly" by short-term investors."
 
And finally, all this consumer caution that's hurting retailers (DJs), airlines (Virgin Blue) and others in the consumption space has a price. In The Australian this morning, economist Don Stammer wrote: "The figure of $74 billion is a lot of money. That's how much Australian households saved, in aggregate, last year. It's 10 per cent of disposable income, or an average of $3300 for each of us. Yet five or six years ago, Australian households spent every dollar of income, and at times a bit more. Thriftiness is back and investors need to be aware of the consequences. Surprisingly though, the number of Australian households that have stepped up saving has increased more than in other countries, despite our being less affected by the GFC."