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Analysis: SABMiller faces slog to turn around Foster’s

David Jones London

SABMiller is set for a tough battle to turn around its Australian Foster’s acquisition as its beer volumes sink and it loses key import contracts, which will stretch management to meet new aggressive targets.

Investors are unconvinced that SABMiller, the biggest brewer in fast-growing emerging markets, made the right move in buying the largest player in the mature Australian market when its beer volumes, profit and market share were all going south. SABMiller’s shares have underperformed its main rival Anheuser Busch InBev.

SABMiller spent $11.8 billion (R100bn) last year on Foster’s and set out ambitious targets to reverse the slide of the perennial underperformer in an Australian market where beer has lost out to wine and volumes have been flat for 20 years.

Last week the brewer of Miller Lite reported Foster’s beer volumes slid 4 percent in its year to March due largely to a weaker Australian economy, poor summer weather and management distractions during the bid battle.

This compared with the SABMiller group’s 3 percent annual volume rise for its beers, with Africa growing volumes as fast as 13 percent and Latin America by 8 percent.

“SABMiller has turned around difficult situations before but those have often been from dominant market share positions. Australia is a tough beer market with two big powerful retailers,” said a major shareholder.

The Australian beer market is a duopoly between Foster’s and Kirin-owned Lion Nathan, and Foster’s market share has shrunk – both big brewers now have about 45 percent each.

SABMiller’s takeover of Foster’s prompted the loss of certain licence and import arrangements for beers such as Stella Artois, Asahi and Modelo-owned Corona. These brands had combined annual volume of 915 000 hectolitres out of an Australian overall annual market of 18 million hectolitres.

The loss of Corona was a major blow as it was the clear leader in Australia’s growing imported beer sector and accounted for two-thirds of SABMiller’s lost volume. Furthermore, the Mexican beer is now being distributed by its arch-rival Lion.

Analysts estimate the loss of these three brands could cut Foster’s profit by between $70m and $100m from a base of $735m for the year to end-March, although SABMiller will be looking to minimise any lost volume by pushing its premium beer Peroni.

“I think Foster’s will be a reasonably long job to turn around as it is relatively unusual of SABMiller to acquire business leadership in a mature market,” analyst Martin Deboo at Investec Securities said.

He remains a pragmatic buyer of SABMiller shares as the group still earns 70 percent of profits from emerging markets, but the Foster’s move has made him cautious as it cut that proportion from 80 percent.

Shares in SABMiller added 1.2 percent to close at R315.01 on the JSE yesterday. – Reuters

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