Issue: 116
Sent: 17-06-2008 13:00:03
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What Went Wrong at Foster's: Five Lessons for Everyone - John Robertson
In one sense, everything went wrong at beer and wine maker, Foster's Group. A poor strategy badly implemented at the bottom of a cycle has taken its toll on shareholder wealth and executive tenure.
In the past week, the directors at Foster's Group, one of Australia's leading industrial companies, threw in the towel. They announced a strategic review.
There were some peculiarities in the Foster's predicament. An earlier generation of entrepreneurial managers had decided to "Fosterise" the world. Foster's did become one of the great Australian brand building stories. But the near death experience that went with that corporate misadventure also permanently hobbled the company.
Through a series of licensing arrangements, the brand was mortgaged to save the business. Ted Kunkel, who took over in the early 1990s to resuscitate the company, had little control over the brand despite its iconic status on the global stage. It could add little to the ongoing wealth of the corporation.
In an era in which executives must produce growth to hold their jobs, Kunkel had to come up with something else. Wine seemed a logical step for Australia's leading distributor of alcoholic beverages.
That much is specific to the company. The rest is a set of lessons for all companies on the tripwires confronting managers implementing strategic changes. For advisers, they are signs that something is going wrong.
1. It gave up building returns. From 1994 to 2000, the Foster's share price rose 200%. This rise coincided with the company increasing the return on its funds employed. There is considerable empirical evidence that companies beating their costs of capital and expanding the spread between their returns and their costs of capital will get a higher share price. Foster's strategic decision making in the second half of the 1990s followed this precept. After that, it lost sight of this important goal.
2. The company fundamentally changed its risk profile. Not since BHP bought Magma Copper to become a cyclical commodity play has a company so completely disoriented its shareholders. Foster's went from being a company an investor bought for its stable beer-based earnings stream to a company exposed to an agricultural commodity cycle. There is nothing wrong with being cyclical. In denying that it had become cyclical, however, the management misled shareholders into expecting something it could no longer deliver.
3. Capital market advisers gained the ascendency. Deals were pushed because advisers could raise the funds. There would be no need to neglect a deal because it might need $5 billion. Advisers, cheering on managers, were paid by their bosses to complete deals. Any obstacle could be overcome. A new investor could always be found for one that might baulk at something stupid.
4. The company had killed its management skill base. Like many other companies in the 1990s, Foster's had trimmed its employed workforce and outsourced any function which would lead to a cost reduction. It also sold assets which were not regarded as core to the main task. These moves were hailed by financial market analysts but left the company with nowhere to teach and develop the management skills which would be needed to handle the mammoth integration tasks which came with the mergers it was contemplating.
5. The company was forced to confront the growing strength of Australian retailers. In the Australian beer and wine industry, customers are retailers. The manufacturers market to consumers but never have a commercial relationship with them. Foster's attempted to restructure the way in which it sold its output. Openly hostile retailers ruthlessly withdrew their support for Foster's just as its rapidly growing portfolio of products needed it most.
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