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Carlton & United Breweries : company profile

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Carlton & United Breweries (or CUB) was until recently the Australian arm of global brewer SABMiller. It was absorbed by AB InBev during 2016. SABMiller originally acquired it in the 2011 takeover of Foster's Group, at one point the leading alcohol company in Australia and the Pacific region. Yet despite the international fame of its namesake Foster's lager, by far the largest proportion of Foster's Group's revenues was always derived from other brands. By the mid 2000s, the group was best known in Australia for market leading beers VB, Crown Lager and Carlton Draught. It was also home to an extensive wine portfolio, enhanced in 2005 by the high-priced acquisition of local producer Southcorp. However the wine business proved increasingly problematic between 2006 and 2008, leading to a series of management shake-ups. In 2011, the group split in two, demerging its wine interests as a separate company under the name Treasury Wine Estates. The remaining beer business became the subject of a takeover bid from SABMiller in September 2011.

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The old Foster's Group's main Australian beer business was always built around local company Carlton & United Breweries or CUB. It changed its name to Carlton United Brewers in July 2011, then back again two years later. The business markets a variety of beers and other beverages in the domestic market through a unique direct sales network which reaches around 20,000 outlets across the country. It is currently the country's #2 brewer with around 39% share of the local beer market in 2015. (Main rival Lion has around 41%). Total volumes for 2015 were 7.07m hl. However, following the acquisition of SABMiller by AB InBev, CUB will become the main Australian brewery business of the global giant. Ironically, AB InBev's existing portfolio of beers, including Budweiser, Corona, Stella Artois and Beck's are currently managed under license by arch-rival Lion. The eventual transfer of those brands from Lion to CUB will establish the latter as the clear local leader.

CUB's portfolio includes mainstream beer Victoria Bitter (known as VB) and supporting brand Carlton, which comes in several varieties including Carlton Draught, sold in bottles as well as on tap, as well as Carlton Natural Blonde, Carlton Black dark ale, Carlton Dry and low-strength Carlton Mid.

VB was traditionally Australia's top-selling beer in the 1990s, with as much as 25% market share, appealing mainly to blue collar working men. However a shift in marketing in the 2000s to appeal to younger drinkers, and a disastrous decision to reduce its alcohol content, caused sales to plunge during the 2000s. It was toppled as Australia's biggest individual brand by volume in 2011 (according to Nielsen), slipping to second place behind XXXX. Following the buyout by SABMiller, the beer's alcoholic strength was restored and a new marketing campaign reinforced VB's working class heritage. Sales have responded positively, and it narrowly overtook XXXX again in early 2013.

Carlton Draught was the #3 brand that year with 9.3% share by volume. It has enjoyed considerable growth in recent years off the back of an ambitious marketing campaign which runs under the slogan "Made from beer". It came to international attention with the epic "Big Ad" of 2006. However Carlton's many variants make it the overall #1 beer family in the country, with share of well over 17%. The group's Crown Lager, originally created in 1954 to celebrate the coronation of Britain's Queen Elizabeth, is Australia's best-selling premium beer. Although it was a top-seller back in the 1980s, Foster's lager itself is now one of the smallest brands in the portfolio.

Other brews include low-carb Pure Blonde, Melbourne Bitter, Cascade premium lager from Tasmania and Cascade Green, the group's first carbon neutral beer, introduced in 2008. (Cascade is in name at least the group's single oldest brand, with a heritage dating back to 1824). Great Northern Beer was introduced in 2010 for the Queensland market. The group's growing portfolio of niche craft beers includes Redback wheat beer, Matilda Bay, Fat Yak and Big Helga. It distributes SABMiller's international brands Grolsch, Miller, Peroni and Urquell in Australia, and has the local license for Heineken's Strongbow and Bulmers cider.

Following the acquisition by SABMiller, CUB absorbed its new owner's existing Australian brewery operations, namely the Bluetongue craft brewery. It was also obliged to acquire full control of Pacific Beverages, previously a joint venture with local Coke bottler Coca-Cola Amatil, which had handled SABMiller's international beer brands. CUB's small soft drinks portfolio - including non-alcoholic Cascade Ginger Beer, Cascade Real Juices and Torquay mineral water - was sold to Coca-Cola Amatil.

The takeover of SABMiller by AB InBev prompted another revision of the portfolio, with the addition of the latter's portfolio of beers, including Budweiser and Stella Artois. Corona Extra returned to the portfolio as well. (It had been distributed by CUB until 2011 and the SABMiller deal).

