Foster’s group ltd

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1.0 OVERVIEW OF THE COMPANY

1.1 PRINCIPAL ACTIVITIES

Foster's Group Ltd is among the leading companies categorized in alcohol beverage industry. Its specialises in the making and marketing of quality branded beer, wine, cider, spirits brands as well as non-alcoholic beverages. The company distributes its beer products under various categories such as Fosters Large, Carlton Draught, Crown Larger, Carlton Black, Melbourne Bitter, Corona, Pure Blonde, Cascade Premium Lager, Victoria Bitter, and Cascade Premium Light, Carlton Sterling, Asahi and Stella Artois. Foster's Group portfolio is made up of over 200 quality brand products which is marketed in more than 160 countries across five continents in the World.

1.2 PEST ANALYSIS

The Market environment is characterised by various factors which affects the growths and development of the company either positively or negatively. This factors includes; Political, Economical, Social and Technological factors.

1.2.1 POLITICAL

Foster's Group as a signatory to the united nation global compact is committed to aligning its operations and strategies with the 10 universally accepted principles of the UN global compact in the area of human rights, labour, the environment and anti-corruption. As the world's principal global corporate citizenship initiatives, the Global Compact is interested in exhibiting and building the social legitimacy of business and markets.

1.2.2 ECONOMY

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The current global recession did not exclude the beer companies. This resulted in Fluctuation of the exchange rate and accounted for a decline of Fosters Group global wine EBITS by about $70 million. There was also a slow down amongst consumers' in the United State and a change of distributor stocks which led to a wine net loss of revenue in the Americas of about 8.9%. Foster's Group Ltd also changed to direct sales, marketing and distribution of its major wine portfolio in key Nordic Markets of Norway, Sweden and Finland.

1.2.3 SOCIAL

Foster's Group with its partners Diageo Australia and Nine Network in an Australian first Cricket Australian Launched their new national community service broadcast campaign called 'Know When to Declare' advising sport fans to take responsibility of their action. The main aim of this programme was to help address the issue of misuse of alcohol, most especially amongst young people.

1.2.4 TECHNOLOGY

Foster's Group has adopted a simpler organisation, new behaviour and an improved system of doing business. They are set to introduce a major programme to build their information capability and technology in the business. This programme would involve over 40 individual projects planned to build the foundation in other to sustain the business transformation and openly enhance efficiency.

1.3 DIVISION ANALYSIS

NET REVENUE

2009

2008

BEER CIDE AND SPIRIT ($m)

2,346.10

2286.6

WINE($m)

2144.82

2098.6

1.4 GEORAPHICAL ANALYSIS

The company operation is classified into three geographical divisions; these are Australia Asia and Pacific, Americas, Europe Middle East and Africa. In the first division, the company maintains a leading market share in Australia with its Foster's Lager brand. Foster's Group sells over 120 million nine litre related cases across the region with its exporting brands growing rapidly in major markets such as Japan, China, and India. While the Australia Asia and pacific division contributed 51.76% of the company net sales in the fiscal year 2009

1.4.1 GEOGRAPHICAL NET SALES REVENUE FROM BRANDS

AUSTRALIA, ASIA AND PACIFIC

2009

2008

BEER CIDE AND SPIRIT ($m)

2,324.40

2267.8

WINE($m)

670.02

676.2

AMERICAS

BEER CIDE AND SPIRIT($m)

5.9

6.3

WINE

1093.2

978.3

EUROPE, MIDDLE EAST AND AFRICA

BEER CIDE AND SPIRIT($m)

15.8

12.5

WINE($m)

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381.6

444.1

1.4.2 AUSTRALIA, ASIA AND PACIFIC

We could observe that net sales revenue in AAP increased by about 2.50%. This was due to strong contribution from price and mix. Pricing growth in the premium categories stabled in the second quarter. The net sales per case which also includes delivery charges was also affected by the movement from store to distribution centre deliveries from major customers. However, Australia Asia Pacific wine was affected by the Economic recession economic conditions in it key markets and distributors inventory reduction in Asia. This result to Volume drop of 7.7% and a constant currency net sales declined by 0.91%

1.4.3 AMERICAS

Foster's shipments were in line with the period at 17.9million cases. Distributor and liquor control board depletions, which provided an indication of underlying consumer demand were 0.9 million cases ahead of shipments. Over the years Foster's has reduced distributor and liquor control board inventories by approximately 1.8million cases. United State distributors of Foster's Californian wine (excluding Beringer White Zinfandel) increased by 10%. Growth was driven by commercial wines with a strong contribution from Berger Californian Collection varietals and the re-launched Meridian brand.

On a constant currency basis net sales revenue per cases fell by 5.1%. In the first half net sales revenue per cases benefited from Beringer Califonia Collection price increases partially offset by negative mix.

