The new Aussie soap opera

So, what of the notion that ‘brand is king’ in the modern international wine market? The acquired wisdom was (note was) that the object of establishing global wine brands was that they would command such clout in the market that retailers would need them as much as they needed the retailers. Thus creating a dynamic where a balanced relationship exists between producer and retailer. Where the brand can resist the vagaries of the price-driven commodity and own-label market, and the bullying of the increasingly imperious supermarkets. In other words, keeping right out of the bun fight and avoiding the cut-throat discount sector; taking the high ground as the lesser mortals sink or swim in the over-supply lake. Protecting margins, ensuring demand and growing market share; all supposed aces in the Big Brand hand.

The emergence of global wine brands also signalled the coming of age of the wine industry. The Lindemans and Rosemounts taking their position alongside the likes of Budweiser, Microsoft, Colgate, Nike and Sony – far from the romantic heritage of peasantry, artistry and idealism.

But doesn’t theory – let alone romance – inexorably succumb to reality? And isn’t hindsight a most remarkable source of perspicacity? Maybe you have been following the latest Aussie soap opera, set at the home of former golden child corporation, Southcorp. Forget Neighbours, Home and Away, Skippie, and all the others. This time there are tones of Dallas and Dynasty, with intrigue redolent of corporate America, as scandal and greed pour out of the boardrooms of post-Enron USA and re-emerge in the corridors of the waning Aussie wine superstar.

Following the Southcorp story has provided daily drama. On 22 February this year The Australian’s headline was ‘Wine giant turns sour’, the article beginning thus: ‘Southcorp’s credibility was in tatters yesterday….’ A few days later, it was announced that investors had taken more than $760 million from the market value of Southcorp as the company reported a staggering 97% plunge in first-half profits and refused to set new profit targets. Net first half profits collapsed from $210 million last year to a dismal $5.7 million this year. Reflecting the outstanding failure of a price-discounting ‘strategy’ employed by now sacked chief executive Keith Lambert. Conjuring up images of a hefty hangover after a moerse party. Chairman and interim CEO of Southcorp Brian Finn could not guarantee that there would not be more write-downs at the company, which has downgraded its profits a desperate five times in the past year.

And at the time of writing, Southcorp’s shares have been suspended from trading not once, but an unprecedented twice on the Australian stock exchange. Analysts predict that it could take up to five years to fix the problems caused by the heavy discounting, notably in the UK and Australian markets. ‘They have absolutely trashed their brands.’ remarked one analyst. ‘They are going to have a lot of trouble now convincing consumers to pay higher prices.’ That sums-up the undoing of all the supposed advantages of global brands. Less than two years ago Southcorp was the most valuable wine company in the world.

Unhealthy retailer power

What ripple effect is this likely to have on the rest of the industry? Good question (even if I ask it myself). In the short-term it has ignited a discounting frenzy across the globe. For the first time in the modern wine era, the average retail price of Australian wines has been decreasing and we’re seeing them dip back into the very cut-throat sector they had sought to avoid by imposing their almighty brands. By focusing on production growth and more production growth, the big groups find themselves with more wine than they know what to do with – coinciding with a period of economic turmoil and instability. This coming about just as the mega-retailers have swallowed up weak and vulnerable small fry and have swung the balance of power so vastly in their own favour.

It’s an unhealthy state of affairs, when seen from the point of view of smaller producers everywhere. The consumer, it may be argued, will get better prices. But the fact remains that this type of scenario will lead to a consolidation of producers in the market (as the weaker and smaller players cannot compete), which in turn will result in less choice and variety for the consumer. Indeed, and for example, we’re already seeing one or two of South Africa’s largest spirit and wine groups picking-up large numbers of listings with numerous retail chains internationally, most often with pretty unexciting wines, whilst almost always guaranteeing bigger margins for the retailer as well as hefty spending on promotions.

Many of these European retailers have already substantially reduced the number of wines they carry. So who will in fact be the winner? The big retailer, definitely. The large producers too? Perhaps not in terms of short-term margins, but certainly in terms of swallowing-up market share. I really question the benefit to the consumer as far as individuality and character of the wines are concerned. But then again, the average consumer doesn’t care about that; they’re more interested in a safe and uncomplicated choice. So the populist mega-producers can claim to be the champion of the consumer – while pursuing a real agenda to attain market domination! There’s an irony in there somewhere….

