Foster’s Group is an Australian company that deals with alcoholic products, mainly beer production and sale with their original products being Foster’s Lager and Victoria beer among others. In the year 2001, the company decided to buy Beringer Wine Estates, a leading wine estate based in California that was making about $1.2 billion in sales. A couple of years later, the brewery company now dealing with wine products also bought another premium wine maker known as Southcorp. This made the Foster’s Group one of the largest wine companies globally. In 2008, wine contributed to 76% of the company’s revenue from total sales. Foster’s thought that the combination of beer and wine made sense because they thought that they would expand their market and capture a whole new target market of wine drinkers. They thought that they would be able to cater for the needs of a large mass of alcoholic takers by creating economies of scope through the increase of market share. The company also foresaw more prospects in the sale of wine more than the sale of beer and decided that it was a worthy investment.
The company also thought that since both products were alcoholic beverages and the company was well established and had infrastructure set in place for both production and distribution, it could share these resources and capabilities because they were in the same line of industry. Another reason for diversifying into wine production and sale was that they thought that the processes used in production, distribution sales and marketing were similar for these two alcoholic beverages and that it would be business as usual or even better since the wine had more prospects for penetration and growth. Since they were a trusted brand, Foster’s Group thought that these new acquisitions would be easy to market and manage. They thought that the market dynamics that they were dealing with in their beer products would be similar to the market dynamics of wine, their new product. Foster’s Group also thought that the two companies were doing well at home and they were big enough to cater for their projected consumer masses. They thought that both operational relatedness and activity sharing would easily develop.
Since Foster’s did not have any prior experience or deep understanding of the wine industry, they were sure to make a couple of mistakes (Hilton, 2008, p. 202). One of their undoing was the use of one sales force for the two products. This sales force was tasked with marketing beer and cheap spirits to the mass market and also the sale of premium (high-priced) wine to specialized restaurants and liquor stores which would later on sell it to wine connoisseurs with more sophisticated tastes. Beer marketing was focused on the low-cost mass market while the wine focused on differentiation by selling premium wines. The other mistake they made was that the assets of Southcorp were procured at a distinct premium with a view that the high growth prospects of wine would cover up for it. To worsen the situation, these premium priced assets depreciated because of currency problems that devalued the US dollar relative to the Australian dollar.
What Foster’s should have done to mitigate these problems and create value should have been to undertake an extensive research and survey into the wine business abroad and in the home market (Hilton, 2008, p. 312). This would prepare them for challenges to come and ways of averting or overcoming them. Again, they would have maintained the existing management and employees or at least the marketing teams/department that the two acquisitions had, because they were the ones who made the two companies grow and be profitable. Alternatively, Foster’s would have opted for a new separate marketing group to specifically handle the marketing needs of the wines while maintaining the existing beer marketing group. This would mean the separation of the two businesses since each one was unique and distinct from the other (Hilton, 2008, p. 354). Foster’s could also chose to divest in the wine business because it expertise is largely if not entirely in the beer business.
Hilton Ronald. (2008). Managerial Accounting: Creating Value in a Dynamic Business
Environment. New York: McGraw-Hill/Irwin