In the lion's den

Rob Murray

Six months into one of Australasia's toughest corporate challenges, Lion Nathan chief executive Rob Murray says he's not sure he even had a honeymoon, never mind the market view that it's already over.

The 42-year-old Englishman has had little reason to propose a toast to the transtasman brewer's performance since he took over from the colourful Scot, Gordon Cairns, in October.

In November, Murray had to announce a loss of $A42.6 million ($NZ46.1 million) due to writedowns in the September year.

More recently, when posting the first quarter results, he conceded the performance of the Australian and New Zealand beer businesses had been "disappointing".

Lion's New Zealand beer sales were down 4.3 per cent on the previous period and Australia posted a 2.6 per cent decline in volumes.

Lion's share price is stumbling. From an early January high of $9.42, it was at $7.65 on Thursday.

And, says one Australian analyst, Murray has bungled a precious "honeymoon" opportunity to announce a profit downgrade. Instead, he has twice now given 2005 net profit guidance of $A230 million to $A235 million for the group.

"I would have liked them to do a profit downgrade last week. He could have got away with it. He could have said 'I've found a few issues we have to deal with, it's going to cost a bit of money and the target is now $125 million to $130 million or $120 million to $125 million'," the analyst said.

"If he doesn't achieve it now, he's almost going to be a lame duck chief executive.

"I think that's unfair. He's better than that."

Lion has not issued a profit downgrade in years.

It is the Kiwi beer business, Lion Breweries, that is causing the most concern to analysts and to Murray, although he prefers to call it "a priority".

The division contributes 20 per cent of Lion Nathan's group earnings, which were A$202.7 million last year.

The Sydney-based company blamed the fall in New Zealand beer sales on dismal holiday weather and the Government's Holidays Act forcing pubs to close to save staff costs at peak holiday time, but Murray does not think all is otherwise well, although he doesn't accept the 13 per cent share price fall this year is a concern.

It's now at about "fair value" he said after the market got "carried away with stocks like ours".

The health of the Kiwi beer business was spot lighted this month when its chief executive, Julian Davidson, resigned.

At the time, Lion said there was no connection between his departure after three years in the job and the division's performance.

But Murray told the Business Herald, Davidson was a man of great "integrity" and the business was not performing to Davidson's standards.

Murray said the real problem was ferocious competition in the Kiwi market, of which Lion has a 50 per cent share. The pressure had been building for five years and the market was now more competitive than Australia.

Big rival DB has been discounting its premium brand, Heineken, at times. DB's Tui brand has been a big hit with North Islanders and Independent Liquor has proved a formidable rival in the under-30s market with a low-cost structure strategy built around ready-to-drink spirit mixes such as the Woodstock brand.

Some commentators put it more bluntly, saying the Lion is no longer lithe and fast. It has been basking in the shade while its flagship, Lion Red, brand dies and Tui has swept in from the south to take hold in the big cities.

Lion's Speight's had also moved up from the South Island with success and, Murray said it was the best-selling beer in New Zealand next to Lion Red. But, overall, the lion had lost its roar.

One analyst said the New Zealand business model was unwieldy for the present market dynamics.

"It's a high fixed-costs business with limited flexibility to react to what's happening. It's probably got fairly high sales and marketing costs."

Other analysts think Lion's biggest problem in New Zealand is that it needs to make price increases but knows its competitors won't. "It's costing them."

DB led an industry price increase in June last year but Murray said the benefits "vanished" over Christmas.

He said that because Lion had the biggest market share it benefited from price rises more than any other measure.

"When you are number two or three, you can build volume or take price, either are equally beneficial, and we've seen our competitors take the opportunity of any positive price movement to build market share."

Murray brought his top management to New Zealand this month to make presentations to analysts at the Wither Hills winery in Marlborough - which, he said, was the only sensible wine acquisition Lion had made. One analyst said it was the only worthwhile acquisition the company had made in Australasia, period.

Murray told analysts Lion would have to be more realistic about how strong its competitors were.

"What I was saying was don't expect any earnings growth for the next couple of years while we invest in this business and try to refine our business model."

He would not discuss his strategy for reviving the New Zealand business with the Business Herald. But he confirmed his statement to analysts that Lion had a "poor" acquisition and expansion track record.

Beer acquisitions such as the Bond Brewery in Australia and Mac Brewery in New Zealand were considered good plays but the same could not be said for the China brewing business (recently divested), the acquisition of Pepsi and the Victorian hotels chain.

"At best, people would say our track record is patchy, the more informed would say you're good with Australasian beer and good with Wither Hills, but the rest of them are pretty ropey."

Lion has spent about A$300 million buying nine wine companies since 2001. They earned A$20 million last Year. Lion pulled out of a takeover battle for New Zealand's biggest wine company, Montana in 2001, netting a $127 million profit.

As part of his turnaround strategy, Murray has committed not to buy any wine companies until wine earnings have doubled to A$40 million.

The target date is 2008. One analyst said this was not possible and Lion knew it.

Murray said Lion did not have a formal merger-and-acquisitions strategy, but had worked instead on a "case-by-case" basis.

A "fairly rigorous" process had now been introduced.

For an explanation, he referred the Business Herald to a presentation at Wither Hills by chief financial officer Jamie Tomlinson. It did not explain the strategy.

One analyst said Murray's response when asked to explain the strategy to analysts in Marlborough "was not satisfactory".

Murray has been a Lion Nathan director since 2002. Surely then the weakness in the New Zealand business came as no surprise to him?

That's true, Murray said.

But a cocktail of factors had "conspired" during his first quarter in the job.

Lion had been watching and waiting to see if the marketplace would stabilise enough to move up prices. It hadn't, he said.

Lion had been signalling to the market that it knew New Zealand was a tougher proposition than Australia but then along came the "dreadful" summer and hotel closures at peak holiday times which hit Lion particularly hard because it has more on-premise business than its competitors.

And all the time that competition pressure has been relentless.

But he's not yet crying into his beer.

While consumers are having a shopping bonanza, they are also aspiring to premium beers and wines, areas that Lion hopes will take up the slack.

Murray said Lion had the right culture and the right people to revive the business, but instead of good they needed to be great.

Plenty to wine about

Lion has spent about A$300 million buying nine wine companies since 2001.

They earned A$20 million last year.

Lion will not buy any more wine companies until its wine earnings have doubled to A$40 million.

It hopes to achieve that by 2008 but analysts query if that is possible.

Rob Murray 
 
OCT 1, 2004 chief executive Lion Nathan.

2000-2004 Nestle Australia/Oceania managing director.

Annual revenues $2 billion.

Born: UK

Age: 42

LION NATHAN BEER BRANDS

New Zealand: Mainstream - Lion Red, Lion Brown ,Waikato Draught.

Premium - Steinlager, Speight's, Mac.

Australia: Tooheys, Hahn.