The big brands are busy snatching-up all the promotional slots – often paying the retailer huge amounts for the privilege. Added to their huge marketing budgets. The retailer can just sit back and enjoy the ringing of the tills, the bulging of their margins and the cash windfall from the brands’ marketing spends. The relationship between production sector and retail sector is being horribly skewed. In brief, retailers can now call all the shots. This means take-it-or-leave-it terms for suppliers, where fierce discounting will be the only option open to producers who need to move large inventories. This will put pressure on all the producers competing in the commercial market segment, which is already so fiercely competitive. With the over-supply momentum likely to exceed demand for a few years to come, it’s a great time to be a buyer and a daunting time to be a seller.

So much turmoil and suspense as the backdrop for our Aussie soap opera, making for addictive viewing. Even JR Ewing’s legendary shooting pales in comparison with the likes of this.

In the next Southfork – sorry, Southcorp – episode, UK supermarket chains are alleged to have returned substantial quantities of unsold stock, following the aggressive build-up of large inventories in November and December, under the doomed discounting policies of now killed-off Keith Lambert. Southcorp’s operations in the UK have also been under intense pressure amid heavy discounting by rival producers, particularly fellow Australian producer BRL Hardy. Lambert blamed the retailers (‘it’s a buyer’s market right now’) and pointed to the 42% of the company’s Australian business being with the big supermarket chains versus only 29% a year ago. Perhaps someone should have pointed out that he implemented this strategy? Anyway, Lambert gets a golden handshake of $4.4 million – not a bad reward for having shed $760 million from the company’s market value during his short tenure. Even I could do that.

Rumours now abound of the extreme vulnerability of Southcorp, with the vultures beginning to circle. UK-based spirit and wine group Allied Domecq was quoted as seeing a potential approach for Southcorp as ‘rational speculation’. Rival Aussie mega-company Fosters, owner of the Australian-America wine giant Beringer Blass, reportedly established an internal team to crunch the numbers on a possible takeover bid for Southcorp. ‘While our recent focus has been on smaller acquisitions, rest assured we continue to keep a dossier on all the world’s premium beverage companies, as I am sure they do on us’, remarked Foster’s Ted Kunkel. ‘In relation to larger acquisitions, Foster’s is certainly very well placed to participate in further consolidation in the beverage sector’, he added.

That other Aussie giant BRL Hardy – itself being taken over by the US’s Constellation Brands – is another possible bidder for Southcorp, as is the French Pernod Ricard. Contrarily, though interestingly, Paul Walsh, CEO of mega-group Diageo, recently distanced his company from making large wine acquisitions, as a glut of chardonnay has hit returns, even though wine consumption is generally rising. Having just disposed of Burger King (at a discount) Walsh presumably feels a little fragile at the moment.

So where would the scriptwriters take us to next? Well, they’ve honed-in on the momentum of global corporate scandal and delivered a spectacular twist: an investigation by the Australian Securities and Investment Commission, with executives at Southcorp allegedly breaching stock market disclosure rules. This brought about the second suspension in Southcorp’s shares, and poured yet more alcohol onto the fire. A horror week for the fading Aussie blue-eyed boy.

Further episodes to come

So, what’s next? Something tells me Osama Bin Laden is behind all this. Trashing the equity of the Western World’s Icarus-like first global wine brands; destroying the beacon of the infidel’s thirst for immorality. Next Colin Powell will demonstrate to the UN and the on-looking planet how Saddam Hussein illicitly used illegally traded oil revenues to buy-up controlling stakes in the main global retailers, through off-shore mirror companies, and conspired to bring about the throat-cutting discounting and the ensuing stock market plight of Lindemans, Rosemount et al. His weapons of mass-reduction stripping Southcorp of its capitalist-oxygen: profit.

This is one Aussie soap opera I’m definitely hooked on. In the hope, however, that global events don’t conspire to make this the first in a global industry-wide implosion, and in the belief that global wine brands – in step with the global retailers – are inexorably destined to dominate, I’ll raise my glass once more to the little guys, the real stars, who’s naïve orbit continues blindly to encircle the romantic and illusive pursuit of pure, vinous indulgence. Couldn’t that be the theme for an original new soap opera? Star quest ... Star pull – no, how about a South African version: Star trek?.

— Alex Dale is a wine entrepreneur based in the Western Cape.