Costly wine hangover for Foster's

You will hear a few chief executives exclaim that "you can’t cost cut your way to greatness" but you will see many more embark on a "transformation process".

This is code for a major cost cutting exercise which in the end just means internal departments will be reshuffled and jobs will be shed.

Earlier this year Foster's  embarked on just such a major transformation process in order to address the fact that its wine business is an earnings anchor and if it can’t be sold the next best outcome is to restructure it -  at least this gives investors the sense that something is being done.

I don’t want to just pick on Foster's - lots of others do the same. But Foster's is undertaking one of those textbook restructurings that are so in vogue in these global financial crisis induced straightened times.

One of the near essential ingredients for any transformation is a new chief executive - preferably one that has an accounting or a finance background rather than a business builder or strategy person. Having said this, Ian Johnston has plenty of experience running businesses in the food industry.

There is a second element to most restructurings - major asset writedowns.  Assets that don’t meet return hurdles need to be written down so that return of capital at least looks better and the balance looks more honest.
 
The one-off cost of cost savings (sackings) is usually also quite large - $119.3 million in restructuring and redundancy costs at Foster's, where about 300 jobs have been targeted so far.

Analysts tend to overlook these one-offs and focus on the far smaller initial benefits (lower ongoing wages bill) and see the overall restructuring as a positive that takes effect in the medium to long term. This year’s Foster's result includes $21 million of efficiency benefits and is looking for $100 million in benefits in 2011.

The best outcome for Foster's would have been to get out of the wine business completely - and it would have done that had there been a buyer happy to pay an even half decent price for it. 

Since the wine business was expensively acquired and even more expensively beefed up through the acquisition of Southcorp, investors have become used to poor returns from this business.

The beer business demonstrated in the full-year result released today that while volumes remained flat, the division managed to lift sales by 2.5 per cent and get a more robust 7.6 per cent increase in earnings.