Wednesday, March 23, 2011

Foster's stands up in beer price war By Tim Boreham

 YOUR columnist can't decide who's the villain in the Great Beer War -- interrupted -- which makes the current bread and milk price skirmishes look like a Spanish civil war-style entree to the real thing.

 Foster's this morning confirmed a report that it turned back supply of the amber fluid to a number of customers for a short period.
 We're not talking about a couple of zealous liquor merchants at the periphery, but Coles' First Choice and Woolworth's Dan Murphys.
 "We have done so to protect the brand equity -- the image of our brands -- and we don't do this lightly," Foster's spokesbloke Troy Hey told AAP.
 These booze behemoths had a fiendish plan to sell a number of mainstay Foster's brands for $28 a case -- well below wholesale cost -- in the hope that shoppers would pick up higher margin tipples as well.
 While Foster's can't set retail prices, it was using a provision of the Trade Practices Act that allows manufacturers to withhold supply if the retailer plans to sell below cost.
 But beer?
 By law alcohol's sold in a separate section, unlike in the US where the Budweiser is co-located with high-margin diapers.
 Here, beer's more of a destination purchase: beer drinkers are unlikely to emerge with a slab of VB and the new release Penfolds bin which, by the way, has been savagely discounted as well.
 One thing for sure is that the retailers aren't motivated by altruism. On the sidelines, the proposed discounting would have been another body blow for the smaller independents (but then again they could always stock up at Dan Murphys themselves).
 The beer market's Tobruk moment of denying supply to the enemy is unlikely to have any direct impact on the valuation of Foster's, Wesfarmers (Coles) and Woolies shares. We have Foster's as a speculative buy and the retailers as long-term buys.
 But the skirmish demonstrates just how sluggish the $14 billion beer market has become -- and the courage of one supplier not to be pushed around by the Big Two retailers.
 If Foster's stance fosters a Middle East-style spread of rebellion, then Coles and Woolies have some thinking to do.

*Disclosure: the author owns Wesfarmers shares


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