SABMiller declared revenues of US$2.49bn from Australia for the year to March 2015, down 7% on the year before. It was the group's third biggest market by revenues after South Africa and Colombia.

Prior to its acquisition by SABMiller, Foster's Group's international presence was actually quite small. It sold ownership of the Foster's brand in Europe in 2006 to what was then Scottish & Newcastle, its local licensee. S&N's part-subsidiary Baltika began introducing Foster's into selected central and eastern European markets in 2004, and in Russia in 2005. That business is now split between Heineken, which acquired S&N's UK operations, and Carlsberg which now owns the former French and Russian businesses. Foster's sold its brewery in China, which produces Shanghai Beer, Guangming and other brands, to Suntory in 2006, and its business in India to SABMiller. In the US, the beer was distributed under license by MillerCoors.

Several other units were sold or demerged during the 2000s. In 2005, the group became one of the world's largest wine companies following the merger of its existing Beringer Blass Wine Estates, with newly acquired Southcorp. However the large amount of debt accumulated in that deal began to create significant problems for the group during 2008. These troubles were exacerbated by over-supply of Australian and New Zealand wines in key American and European markets, as well as a general decline in demand prompted by the economic downturn. The entire business was demerged in 2011 as Treasury Wine Estates. A separate collection of hotels and pubs business was spun off in 2003 as Australian Leisure & Hospitality Group, and later acquired by Woolworths. The group's international wine clubs, operating in 11 countries across Asia Pacific, Europe and North America, under the Cellarmaster brand or as Windsor Vineyards and IWA in the US, were sold in 2006.

Background

Although Foster's has come to be perceived as an iconic Australian brand, brothers Ralph and William Foster who first invented the beer in 1888 were actually American. (Back then of course almost all Australians were from somewhere else). They set up premises in Melbourne and, influenced by their German American brewmaster, created a German-style bottom-fermented lager. It was the first produced in Australia, where the popular taste until then was for English-style top-fermented ales, which could be produced more quickly and cheaply. However the extra time and effort paid off for the Foster brothers. Their lager won its first accolade the same year, the International Brewing Award at Melbourne's Centennial Exhibition, and rapidly increased in popularity over the next few years. The brothers, however, had had enough of Australia, and sold the business to investors after just two years, before returning to the US.

Foster's was soon established as Melbourne's best-selling beer, and began to be exported in 1899, initially to South Africa, where Australian soldiers were stationed for the Boer War. Later the beer was also delivered to the UK and selected other markets. In the wake of an economic recession in the new developing Australia, in 1907 the Foster Lager Brewing Company merged with five other local brewers to form Carlton & United Brewing Group (CUB), and went public in 1913. During the 1930s, CUB moved beyond its local state of Victoria for the first time, buying Northern Australian Breweries and the Cairns Brewery, and then other breweries around Australia during the 1950s and 1960s. Later it also acquired stakes in other businesses in the food and beverage industry with the aim of diversifying its range. One of these was Henry Jones, a substantial food manufacturer based in Tasmania, whose brands included IXL jams and preserves.

At the same time CUB had already begun to export significant quantities of their main lager. The UK proved a particularly successful market, and All Brand Importers, a partnership between Grand Metropolitan and Whitbread, subsequently targeted the US in the early 1970s. In 1981, the company secured its first draught distribution deal in Britain through GrandMet's Watney Mann & Truman, which began supplying imported Foster's on tap for the first time through its pub network. A marketing campaign launched towards the end of the year, created by agency Hedger Mitchell Stark, and using comedian Paul Hogan, with the strapline "Foster's: The Australian for lager". The most significant development came in 1983, however, when CUB was itself acquired.

Elders IXL had originally been Elder Smith Goldsbrough Mort, one of South Australia's oldest companies. Originally a sales agent for wool farmers, it had expanded over the years into property, natural resources and a variety of other industries. In 1981, the business was targeted by corporate raider Robert Holmes a Court. Casting around for a defence from takeover and break-up, Elders negotiated a partnership with Henry Jones, the jam-maker part-owned by CUB, but now controlled by another pugnacious entrepreneur John Elliott. Elders and Henry Jones merged as Elders IXL in 1981, with CUB as its biggest shareholder. But this deal wasn't big enough for Elliott who set out to extend his interests around the globe. He selected CUB as his principal vehicle for this, reversing the tables on the brewer and buying control of the business, while also selling off a number of less exciting assets (including IXL jams).

