Mixing wine and beer was a disaster, says former wine boss

A $12bn demerger by Foster's was the culmination of "stupid" wine acquisitions, poor management and a changing wine industry.

A $12 billion demerger announced by Foster's earlier this week was the culmination of "stupid" wine acquisitions, a poor management culture nurtured by monopoly positions in the beer market and the changed economics of the wine industry.

The scathing assessment of the company's fumbling efforts to blend its brewing and wine operations was delivered by the highly regarded Ray King, who ran the wine business for three years after Foster's paid $482 million for his listed Mildara Blass group in 1996.

Seduced by the mythology surrounding the Penfolds brand, Foster's had encouraged him to "have a look at Southcorp", as well as Beringer in the US, Mr King said.

Both companies were ultimately acquired -- Beringer for $2.7 billion only months after Mr King retired in 1999, and Southcorp for $3.2bn in 2005.

The strong reservations he expressed at the time about Southcorp, in particular, have proved to be prescient.

"Southcorp was just stupid -- Penfolds probably represented less than 5 per cent of the business, and apart from that it was just a poor business with low prices and low margins," he said.

"I was less critical of Beringer, even though I resisted requests to make overtures, but I was still concerned that Foster's didn't know the US market well enough to spend that kind of money."

Beringer, he said, had a poor return on capital invested, but was growing "quite nicely".

Within 12 months, however, the US industry had changed dramatically, exposing Foster's lack of detailed market knowledge.

The scale of the wine misadventure has now become apparent, with writedowns nudging $3.5bn from $8bn in invested funds, including capital expenditure.

Asked who was the best Foster's director he had worked with, Mr King nominated non-executive board member Fred Hilmer, who went on to have an unsuccessful stint as chief executive of publisher John Fairfax.

"He was a real clear thinker," Mr King said.

Pressed on his assessment of other directors, he declined to comment.

For Foster's in 1996, Mildara was a test case for its ambitious wine strategy.

But in a forerunner to the challenges Foster's would face, Mildara was experiencing growing pains, forcing it to build a second sales force to nurture its expanding armoury of brands.

"We'd grown organically and by acquisition, but I was concerned the growth would be limited if we stuck to one sales team, so as we grew I added the new brands to a second team," Mr King said.

"But even then, they tried me on for size to merge the distribution of wine and beer.

"It happened after I left, and then they added even more brands with Southcorp, so it was a disaster waiting to happen.

"It proved the old adage that you don't mix the grape and the grain."

Mr King conceded the wine industry's dynamics had fundamentally changed, with the power of the retail chains growing significantly, and a global shortage of grapes in the 1990s turning into a persistent, profit-sapping glut.

However, instead of confronting the chains with an endless array of wine labels, he said Foster's should have concentrated on a much smaller number of core brands.

"If you have too many brands, you have no choice but to sell in bulk," he said.

"The retailers will tell you: 'I'll take your top-five brands and five truckloads of the other stuff at a 20 per cent discount."

Part of Foster's problem in responding effectively to the growing power of the big grocery and liquor chains was an arrogant culture built on monopoly positions in the old, state-based beer markets. This culture was still "surprisingly strong", even in the late 1990s.

As to the oversupply of grapes, Mr King said the 1990s shortage had been an exception to the normal surplus position.

"Wine companies traditionally had a low return on investment and low margins," he said.

"But even when there was a glut of grapes in the 1970s and 1980s, Mildara's returns were about three to four times the industry average."

According to Mr King, Foster's thought the favourable wine industry dynamics of the 1990s, when it bought Mildara, would last forever. Foster's shareholders have since learned otherwise, to their detriment.