News

19 Feb, 2019
Woolworths scraps $1 milk from stores nationwide
Inside FMCG

Supermarket giant Woolworths has announced that from tomorrow, Tuesday, it will remove $1 per litre fresh milk from its stores nationwide, following the success of its drought relief milk range.

Last month the supermarket giant announced that it would continue the range on the eastern seaboard for a further six months, but today CEO Brad Banducci announced a long term nationwide plan, saying this model is the most effective way to guarantee price increases end up in the pockets of Australian dairy farmers.

Two and three litre varieties of Woolworths branded fresh milk will be priced at $2.20 and $3.30 respectively, with the full 10 cent increase to go to the 450+ farmers who supply into this milk.

The drought relief range on the eastern seaboard has secured $5.8 million for more than 285 dairy farmers since September 2018.

“We believe the long term sustainability of our dairy industry – and the regional communities they help support – is incredibly important for Australia,” Banducci said.

“In our consultation with industry bodies, including the Australian Dairy Farmers Association, its state members and NSW Dairy Connect, we’ve heard the outlook will continue to be extremely tough for dairy farmers right across the country.

“This is affecting milk production and farm viability, which is devastating for farmers and the regional communities in which they live. It’s clear something needs to change and we want to play a constructive role in making this happen.”

While Banducci admitted that this won’t solve broader structural issues he is hopeful it will inject “much needed confidence” into the sector.

Australian Dairy Farmers CEO David Inall welcomed the move by Woolworths, calling it a “game changer in the fight against discount dairy”.

“It is reassuring that Woolworths has committed to deliver the full 10 cent increase back to those farmers who supplied the milk into that product category,” Inall said.

“Removing $1 milk is not just intended to restore farmers’ financial confidence, but it will also boost confidence in regional communities and small businesses that rely on the industry. Consumers can buy fresh milk from Woolworths knowing they are supporting the Australian farmers who supplied it.”

The extra 10 cents is distributed to farmers by processors in line with the usual payment cycles and will have continued oversight and be independently audited.

“We’re acutely aware of the budgetary pressures facing many of our customers and have not taken this decision lightly,” Banducci added.

“We believe it’s the right thing to do and a key step in shoring up fresh milk production in Australia.”

Woolworths was the first Australian supermarket to launch Drought Relief Milk back in September 2018 with Coles later following suit.

19 Feb, 2019
Blackmores lifts, but China outlook poor
Inside FMCG

Blackmores has posted a slightly higher half-year net profit but the vitamin maker warns its sales in China are not expected to grow within the next six months.

The company’s net profit was up 0.4 per cent to $34.3 million for the six months to December 31 with total revenue climbing 11 per cent to $319.3 million.

But the health supplements manufacturer said its “reported China segment sales were down 11 per cent in the half compared to the prior corresponding period,” while the company had started a review of its investment approach in the country.

“China sales in the third quarter are being impacted by continuing changes to the way consumers purchase our products as well as higher inventory in the trade and a general softening of consumer sentiment,” Blackmores said in a statement.

“As a result, we do not expect the second half profit performance to be ahead of the first half result.”

Blackmores said its outlook was for modest full-year revenue growth overall.

The company has declared a fully franked interim dividend of $1.50 per share, unchanged from a year ago.

19 Feb, 2019
Coles sales up but restructure costs pull profit
Inside Retail Australia

Supermarket giant Coles has reported sales growth of 3.1 per cent at its first half-year results as an independently-listed company, but the costs of a restructure had an impact on net profit, which dropped 14 per cent for the half year to $738 million.

A $146 million pre-tax provision as part of a distribution network overhaul detailed by the retailer last month dragged profit down by 29 per cent on the same period a year earlier.

Half year group revenue rose by 2.0 per cent to $20.35 billion, with supermarket sales of $15.72 billion driven largely by the popular Little Shop campaign and improved in-store execution.

Coles chief executive Steven Cain said the first-half results show a solid outcome in a challenging retail environment with the supermarket now intent on laying down plans for long -term growth, including its $950 million investment in supply chain automation and the new alliance agreement between Coles Express and Viva Energy.

“We have delivered strong cash generation and we have a robust balance sheet which will enable us to reposition the business in the years ahead,” Cain said on Tuesday.

Half-year liquor sales were flat at $1.68 billion, while Coles Express sales fell 2.5 per cent to $2.8 billion.

Coles Online achieved over 30 per cent sales growth, with click and collect now representing 30 per cent of online sales following investment in the service.

No movement on milk prices for farmers

On Tuesday, Coles also revealed that it would not follow Woolworths lead on scrapping $1 own-brand milk, as it believes consumers are already facing high living costs.

The supermarket said it would look for a better model that can be adopted by the industry to assist Australian farmers, with plans to liaise with relevant parties including government and the ACCC on this.

Coles has already committed $16 million over the past six months to support dairy farmers.

 

 

19 Feb, 2019
Penfolds owner Treasury Wine eyes French winery buys
The Financial Review

Treasury Wine Estates chief executive Mike Clarke says the company is poised to acquire up to two small wineries in France along with premium vineyards to supercharge a push into China with a portfolio of three French-made wines, one of which will be branded Penfolds.

Mr Clarke said the fragmented French wine category makes up 40 per cent of the total wine market in China, and the company wants to secure a chunk with some French-sourced labels to sit alongside the hugely successful Penfolds wines from Australia, which have been a major driver of impressive profit growth in China.

"This is a happy hunting ground for us," he said.

 

Treasury Wine Estates chief executive Michael Clarke is in negotiations with two or three parties in France to buy premium winery and vineyard assets to help fuel a concerted push into China.  Jesse Marlow

Treasury, which also owns the Wolf Blass brand, accounts for about 5 per cent of wines imported by China. It is aiming to expand its distribution in China's cities by 50 per cent in the next three years, using the lure of luxury Penfolds allocations to retailers to gain more shelf space.