1.4.4 EUROPE MIDDLE EAST AND AFRICA

Wine category growth slow through the second quarter with major markets in the Europe, Middle East And Africa experiencing a severe recessionary economic environment. Throughout the region consumers were trading down and switching consumption to off-premise channel and the distributors and retailers have reduced inventories.Volume decline by 11.6% and included a 0.2 million case impact from retailer and distributor inventory reductions, a 0.6million cases impacted from the transition to direct distribution in the major Nordi markets and a 0.4 million cases impacted from the transfer of certain packaging activities from Australia to the United Kingdom.

1.5 HISTOTICAL TURNOVER AND PROFIT

2009

2008

2007

2006

2005

TURNOVER($M)

4684.5

4372.7

4555.2

4350.9

3322.2

NET PROFIT($M)

438.3

111.7

966.2

1166.2

919.9

Foster's Group Turnover and profit has been relatively stable over the past five years period. However, there was a major drop in the profit of 2009 and 2008 even though turnover remain stable when compare to other periods. This could be associated to a major tax payment of about $9.1m made to the Australian tax commission which was not anticipated and the cost of implementing the wine strategic review.

1.6.0 FOSTER'S GROUP LTD SWOT ANALYSIS

1.6.1 SWOT Analysis Summary.

Foster's Group Limited is among the world's leading companies in various brands of beverage alcohol industry. Its engage in the production and distribution of quality beer, wine, cider, spirits brands and non alcoholic beverages. Their strong brands and product portfolio gives them advantage over their competitors and subsequent lunching of new products improve the revenue stream of their cash flow. Unfortunately, the company business is subject to the government regulations at both the Federal and State levels which often impose various liabilities that eventually lead to a significant decline in profitability.

1.6.2 Strengths: Diversified brand and product portfolio

Foster's Group has a wide range of product portfolio in the beverage markets that tends to satisfy a diversified customer base. This portfolio is constituted of wine, ciders, spirit, pre-mixed drinks, juice and other non alcoholic drinks. The company major beer brands are Victoria Bitter, Fosters Larger, Carlton Draught, Pure Blonde and Carlton Sterling. Subsequently these wide ranges of product and brand tend to satisfy different category of customers and in turn increase the revenue of the company.

1.6.3 Large Portfolio of Agricultural Assets

Foster's Group boast of a large portfolio of Agricultural produce, which include grape vine, and a small holding of olive trees. It has over 15,021 hectares of vineyard across 5 continents. As of this vineyard, the company has significant advantage to some of Australia's highest quality super fruit from regions like the Barossa Valley in the in central South Australia, Coonawarra in the south eastern South Australia and the Hunter Valley in New South Wales. The company also have vineyards in North America, Italy. France and New Zealand. All these offers the Company a diversified premium fruit styles and the opportunity to spread its risks across different geographical Locations.

1.6.4 Strong Brand Equity

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Foster's Group LTD. Has a strong heritage of over 130 years, which gives it an advantage of a strong market position in Australia and the Pacific. The company's Victoria Bitter beer brand maintains a leading position in the Australian market. The Company also boast of experience marketing and promotional group that focuses on increasing consumers desires of the brands.

1.7.0 Weakness

1.7.1 Geographical concentration

The company is not well spread in terms of geographical location. This would make it vulnerable to risk that is specific to a particular region. However its produce is sold via retail medium to in America, Europe, the middle East, Africa and Africa. This geographical limitation could limit the growth of the company because a wider geographical spreads has the advantage of improving the profit margins, reaching economic of scale and a wide basis of world recognition.

1.8.0 Opportunity

1.8.1 New Product Lines

Foster's Group innovations on new product has improved its product portfolio and allowed it to have an edge over other competitors in the industry. In 2008 the Company launched new products; Cascade Green, Carbon offset beer, re- launched Carton Premium Dry in the lower carbohydrate category. Other innovations of the company include Zero sugar ready to drink product in the Australia Market and Carlton Dry Fusion. This strong focus of product innovation could give Foster's Group Competitive advantage over its peers, and in turn generate higher income

1.9.0 Threat

1.9.1 Regulations restricting commercial advertising of alcoholic Products

And intense competition

Foster's and its Subsidiary are subject to legal restrictions on advertising and marketing of alcoholic product, which could be a serious setback to the value of existing product and reduce its revenue. One of such countries is the United State where television and radio advertisement has been barred since 1971. The alcoholic market is highly competitive and entrant of numerous new players in the market is expected to further increase the competition. However, Foster is the market leader in the premium beer segment with 52% market share in Australia, and its major competitors are Constellation Brands, Prince Hill Wines LTD, Lion Nathan LTD and Shepherded Neame Ltd.

