All chief executives can learn from the mistakes of Foster’s CEO Trevor O’Hoy. That’s why it is worth looking at exactly what went wrong with the Southcorp takeover.
In classic management theory, Southcorp was a good buy because it made Foster’s a serious global premium wine player. And if you are going to be in any world industry you need to be either a boutique operator or in the top two or three in the market.
Being in the middle is “no mans land”. If Foster’s didn’t buy Southcorp, it had relegated itself to the middle ground. What went wrong was the assessment of some of the risks in Southcorp and the execution. Wine is a farm product and is susceptible to gluts in good seasons and shortages in bad seasons, and that risk was not written in to the takeover price. Earlier, Foster’s had thrust in to the US but got caught in the wine glut and then suffered at the hands of the higher Australian dollar.
But there was also specific execution mistakes in Southcorp. O’Hoy and his people did not fully take account of the enormous power of Woolworths, Coles and Metcash. Some years earlier, Foster’s had foolishly sold its hotel operations, and when these fell into the hands of Woolworths the power of the chains was multiplied.
After the Southcorp takeover, the chains were not happy at the increased power Foster’s could exercise, so they cut back on the purchases of Southcorp wines and in some cases the slower selling Foster’s beer brands.
O’Hoy believed that you could sell beer and wine together. He was probably right in the back office, but most of the marketing outlets required skilled beer and wine salespeople who knew their products. For example, the Penfolds wine brand was tagged to the most expensive wine in Australia – Grange – and required particularly skilled selling. Lump it with VB and you decimate it.
O’Hoy discovered his mistake by talking to his customers, but never quite recovered. And one of the reasons it was hard to recover was that in the original takeover documents, enormous cost reductions were assumed. But embedded in those cost reductions were the retrenchment of large chunks of the Southcorp talent bank. And once they were lost it was hard to reverse those initial mistakes.
Another problem is that there are far too many wine brands and smaller players are taxed at a lower rate. Down the track wine brands will be consolidated in the same way as beer and other products. And when that happens the Southcorp brands will be incredibly valuable. On the global market the advances made in South Africa and Chile has dramatically increased competition.
I actually beg to differ from my colleague Alan Kohler – I think Foster’s chairman David Crawford will do a superb job analysing the strategic alternatives for the company, and the CEO will be appointed to pursue the strategies that arise.
This story first appeared in Business Spectator.
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