The value of Treasury's luxury wine inventory ready for release in future years is now at $1.18 billion, compared with $959 million a year ago, with Mr Clarke bullish about the "fabulous" quantities and quality available from the 2018 grape harvest. The 2019 grape harvest is underway and is shaping up as a robust vintage, too, he said.

Treasury intends on leveraging the Penfolds brand by making a French version.

The other two French offerings will be the existing Maison de Grand Esprit, which it started from scratch in mid-2017 as a "virtual" wine brand made by outsiders, and a French version of its Californian premium brand Beaulieu Vineyard.

It now intends owning assets in France for the first time. "We're in dialogue with two to three parties," he said, with the targeted wineries in premium regions with vineyards attached.

Natalie Tam, investment director with Aberdeen Standard Investments, said the company had been quite clever in its approach. 

 

Penfolds owner Treasury Wines lifted its dividend by 20 per cent after delivering robust profit growth in Asia of 31 per cent.  Carla Gottgens

"They've tried to do it in a capital light way so far," Ms Tam said. "It makes sense to go after that category. They don't want to be a one-trick pony with Penfolds."

Mr Clarke said Treasury had built a strong "self-distribution" model into China where it works directly with retail partners, which gives it a big advantage over rivals whose profits are eaten into by a range of third parties clipping the ticket on the way through to the end consumer.

"The challenge they face is they are trying to feed too many mouths," he said. 

Treasury lifted its first-half dividend by 20 per cent to 18¢ after delivering robust profit growth of 31 per cent in Asia to $153.1 million for the first half of 2018-19.

Across its four main divisions, Treasury generated the fastest organic sales growth rate since the company split off from former parent, the brewing company Foster's Group, in 2011.

Treasury shares dipped initially on Thursday after initial worries over cash conversion rates but recovered to be largely flat at $16.70.

Treasury announced a 17.1 per cent rise in net profit after tax to $219.2 million and a 19.4 per cent rise in EBITs to $338.3 million, inside the forecast range of $335 million to $340 million, which had been previously reaffirmed in an announcement on January 10, and then again on January 21 when it stunned investors by revealing the abrupt departure of chief operating officer Robert Foye following a breach of the company's internal code of conduct policies.

'Disappointed' in Foye exit

It hasn't specified the nature of the breach. Mr Clarke said on Thursday it had been personally disappointing for him to have to give Mr Foye his marching orders because they had worked closely together over decades at other companies, including Coca-Cola.

"Yes. It was disappointing, and it was disappointing for Robert," Mr Clarke said. "He's a great operator. At the end of the day it was an easy decision. It wasn't left to debate as to what was going to happen".

He declined to specify what the nature of the breach was about. "I can't give any more colour."

The company raised some eyebrows on Thursday by putting a toe back in the water in beer. The fast-growing 19 Crimes wine brand in the United States will launch three different craft beers in March in Ohio initially, along with an Irish whisky. 

Nineteen Crimes had been the fastest-growing wine brand in the US over the past three years. "It has really connected us with Millennial customers," he said. Big liquor retailers had been asking if it could be expanded into other beverages.

The Asian region was the standout for Treasury, although profit margins slipped marginally to 38.9 per cent from 39.3 per cent as it invested in a new warehouse. The Americas division, where Treasury is well advanced now in an overhaul of 40 per cent of its distribution systems, delivered a 12 per cent rise in EBITs to $112.1 million, although margins fell to 18.5 per cent from 19.9 per cent. Mr Clarke said profit margins would begin rising again in the US from 2019-20.

Australia and New Zealand lifted its profit margins to 23.2 per cent from 20.4 per cent a year ago, with EBITs rising by 13 per cent to $77.4 million in an overall wine market which is flat. Treasury is making headway by moving higher up the value chain in its "premiumisation" strategy, which is fattening margins.

19 Feb, 2019
HSBC Australia appoints new head of retail
Image via Investor Daily

HSBC has appointed a new head of retail banking and wealth management effective immediately to help build a bigger retail presence. 

Jessica Power will be part of the banks efforts to increase its presence in retail banking by assisting domestic and international customers with their mortgages, bank accounts, credit cards and other financial needs. 

Ms Power has over 23 years’ experience in the industry, most recently as state manager metro NSW for Westpac. Prior to that, she worked at Citigroup Australia for 19 years in various roles. 

Ms Power replaces Graham Heunis who has taken on a new role as head of Asia-Pacific sales management, retail banking and wealth management. 

HSBC Australia’s chief executive officer Martin Tricaud said that under Ms Power’s leadership the bank would see its growth efforts come to fruition. 

15 Feb, 2019
7-Eleven phases out cage eggs
Inside FMCG

Convenience store chain 7-Eleven Australia has phased out cage eggs from its stores nationwide.

Starting this month, only free range eggs are available to order by all corporate and franchised stores through its centralised supply chain.

The convenience chain said it has been working with suppliers across all states to make the transition in a step towards better animal welfare commitments.

“Whilst our franchisees are free to engage with alternative suppliers due to our franchise agreement, we will continue to work alongside them to encourage their involvement in this initiative by sourcing free range eggs via our centralised supply chain,” 7-Eleven Australia said on its blog.

“We recognise that this is just one step, and we will continue to review animal welfare commitments in our supply chain and 7-Eleven branded products as opportunities arise.”

15 Feb, 2019
Nestlé expects sales to rise in 2019 following revived growth in US and China
Inside FMCG

Confectionery giant Nestlé is expecting organic sales to rise in 2019. following revived growth performance in China and the US last year.