2.0 GEOGRAPHICAL PROFITABILITY

2.1 PROFITABILITY RATIOS

PROFITABILIT RATIOS

2009

2008

2007

2006

2005

5YRS AV

ROCE(%)

12.04

6.66

17.14

21.05

14.56

14.29

GROSS PROFIT MRG(%)

35.03

38.51

41.44

43.82

49.88

41.74

OPERATING PROFIT MRG(%)

11.57

3.99

20.81

4.63

9.78

10.16

NET PROFIT MRG(%)

9.77

2.56

25.47

23.76

23.57

12.27

ROE (%)

11.59

2.65

25.6

28.72

19.79

17.67

Foster's Group profitability indicates that on average, only 14.19% of the total profit was generated from the capital employed by the management. However, the gross pofit margin gives a pointer that Its generating significant profit from its trading activities. The significant drop in operating profit in 2008 and 2009 was due to a major investment in Its Subsidiary that cost about $1,593.2 , $1,804.7 respectively. But there could be an advantage of increasing operating profit in the log-run.The net profit margin was a little beat stable in other periods aside from 2008 and 2009. Consequently an average return on equity of 17.67% distributable to Foster's Group shareholders is a beat fair when compare to yields on other investment instrument.

2.2 Finance Long-term Ratios

2009

2008

2007

2006

2005

5YRS AV

Debt/Equity ratio (%)

76.83

68.81

62.05

88.50

102.51

79.74

Debt/Capital ratio (%)

43.33

40.58

38.15

46.79

50.42

43.85

Gearing ratio (%)

42.98

44.12

40.18

46.90

48.04

44.44

The financing structure of Foster's group has been relatively stable over the past five years, and its has also been lowly geared with an average of 44.44%. This was due to the fact

That, Its operation is mostly finance by equity and short term loans. This shows that Foster's Group is not likable to face any financial risk in the foreseeable future and its going concern is also certain. However, one could point that Its ability to conserve tax savings is very low and so large portion of the wealth created for shareholders will be paid as tax liability.

2.3 Finance short-term Ratios

Liquidity Ratio

2009

2008

2007

2006

2005

5YRS AV

Current ratio

1.74

2.22

1.73

1.82

1.79

1.86

Quick ratio

0.79

1.18

0.95

0.90

0.95

0.95

With an average current ratio of 1.86 within the five years period covered, Foster's Group maintain a strong and robust liquidity position. This shows that Foster's can meet it short term obligation as at when they fall due and that it is far from been bankrupt within the short term period. The cash flow statement also confirms this position as major part of its liquidity was generated from its operating activities, which also covers its dividend payout conveniently.

However, a careful analysis of the trends of the liquidity position reveal that there was a sharp mean reverting of about 0.48 between 2008 and 2009 which is quite significant. This was due to the reduction in grape production which contributed to about $21.9million operational loss that subsequently reduced cash flow in their Australian business.

2.4 ACTIVITY RATIOS

2009

2008

2007

2006

2005

5YRS AV

Debtor Days

81.46

92.81

85.07

74.74

77.25

82.27

Creditor Days

41.53

43.66

44.11

58.52

89.90

55.5

Sales to capital Employed

0.72

0.68

0.63

0.62

0.43

0.61

A careful look at the activity ratios reveals that Foster's Group management was efficient in generating cash flows from inventory as debt conversion rate increased by about 12.23% between 2008 and 2009 when compared with previous periods. The creditor's days in 2009 also re-assures Fosters's suppliers of quick payment of goods bought on credit, as there was a sharp improvement when compared to 2005. However, when comparing Foster's debtors conversion rate to the rate at which it makes payment to creditors one can assert that Foster' management still has more work to do. This is because its meets it obligation to suppliers faster than it takes in debt to conversion. The sales to capital employed of 0.72 in 2009 also show a steady improvement and that Foster' management has been efficient in utilising it capital base.

The sales growth can be accounted for by the increase of about 5.3% in Beer, Cider and Spirits in Australia, Asia and the Pacific markets.

2.5 INVESTORS RATIOS

2009

2008

2007

2006

2005

5YRS AV

EPS

0.23

0.06

0.48

0.58

0.47

0.36

DPS

0.27

0.26

0.24

0.22

0.20

0.24

Dividend Yield(%)

5.29

5.18

3.72

3.93

3.76

4.38

Dividend Cover

0.85

0.23

2

2.64

2.35

1.60

P/E Ratio

22.59

92.18

13.29

9.45

11.37

12.23

One could observer that there was a sharp drop in the earning per share of the company in 2008 and 2009 when compared with previous period. This drop could be attributed to the payment associated with the implementation of the initiatives identify in the wine strategic review and the $9.1 million disputed payment made to the Australian taxation commission which was announced to the market in June 2007.

However, the dividend per share has been relatively stable, and signifies that Foster's has been consistence in meeting its shareholders need has can be confirmed by the interim dividend of 12.0 cents/share paid in April 2009. This is the major reason why investors are interested in its share which accounted for a high price earnings ratio in 2009 and 2008 despite the drop in its earnings per share. One could also points that Foster's has a strong generating cash flow power, as its cash flow from operating activities covers it dividend payout conveniently. The average dividend cover of 1.60, which is far above 1 also confirms this position.

2.6 MULTIPLES

2009

2008

2007

2006

2005

5YRS AV

P/E Ratio

22.59

92.18

13.29

9.45

23.5

32.20

P/S

2.2

2.2

2.8

2.3

2.7

2.44

P/CAS FLOW

9.5

9.7

14.1

15.4

14.1

12.56

P/BV

2.7

2.6

2.7

2.5

2.9

2.68