This marked the beginning of a period of aggressive expansion. In 1984, the group licensed Watney Mann to begin local production of Foster's. Following the acquisition of Hedger Mitchell Stark by Saatchi's, the account moved to Gold Greenlees Trott in 1985, who introduced a new slogan, Foster's: the amber nectar". As the popularity of Foster's soared in the UK, Elders decided to up the stakes with an agreed acquisition of Courage in 1986 for £1.4bn, then the largest ever overseas takeover by an Australian company. Two years later, Elders set its sights on another UK brewer, Scottish & Newcastle, unveiling a hostile takeover. The deal was accepted by S&N's shareholders, but the British government proved more difficult, blocking the sale in 1989. Meanwhile, Elders had moved on into North America, acquiring Canadian brewing group Carling O'Keefe in 1987, and then merging that company into a joint venture with Molson Breweries in 1989 in return for a 50% stake in the combined business. Foster's was launched in Canada the same year.

But as the boom years of the 1980s turned into the economic hangover of the 1990s, the group found itself increasingly restricted by the huge debt burden it had accumulated to fund its international expansion. In order to protect Elders IXL from takeover, John Elliott had attempted to purchase a minority stake through his own private investment company, Harlin. But his offer was so popular with Elders shareholders than he was forced to acquire a majority stake instead, saddling both Elders and his own company with significant financial problems. Elliott was forced out in 1990, many of its assets (including the stake in Molson of Canada) were sold and the company changed its name to Foster's Brewing Group. His shares in Foster's were subsequently seized by industrial giant BHP after Harlin went bankrupt in 1992. (The shares were subsequently spun off to BHP shareholders in 1997).

New CEO Ted Kunkel was appointed to restructure the business and began selling off assets. In 1995, in a neat reversal of its previous bid, Foster's sold its Courage brewery to former target Scottish & Newcastle. Closer to home, Foster's established a joint venture in Shanghai to begin local production of Foster's in China. A year later the group moved into the fast developing wine industry, acquiring Mildara Blass. The first Mildara winery was established in Australia in 1888, the same year that the Foster brothers developed their first beer. It merged in 1991 with Wolf Blass wines, established in the mid 1960s in the Barossa valley. Following acquisition of Mildara Blass, Foster's continued to expand its wine operations at home, while also acquiring interests in Chile and US. In 1999 it bolted on a spirits arm with the purchase of the former Seagram distribution network in Australia, but withdrew from Canada, selling its shareholding in Molson.

In 2000, as sales of Foster's soared across the globe in the wake of the Olympics in Australia, the group consolidated its wine portfolio with the A$3bn acquisition of US-based Beringer Estates. It continued to build up its wine portfolio, while also strengthening beer and cider portfolio with the purchase of the local business of HP Bulmer. Ted Kunkel retired as chairman & CEO in 2004.

In early 2005 the group surprised the market by acquiring a 19% stake in rival wine group Southcorp, owner of the Penfolds, Lindemans and Rosemount estates, from Rosemount's founding family. A few days later the company announced a A$3.1bn offer to acquire the remaining shares. Southcorp was quick to announce that it considered the offer inadequate. With its share price soaring on the back of the hostile bid, Southcorp countered instead with a cheeky offer to buy out Foster's wine division. A revised offer from Foster's of A$3.17bn was accepted by Southcorp's board in April 2005. The acquisition doubled the size of Foster’s global wine business to around 39m cases a year, making it the world #1 in premium wine, as well as the only Australian consumer goods group with a #1 global position.

However the deal almost immediately went sour, initially because of problems integrating the two portfolios, followed by an economic recession and a glut in supply. In 2008, the group issued a profit warning, and said it would write off as much as A$600m against the value of its wine business as a result of poor trading exacerbated by the strong Australian dollar. That led to a sharp drop in profitability for the year. Following a strategic review, the group pruned its portfolio to eliminate more than 30 non-core vineyards and their associated wines, resulting in a short-lived modest improvement. Another downturn in 2009 forced the group to push through an even bigger impairment charge of A$1.3bn, resulting in net losses of A$464m on revenues of A$4.3bn. Net debts were A$2.2bn. Eventually, Foster's admitted defeat and began moves to demerge the wine business altogether.

It was widely expected that the demerger of Treasury Wines Estates would prompt a bid for the remaining beer business from a larger international player. SABMiller issued an initial offer for the slimmed down Foster's Group in May 2011 - it was refused by the board - and raised its bid to A$9.5bn in August. A deal was finally agreed at an increased price of A$9.9bn, or A$11.5bn including debt.

Last full revision 29th March 2016

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