“We are pleased with our progress in 2018. All financial performance metrics improved significantly and we saw revived growth in our two largest markets, the US and China, as well as in our infant nutrition business. Nestlé keeps investing in future growth and – at the same time – has increased the amount of cash returned to shareholders through our dividend and share buyback program,” Mark Schneider, Nestlé CEO said.

“We made significant progress with our portfolio transformation and sharpened our Group’s strategic focus, strengthening key growth categories and geographies in the process. Our unique Nutrition, Health & Wellness strategy, with food, beverage and nutritional health products at its core, has become much clearer as we completed a sizeable number of transactions and announced strategic reviews for Nestlé Skin Health and Herta.”

Organic sales grew 3.0 per cent in the full year with RIG of 2.5 per cent for the full year. Net acquisitions increased sales by 0.7 per cent, due to the acquisitions of the Starbucks license and Atrium Innovations. North America also showed solid growth in Purina petcare including Pro Plan, Fancy Feast and Tidycat, and online. Coffee-mate creamers and Nestlé Professional also maintained high growth.

The confectionery giant also reported positive growth after launching Nescafé Gold and KitKat Gold in Australia. Overall for Oceania and Asia, infant nutrition, Purina petcare and Nestlé Professional grew mid single-digit, helped by a strong performance in the second half. The Zone’s underlying trading operating profit margin improved by 60 basis.

Nespresso reported positive growth across all regions, continuing to expand globally, reaching 792 boutiques.

“In 2018, we upgraded our innovation engine notably to ensure continued technology leadership and a shorter time to market. In the fast-changing food and beverage space Nestlé has what it takes to truly excite consumers with meaningful innovation and must-have products,” Schneider said.

“We reaffirmed our sustainability leadership at a time when consumers and regulators around the world are increasingly looking for solutions to today’s environmental and societal problems. Our decisive action and strong commitments to tackle the global packaging waste problem are a case in point. We are on our way to meeting our 2020 targets and positioning Nestlé for sustained and sustainable growth in the years beyond.”

Nestlé also announced on Thursday that the company is proposing an election of Dick Boer, former president and CEO of Ahold Delhaize, and Dinesh Paliwal, president and CEO of Harman International, to its Board of Directors.

8 Feb, 2019
Bellamy's launches baby formula with omega-3
financial Review

Bellamy's Australia has launched a baby formula with twice the omega-3 of its rivals, making it a likely winner with mothers, helping to boost sales and earnings.

Chief executive Andrew Cohen has been looking to rebuild the business and regain investor trust after several tumultuous years that almost led to the collapse of the organic baby food and formula maker. 

Mr Cohen believes he has laid the foundations for a stronger business, aiming to hit $500 million in revenue by financial year 2021, a model supported by product innovation such as new cereals like pumpkin baby rice, an exotic fruits range of pouches and new packaging.

A soft launch of the formula has targeted Coles, with Woolworths and Chemist Warehouse to follow. Bellamy's said the formula would be stocked once the old formula had sold through, and a more formal launch would be likely after Lunar New Year when supermarkets had fully stocked the product. 

Product development is critical for every consumer company, Morgan Stanley analyst Thomas Kierath says. 

"The key change in the infant formula market over the past five years has been that omega — which reportedly supports brain development amongst other things — is now considered essential," he wrote in a note to clients.

"Bellamy's old formula didn't have omega, but the new formula does, which we think changes the game. Our recent survey of 1500 infant formula buyers indicates that Bellamy's brand awareness in China is high relative to A2 Milk, which leads us to think that recent performance has been product, rather than brand driven.

"The product has just been improved. Bellamy's price point should drive volume growth, rather than margin expansion."

The once-troubled Launceston-based company is pricing its stage three product at $28 (for a 900 gram tin) compared with rivals Nan Organic at $31 and Biostime at $38 (both 800 gram tins), so the product should appeal to a wide base. 

"In the future, we think that there is the potential for a premium product to be launched which will drive margin," Mr Kierath said.

The Chinese market

Bellamy's reports its first-half results on February 27, when investors will look for upbeat commentary about the outlook in China, and to see whether it has gained the needed certification from Beijing allowing it to sell Chinese-labelled products in China.

The company filed the application more than a year ago to the new market regulator, the State Administration for Market Regulation (formerly called the China Food and Drug Administration). Mr Cohen had expected to get certification before the end of last year. 

In October, Bellamy's flagged full-year sales for its baby formula would be at the lower end of its guidance, and first-half revenue would fall by as much as 15 per cent as it looked to run down trade stock before a brand upgrade.

Mr Kierath expected the company to take some provisioning at the full-year results, outlining a $20 million, one-off provision of older formula product. Bellamy's already took a $6 million provision at the 2018 full-year results.

8 Feb, 2019
Kroger expands meal kits to 500 stores
Inside FMCG

US supermarket Kroger has expanded its Home Chef meal kits to 500 additional Kroger stores across the country.

Home Chef has also launched a customisable meal kit feature for online orders on its website, in which consumers can change and upgrade recipe ingredients.

“Kroger continues to redefine the customer experience and provide new ways to shop for, prep and cook meals through exciting brick-and-mortar and digital experiences,” said Robert Clark, Kroger’s senior vice president of merchandising.

“Last October, Kroger introduced Home Chef retail meal kits, and we’re now expanding to add the easy-to-prepare recipes to hundreds of new locations, providing convenient access to the meal solution at more than 700 stores. We look forward to the continued growth of Home Chef in 2019 through expansion and new products.”

Home Chef offers rotating retail menu weekly with a variety of classic meals, including Home Chef Express meal kits that can be prepared in 15 minutes or less. Each meal kit is designed to serve two and starts at $8.50 per serving.

5 Feb, 2019
Freedom Foods confirms Coomboona Dairy deal
Inside FMCG

Australian Fresh Milk Holdings (AFMH) has finalised the acquisition of Coomboona Dairy farm.

