Lion Brews Market Storm
The Age
Thursday October 29, 1998
Australia's beer market was in danger of suffering the same fate as the petroleum industry, where producer ownership of retail outlets had effectively strangled competition, Lion Nathan's chief executive, Mr Gordon Cairns, warned yesterday.
Despite this, and Lion's antipathy to gaming and leisure, the trans-Tasman brewer has laid down the gauntlet to its rival Foster's Brewing Group, declaring it would decide on its own hotels strategy to meet within the next 12 months.
Mr Cairns, speaking at the announcement of Lion Nathan's ``watershed" $136.1million 1997-98 net profit, said Lion was:
* Poised to launch a strategy to counter Foster's Brewing Group's Carlton & United Breweries' move in July to beef up its hotel portfolio with the $300million purchase of Austotel from Brierley.
* Expecting to grow its profit in Australia in 1998-99.
* Considering a buyback if it could not find investment opportunities that met its internal hurdle rates of 12per cent.
* Committed to selling its Pepsi franchise in Australia and New Zealand, despite the profit turnaround in Pepsi.
* The only international brewer enjoying volume and pricing growth in China.
The trend towards brewer-owned hotels was ``unfortunate", Mr Cairns said, but ``if a competitor makes a move, you can't sit there and do nothing".
Producer ownership of downstream retail outlets in the petroleum industry resulted in the elimination of independent outlets, less competition and higher prices.
``Our philosophical point of view is that there is a danger that will happen ... at the end of the day, it's not good for the consumer," Mr Cairns said.
However, later he said: ``It's not a regulatory issue, because I think CUB have 10per cent of hotels or something like that, so if we do 10per cent, there's still 80per cent of the market that's free."
Lion Nathan, which was exiting its South Australian hotels, preferred not to own hotels, Mr Cairns said, adding that the group was still considering its options. These included making a similar investment in hotels, or forming more effective alliances with non-CUB hotels.
``Our history has been that we are not very good hoteliers, we are brewers," Mr Cairns said.
He also foreshadowed further investment in China along the Yangtze River delta, where the group has a profitable joint-venture brewery in Wuxi, and a state-of-the-art brewery in Suzhou.
Lion Nathan earlier reported a 54.5per cent hike in 1997-98 net profit, from $NZ88.1million ($A74.5million) last year.
The directors maintained the final dividend of eight cents, taking the full-year payout to 16cents, the same as last year.
The result was underpinned by an 11per cent hike in earnings before interest and tax of $NZ286million, from $NZ257.7million in Australia. Lion Nathan's flagship brands are Tooheys, Hahn, XXXX and Swan Lager.
Despite a third-quarter market share slump, caused by a ``ferocious" attack from its rival, Lion reported a stable Australian market share of 41.3per cent, with volume growth in line with market growth of 1.7per cent.
``I'm very confident the (Australian) market will grow again next year," Mr Cairns said.
As foreshadowed, the group reported a substantially increased loss of $NZ29.8 million in China, from losses of $NZ8.8 million a year earlier, with about $NZ5 million attributable to the impact of a 20per cent devaluation in the Chinese yuan against the New Zealand dollar.
The brewer's Wuxi joint venture notched up earnings of 17.5million yuan, while its newer wholly-owned Suzhou brewery, near Shanghai, reported losses of 162.3million yuan.
Lion was investing $NZ20million on marketing and brand development and expected to ``take money out" of China after five to 10 years, Mr Cairns said.
In New Zealand, earnings declined 3.5per cent to $NZ100.1 million, as the market shrank and Lion, the dominant player, conceded market share to its rival DB Breweries. Lion's share dipped to 61.1per cent from 61.5per cent a year earlier.
Pepsi, valued at about $NZ100 million, reported EBIT of $300,000 - a substantial turnaround from the $NZ11.3million losses of a year earlier.
However, Mr Cairns confirmed Lion was still committed to selling Pepsi, hinting that the sale of the New Zealand franchise was closer than the sale of the Australian franchise.
It has hired Macquarie Bank to oversee the sale.
Lion, which had free cashflow of $NZ200million, had plenty of scope for acquisitions, he said.
Kirin Brewery Co of Japan, which became a 45per cent shareholder in Lion in April, declared the profit ``a very good result in a year of turmoil for the region's economies".
On the Australian market, Lion Nathan shares closed eight cents firmer at $A4.22.
Helen Shield was flown to Auckland by Lion Nathan.
© 1998 The Age