Freedom Foods confirmed that Australian Fresh Milk Holdings, in which it owns a 10 per cent stake, purchased the operation in Northern Victoria.

The acquisition will expand AFMH’s production which will leverage on delivering sustainable production of high quality milk, supporting a range of value added product opportunities.

Currently the dairy business operates Moxey Farms in Lachlan Valley, New South Wales. Freedom Foods said the acquisition propels AFMH as the largest dairy producer in Australia with current operations forecasted to produce over 150 million litres in 2019.

Freedom Foods is now utilising a proportion of the dairy milk output from Moxey Farms and Coomboona Dairy for it’s Australia’s Own Kid’s Milk and other dairy products. As part of the acquisition, Freedom Foods contributed A$4.6 million in equity funding, based on its 10 per cent equity shareholding.

5 Feb, 2019
Bubs revenue soars on new Chinese network
Inside FMCG

The opening of Bubs’ corporate daigou channel has helped infant formula maker outstrip last year’s total revenue in just six months, including a 23-fold increase in sales to China.

In a quarterly trading update on Wednesday, Bubs flagged $21 million in gross revenue for the six months to December 31, already beating its $18.42 million revenue from FY18.

Bubs’ second-quarter gross revenue of $12.1 million was up nearly five-fold on the same period last year, and 35 per cent up on the first quarter of FY19, while sales more than doubled on the prior corresponding period.

The company is due to report its audited half-year results on February 28.

Founder and chief executive Kristy Carr credited the lift to its pursuit of China cross-border eCommerce sales and activation of the corporate daigou distribution channel.

“Sales into China are 23-fold up on the same period last year, demonstrating our route-to-market strategy is being successfully executed,” she said.

In June, the company raised $40 million in shares at 75 cents each in to support its Chinese push, while in the same month it secured a deal to sell its products on the nations biggest e-commerce platform: Alibaba.

In December, Bubs secured additional goat milk supply with NZ’s Central Dairy Goats Pty Limited, adding another six million litres annually.

Domestic sales growth is up nearly four-fold year-on-year and up 18 per cent on the previous quarter.

Bubs products and CapriLac powder account for 48 per cent and 38 per cent of the quarter’s revenue respectively, with fresh dairy products accounting for the remaining 14 per cent.

Shares in Bubs were trading at 43 cents before open of trade on Thursday, down from 72 cents a year ago.

5 Feb, 2019
Laguna Bay and Peter Fogarty in McWilliam's Wines rescue
The Australian Financial Review

Agricultural fund manager Laguna Bay and West Australian businessman Peter Fogarty have injected $16 million into ailing McWilliam's Wines in a recapitalisation that new chief executive David Pitt says will enable it to break even this year after a dive into the red.

Mr Pitt, who took the helm in July, said the historic wine company had to modernise and start making more wines that consumers wanted to buy rather than focusing too much on the past.

"We need to get the balance right," he said.

He also intends cutting up to $10 million in costs from McWilliam's operations and wants the winemaker to move further up the value chain to focus more on higher quality wines.

He said a new range under the MCW banner was showing good signs and was evidence of a more modern, consumer-focused approach, steering clear of "wines that we're making for ourselves rather than what consumers want".

"If you don't play the game properly, then you are going to miss out," Mr Pitt said.

Laguna Bay is injecting $9.6 million into the company via the Margaret River Wine Production vehicle controlled by Mr Fogarty, who has extensive wine interests in Western Australia's Margaret River region, and also controls the Lake's Folly brand in NSW's Hunter Valley. Mr Fogarty is pumping a further $6.2 million in via the MRWP entity.

The looming recapitalisation and heavy losses at McWilliam's were revealed in The Australian Financial Review early on Tuesday.

Mr Fogarty said he and Mr Pitt were "aligned on strategy" and the two groups would work more closely.

Mr Pitt said McWilliam's generated 85 per cent of its sales in the domestic market, but China would be a much larger focus: "We certainly see that as a significant growth opportunity."

Been through upheaval

He said the "cash flow challenges" of the past year would be addressed partly by the recapitalisation, but costs needed pruning and "we're obviously starting that journey now". The company had also had too many brands and product lines. "We've diluted ourselves by playing with a number of different brands," he said.

McWilliam's, with a history dating to 1877, is an unlisted public company owned by 70 family members. It is the sixth largest wine group in Australia.

It has been through upheaval after shifting its bottling line and packaging operations from suburban Sydney to its Hanwood winery in the Riverina region in NSW, and faced lower yields from its vineyards after drought in the Riverina and Hunter Valley. It has also been squeezed after being too reliant on the commercial wine segment under $10 per bottle, where margins are razor thin.

The company sells brands including Mount Pleasant and Hanwood Estate.

Documents lodged with the Australian Securities and Investments Commission late last month show McWilliam's made a bottom-line loss of $5.5 million for the 12 months ended June 30, 2018, but that losses had been reined in from the disastrous $22 million tumble into the red of a year earlier. Sales revenue fell 13 per cent to $87.4 million in 2017-18.

Mr Fogarty bought a controlling stake in the Evans & Tate wine brand and production assets from McWilliam's in October 2017 for $32 million under a previous deal, where McWilliam's was left with 30 per cent. McWilliam's also entered into a three-year loan agreement with MRWP at that time, and has been in breach of some of those financial covenants.

Mr Fogarty's broader wine operations include Deep Woods, Millbrook Winery and Smithbrook in Western Australia, and Lake's Folly.

McWilliam's also has a $12 million trade receivables facility with AssetSecure, and at June 30 was in breach of an interest cover ratio covenant connected to that facility.

McWilliam's also breached a loan contract with privately owned Californian wine giant E&J Gallo, which held a small stake in McWilliam's until late 2014. Under a loan agreement with E&J Gallo, $1.675 million was due to be repaid on July 1 last year but McWilliam's did not make the payment. Six weeks later, the companies agreed the amount would be repaid in three instalments.

 

 

29 Jan, 2019
Laguna Bay and Peter Fogarty in McWilliam's Wines rescue
Financial Review

Agricultural fund manager Laguna Bay and West Australian businessman Peter Fogarty have injected $16 million into ailing McWilliam's Wines in a recapitalisation that new chief executive David Pitt says will enable it to break even this year after a dive into the red.

Mr Pitt, who took the helm in July, said the historic wine company had to modernise and start making more wines that consumers wanted to buy rather than focusing too much on the past.

"We need to get the balance right," he said.

 

A McWilliam's advertisement from the 1970s. The new CEO says McWilliam's needs to modernise and he aims to be in a break-even position in 2018-19 after a $16 million injection from outsiders. Supplied

He also intends cutting up to $10 million in costs from McWilliam's operations and wants the winemaker to move further up the value chain to focus more on higher quality wines.

He said a new range under the MCW banner was showing good signs and was evidence of a more modern, consumer-focused approach, steering clear of "wines that we're making for ourselves rather than what consumers want".

"If you don't play the game properly, then you are going to miss out," Mr Pitt said.

Laguna Bay is injecting $9.6 million into the company via the Margaret River Wine Production vehicle controlled by Mr Fogarty, who has extensive wine interests in Western Australia's Margaret River region, and also controls the Lake's Folly brand in NSW's Hunter Valley. Mr Fogarty is pumping a further $6.2 million in via the MRWP entity.

The looming recapitalisation and heavy losses at McWilliam's were revealed in The Australian Financial Review early on Tuesday.

Mr Fogarty said he and Mr Pitt were "aligned on strategy" and the two groups would work more closely.

Mr Pitt said McWilliam's generated 85 per cent of its sales in the domestic market, but China would be a much larger focus: "We certainly see that as a significant growth opportunity."

Been through upheaval

He said the "cash flow challenges" of the past year would be addressed partly by the recapitalisation, but costs needed pruning and "we're obviously starting that journey now". The company had also had too many brands and product lines. "We've diluted ourselves by playing with a number of different brands," he said.

McWilliam's, with a history dating to 1877, is an unlisted public company owned by 70 family members. It is the sixth largest wine group in Australia.

It has been through upheaval after shifting its bottling line and packaging operations from suburban Sydney to its Hanwood winery in the Riverina region in NSW, and faced lower yields from its vineyards after drought in the Riverina and Hunter Valley. It has also been squeezed after being too reliant on the commercial wine segment under $10 per bottle, where margins are razor thin.

The company sells brands including Mount Pleasant and Hanwood Estate.

Documents lodged with the Australian Securities and Investments Commission late last month show McWilliam's made a bottom-line loss of $5.5 million for the 12 months ended Junes 30, 2018, but that losses had been reined in from the disastrous $22 million tumble into the red of a year earlier. Sales revenue fell 13 per cent to $87.4 million in 2017-18.

Mr Fogarty bought a controlling stake in the Evans & Tate wine brand and production assets from McWilliam's in October 2017 for $32 million under a previous deal, where McWilliam's was left with 30 per cent. McWilliam's also entered into a three-year loan agreement with MRWP at that time, and has been in breach of some of those financial covenants.

Mr Fogarty's broader wine operations include Deep Woods, Millbrook Winery and Smithbrook in Western Australia, and Lake's Folly.

McWilliam's also has a $12 million trade receivables facility with AssetSecure, and at June 30 was in breach of an interest cover ratio covenant connected to that facility.

McWilliam's also breached a loan contract with privately owned Californian wine giant E&J Gallo, which held a small stake in McWilliam's until late 2014. Under a loan agreement with E&J Gallo, $1.675 million was due to be repaid on July 1 last year but McWilliam's did not make the payment. Six weeks later, the companies agreed the amount would be repaid in three instalments.

29 Jan, 2019
UK grocers warn of chaos in no-deal Brexit as Tesco supermarket sacks 9000
Financial Review

London | Britain's food supply could be seriously disrupted if it leaves the EU without a deal, a lobby group representing Sainsbury's, Asda, McDonald's, KFC and other firms said on Monday.

Problems will be particularly acute in the lead-up to the March 29 deadline, when Britain is scheduled to quit the bloc, and when most of its produce from lettuces to tomatoes is out of season, with a higher per centage imported, the British Retail Consortium (BRC) added.

Coming at the same time as the retailers' warning was news that Tesco, the country's biggest retailer, may axe as many as 9000 jobs in its UK stores and head office as it tries to cut costs.

 

British supermarket chain Tesco has announced a major revamp of its operations across the country.  supplied

About one third of the food eaten in the UK comes from the EU, and in March, 90 per cent of Britain's lettuce, 80 per cent of its tomatoes and 70 per cent of soft fruit will be sourced from the bloc and subject to new customs duties.

The statement, signed by the bosses of the Co-operative, Marks & Spencer, Lidl and Waitrose supermarkets, was published before key Brexit votes in Parliament set for Tuesday in London (Wednesday AEDT).

Responding to the BRC's letter, a spokesman for Prime Minister Theresa May said plans were in place to keep customs working and traffic flowing in the event of a hard Brexit. Food security was high and that would "continue to be the case whether we leave the EU with or without a deal, he said.

The bosses said in the letter they had been making contingency plans with suppliers but "it is not possible to mitigate all the risks to our supply chains and we fear significant disruption in the short term as a result if there is no Brexit deal.

"We are therefore asking you to work with your colleagues in Parliament urgently to find a solution that avoids the shock of a no-deal Brexit on 29 March and removes these risks for UK consumers."

Only about 10 per cent of Britain's food imports are currently subject to tariffs. If the UK were to revert to WTO Most Favoured Nation status in a no-deal scenario, it would greatly increase import costs, which could in turn put upward pressure on food prices, the BRC said.

 

A spokesman for Prime Minister Theresa May said plans are in place to keep customs working and traffic flowing in the event of a hard Brexit. Alastair Grant

The signatories said they were stockpiling where possible, but noted that all of Britain's frozen and chilled storage is already being used, with very little general warehousing space available.

Tesco, which employs more than 300,000 people says it may be able to redeploy about half of the 9000 positions that it is going to eliminate, a move that would "limit the impact" on its workforce.

The main change in its supermarkets across the country would be to its fresh meat, fish and delicatessen counters. It expects to close counters in about 90 stores, with the remaining 700 trading with either what it called "a full or flexible counter."

Tesco's move shows its operation diverging from rivals such as No. 4 player Morrisons, which emphasises its army of trained butchers, fishmongers and other specialists who prepare food in-store.

All of Britain's big four food retailers - including No. 2 Sainsbury's and No. 3 Asda who want to combine - are chasing efficiency savings to fund price cuts so they can better compete with discounters Aldi and Lidl, who are still winning market share.

Tesco set out a plan in October 2016 to reduce operating costs by £1.5 billion pounds ($2.8 billion) over three years through efficiencies in its distribution network and stores and from procurement savings.

It needs the cost savings to help achieve its target of a group operating margin of 3.5 per cent to 4.0 per cent by financial 2020, up from 2.9 per cent in fiscal 2018.

29 Jan, 2019
Marley Spoon secures more than $30m in funds to support meal-kit growth
Financial Review

Meal-kit delivery business Marley Spoon, which is burning through $5 million a month, has secured more than $30 million in debt funding to support growth until it starts to break even in 2020.

Marley Spoon, the second-largest player in the $500 million Australian meal-kit market, said on Tuesday it had raised €10 million ($15.95 million) in bridging loans from two funds affiliated with US-based venture capital firm Union Square Ventures and €2 million from two minority shareholders.

The company, which has a market valuation of $56 million, will seek shareholder approval in March to convert the loans to convertible bonds.

 

Marley Spoon CEO Fabian Siegel says more than $30 million in new funding will help support the meal-kit company until it breaks even in 2020. Louie Douvis

It has also signed a €2.5 million two-year term loan agreement with German lender Berliner Volksbank, extended the bulk of an existing €6.7 million loan from Moneda until 2020, and entered into a €2.6 million equipment-leasing agreement with CSC Leasing to finance equipment to support the automation of production lines in the US and Australia.

Marley Spoon shares rose 15 per cent to 55¢ in thin trade on Tuesday after gaining 27 per cent last Thursday. The shares have plunged 75 per cent since the company listed last July amid question marks over the long term economics of its business model.

Path to breaking even

"It did look like it was running out of money, so I'm not surprised the stock has had a little bit of a bounce," Cyan Investment Management director Dean Fergie said. It was likely to be easier for the company to raise debt rather than issue new shares at a deep discount to its $1.42-a-share issue price last year.

Marley Spoon chief executive Fabian Siegel said the funds would help support the company on its path to breaking even on an EBITDA (earnings before interest tax depreciation and amortisation) basis in 2020.

However, the funding will come at a cost, incurring interest between 8 per cent and 12 per cent.

Marley Spoon also warned it was likely to lose €36 million EBIT in calendar 2018, compared with revised guidance for EBIT losses between euro 32 million and 34 million, after spending more on marketing to attract customers.

The company, which competes in Australia with HelloFresh, has been marketing heavily to attract customers, launching a television advertising campaign in early January taking aim at boring mid-week meals such as spaghetti bolognese.

The meal-kit market in Australia is growing more than 10 per cent a year, according to UBS, fuelled by time-poor shoppers. But take-up or market penetration is low at 9 per cent and in a recent UBS survey, only 5 per cent of consumers said they intended to subscribe over the next year.

Supermarket giants enter fray

Coles and Woolworths have also entered the market, launching a range of meal kits as part of their convenience strategies.

Marley Spoon sold 15 million meals in Australia, the US and Europe last year, mostly (75 per cent) to existing customers. Global sales rose 65 per cent in the December quarter - buoyed by additional menu choices - lifting annual sales 78 per cent to €92 million.

However, sales growth in Australia slowed to 15 per cent in the final quarter, less than half the rate of growth in the September quarter.

"Our increased investment in marketing at stable acquisition costs is paying off as we keep building our loyal customer base to serve as the foundation for strong growth in 2019 and beyond," Mr Siegel said.

Operating cashflows improved in the December quarter, from negative €11.2 million to negative €9.5 million, leaving the company with about €9 million in cash at year's end.

Under the revised loan agreement with Moneda, Marley Spoon must pay €2 million on February 20 and another €1 million on August 31.

29 Jan, 2019
Why the Sequoia Fund bought A2 Milk
Financial Review

A2 Milk is on of three new stocks added to a concentrated and highly regarded 49-year-old global portfolio known as the Sequoia Fund run by New York-based value manager Ruane, Cunniff & Goldfarb​. 

The addition was disclosed in the manager's investment letter of January 28 which shows the strategy owns just 23 stocks that meet its "open-minded approach to value". That means an emphasis on quality and growth and has led Sequoia to invest in stocks such as Alphabet, Berkshire Hathaway and Liberty Media.

Sequoia was attracted to A2 because it has "an unusually long story behind it". The fund manager acknowledges the theory that some populations of cows thousands of years ago developed a genetic mutation which affected the protein passed through their milk.

 

Sequoia thinks A2 can be as effective branding milk as Chobani has been marketing Greek-style yoghurt. Brendon Thorne

"While this is far from settled science, some researchers and nutritionists believe that because people have only been drinking A1-bearing milk for a relatively short period by evolutionary standards, our bodies have a harder time digesting it than 'pure' A2 milk," the manager wrote.

But for the purposes of mounting an investment case, Sequoia thinks A2 can be as effective branding milk as Chobani has been marketing Greek-style yoghurt.

"A good analogy here is Greek yoghurt, which is believed in some quarters to confer health benefits you can't get from regular yoghurt," the letter explains. A2-protein milk is a commoditised product, like yoghurt

"A2 Milk is attempting to do the same thing, to great effect thus far. Riding powerful consumer trends favouring products perceived to be healthy and natural, A2 has become the leading premium milk brand in Australia while making rapid inroads into the massive and quality-obsessed infant formula market in China.

"An effort to penetrate the US milk market is also showing early promise."

This won't be news to New Zealand and Australian investors who are familiar with the A2 story since it was floated in 2015 on the ASX, and in 2012 on the NZX main board. Since then the stock has ridden the Chinese consumption boom because of demand for its infant formula. A2 shares closed at $11.62 on the ASX on Tuesday.

"Notwithstanding its remarkable success to date, A2 remains a young company, and much will depend on whether management can navigate a thorny distribution landscape in China, solidify the positioning of an embryonic brand and exploit growth opportunities in new geographies and product lines," Sequoia argued.

"With good execution, particularly in China, we think A2 could become a much larger business than it is today, more than justifying the statistically high price-earnings ratio we paid for our shares."

The other stocks it added were Electronic Arts and Melrose.

A co-founder of Ruane Cunniff​, the late Bill Ruane, was a long-time friend of Warren Buffett. The strategy stumbled on account of a massive stake in Valeant Pharmaceuticals which ended a celebrated winning streak for the investment manager. Valeant nearly collapsed in 2016, , under the weight of an accounting scandal, and has since reinvented itself as Bausch Health.

29 Jan, 2019
Tesco to cut thousands of jobs as part of wide-ranging corporate overhaul
Financial Review

London | Tesco plans to slash thousands of jobs as the UK's largest supermarket group embarks on a shake-up to cut costs in the face of intense competition.

Tesco said on Monday that about 9000 positions were at risk as it reviewed in-store fresh food counters and head office staffing levels – but up to half the workers affected were expected to be redeployed to new roles.

The measures come four years after Tesco Launched a turn-around program under chief executive Dave Lewis. That program, which included selling assets such as Dobbies Garden Centres and moving the company's head office, is designed to save £1.5 billion ($2.75 billion) by the 2019-20 financial year.

 

Tesco briefed staff at dozens of stores throughout the UK on the wide-ranging measures. Among the changes are plans to close fresh food counters in about 90 stores.  DARREN STAPLES

"Whilst this turn-round continues, it does so in a competitive and challenging market," Tesco added. German discounters Aldi and Lidl continue to open about 100 stores between them each year, and seem content with low operating margins. Traditional rivals such as Wm Morrison and Asda have also improved their operational performance over the past two years. 

Tesco shares closed 1.3 per cent lower at 222p – about the same level they were when Mr Lewis took over as chief executive in September 2014. 

The retailer on Monday (Tuesday AEDT) briefed staff at dozens of stores throughout the UK on the wide-ranging measures. Among the changes are plans to close fresh food counters in about 90 stores. There will also be changes to stock control and merchandising processes, reducing workload.

Changes will also be made at the retailer's head office, which Tesco said would create "a simpler and leaner structure".

"We will be doing all we can to help colleagues affected by these changes, including offering redeployment opportunities wherever possible," Tesco said.

Steve Dresser, managing director of consultancy Grocery Insight, said the changes in part reflected a generational shift. "Counters are used mainly by older people. Younger shoppers are happy to wander round scanning things with the smartphones and using self-checkouts." 

Fresh food counters are also expensive to operate and their pricing structure has to some degree been eroded by the price cuts Tesco has made on its pre-packed ranges in response to competition from discounters, he added. The supermarket has invested heavily in a range of "farm brand" ranges of meat, poultry and fresh produce designed to match discounters' prices. 

Bruno Monteyne, food retail analyst at Bernstein and a former supply chain director at Tesco, said he was reassured by the plans and estimated they would save as much as £170 million a year. "This is the final big phase of rethinking the operating model. It is balanced and most likely well-tested," he said.

Along with cutting costs, Mr Lewis set a target of returning to a 3-4 per cent operating margin by 2019-20.

23 Jan, 2019
API investor Andy Gracey wary of Sigma Healthcare merger
Financial Review Supplied

 

The Australian Ethical portfolio manager, who controls about 3 per cent of the drug wholesaler and pharmacy marketing outfit, said he struggled to see how the $1 billion-plus merger benefited API investors.

"We're not particularly comfortable with the bid in terms of we think Sigma was in a tough situation and it feels like API is kind of handing them a pretty reasonable opportunity, and to the detriment of API shareholders," he said. "We feel like we're giving away more than we're getting."

API and Sigma are competitors in the $14 billion pharmaceutical wholesaling business alongside a third ASX-listed player, EBOS. The three operate in a highly regulated, government-subsidised sector, to deliver prescription and over-the-counter medicines to pharmacies around the country. Each wholesaler has exclusive distribution and support agreements with different brands – such as API and Priceline, or Sigma and Amcal.

Sigma investors got a shock in mid-2018 when the pharmacy industry gorilla Chemist Warehouse pulled its agreement in favour of a new exclusive distribution contract with EBOS.

API shares collapsed in the weeks after the proposed merger was announced on December 14, but are back trading at the $1.48 level they were at previously. The shares are flat over the year and at current levels are trading well below a 12-month high of $1.935 hit in September.

Earnings target

Sigma shares are down 32 per cent in the past year, mostly due to concerns about its earnings prospects after losing the Chemist Warehouse contract. They jumped 44 per cent to 58¢ on the merger news and have traded around that level since. The stock, however, has lost 32 per cent in the past year.

Given that change to its business Mr Gracey said he is concerned that Sigma's 2020 earnings target of $40 million to $50 million is "overly optimistic". Similarly, estimates from Sigma that losing the Chemist Warehouse contract will free up about $300 million in working capital may underestimate what's required to run the remaining business, he said.

Under the proposal API is seeking to buy out Sigma investors in a mixture of 0.31 API shares and 23¢ cash for each Sigma share.

 

 

23 Jan, 2019
Pub owners bristle at Carlton & United Breweries' dual role as online steps up
Financial Review Supplied

 

Angst levels are rising among the country's 5500 hotel owners at the e-commerce strategy of the owner of big beer brands Victoria Bitter and Carlton Draught.

On-tap beer sales inside hotels and bars by the two main players in Australia's beer industry, CUB and Lion, are still a major money-spinner for pub owners along with sales of packaged beer made through attached bottle shops and drive-through operations.

CUB and its parent AB-InBev, the world's biggest brewer, in November began a trial selling CUB products via eBay in a direct-to-customer push sweetened with sharp discounts.

This followed the separate acquisition in August of Australian-based online e-commerce platform BoozeBud which sells alcoholic products direct to consumers.

BoozeBud's current offerings include a promotion to buy three cases of "Aussie icons" beer to save 10 per cent, mostly featuring CUB products, although there are a handful of rival beers on offer too.

Australian Hotels Association chief executive Stephen Ferguson said concerns were being raised by hotel owners. They are worried about the blurring of the lines between supplier and retailer.

"This is a new channel," Mr Ferguson said. "We've had issues raised by some of our members".

Craft beer acquisitions

The AHA was trying to resolve the concerns initially through meetings with CUB.

"We're just trying to better understand what they're trying to achieve and to let them know of our concerns," Mr Ferguson said.

A CUB spokesman said on Tuesday that the brewer was in talks with the AHA to listen to their concerns. "We deeply value our relationships with local bottle shops and hotels across the country," the spokesman said.

The angst comes as all mainstream beer companies battle against declining beer sales, with consumers increasingly shifting towards smaller craft brewers.

The situation has close similarities to an angry stoush which flared almost two decades ago at the height of the dotcom boom in 2000. CUB's then parent, the ASX-listed Foster's Brewing Group, sparked outrage when it bought a 25 per cent stake in an online retailer, Wine Planet.

Big liquor retailing players were furious behind the scenes at Foster's daring to move into the retail space, and threatened to use their clout to undermine it by pulling CUB products off their shelves. Foster's subsequently sold its holding after Wine Planet suffered heavy losses and failed to make the inroads Foster's had hoped for.

Foster's in 2011 split into beer and wine divisions, with ASX-listed Treasury Wine Estates being spun off into a wine-only operation.

AB-Inbev acquired BoozeBud last year via its entrepreneurial division known as ZX Ventures. CUB became part of AB In-Bev in 2016 through a global mega-merger where AB In-Bev acquired SABMiller, which had bought the Foster's beer business in 2011 for $12 billion.

AB-InBev and CUB have been buying up craft beer brands such as Sydney's 4Pines and the Adelaide-based Pirate Life in 2017 to try to generate more growth.

The craft beer industry in Australia is worth an estimated $740 million annually and is growing at 15 per cent to 20 per cent a year, outstripping mainstream beer sales, which are going backwards.

CUB is the No.1 beer company in Australia, with a market share of about 46 per cent, ahead of big rival Lion, which has 42 per cent.

 

23 Jan, 2019
Subway strikes national delivery deal with Uber Eats
Inside Retail

Subway on Monday announced a strategic partnership with Uber Eats, making it the latest national quick-service restaurant (QSR) business to embrace third-party delivery apps.

The deal will see more than 700 Subway restaurants offer on-demand delivery, as the company seeks to tap into the growing demand for convenience.

“With almost 14,000 searches on the Uber Eats app for ‘sandwiches’ each month, we know Subway delivery will be a game-changer for Subway fans,” Kate Brody, Subway ANZ director of marketing, said.

This is in line with a spate of national QSR chains, including McDonald’s, Hungry Jack’s and KFC, that have started offering delivery of online food orders through third-party apps like Uber Eats, Deliveroo and Menulog.

While delivery traditionally has been viewed by restaurants and consumers as a time-saving option for dinner, the ease of ordering through smartphones and ability to scale delivery fleets through the gig economy have redefined delivery for any time of the day.

According to Uber Eats, the number of lunch orders on the app more than doubled in 2018, which is just one more reason that delivery has become an attractive proposition for QSR chains like Subway.

While some restaurants have highlighted the large cut that such delivery platforms charge, Subway ANZ country director Geoff Cockerill told IR in a previous interview that they are definitely a win.

“There is a cost to it, but you can price your menu items accordingly. People purchasing products on third-party delivery apps are prepared to pay more than they are for normal menu items,” he said.

“If a menu item costs $10 and the delivery platform charges [the restaurant] a fee of 30 per cent – I’m making up these numbers – you would price your product somewhere in between. If you price it at $13, you’re probably going to lose your guest, but if you price it somewhere in the middle of $10 and $13, you’re likely to drive a profit because you’re utilising the resources you already have in the restaurant.

“What you’ve also got to remember is that it doesn’t matter if we’re a firm believer in this or if the restaurant is, it’s what the guests want. They want it now, so either you’re in it, or you’re not, and our view is you need to be in it.”

 

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