Tuesday 20 February 2018

No windfalls for C&C in an American horror story

Bulmers maker C&C spent €300m on setting up a US cider business. Last week it wrote off €150m against the value of its US assets. What went so wrong?


C&C's foray into the US may go down in history as one of the bigger strategic errors by an Irish listed company.

Desperate to tap into Americans' growing thirst for cider as demand shrivelled up at home, the company spent around €300m setting up a US cider business. The 2012 friendly takeover of Vermont Hard Cider, the maker of the Woodchuck brand in the US, cost it $305m (€235m at the time). It has spent another $34m on a new cidery in the same state which opened last autumn, and an unknown amount on staffing, distribution deals and other expenditure.

Results released this week revealed just how big a mistake this has been.

The US business brought in a mere €1.5m in operating profit for C&C in 2015, down from €11m the year before. Results released last week showed the Bulmers maker was forced to write €150m off its books because of how badly the business was faring.

It all began with the best of intentions.

"They had already been exporting Magners into the US for several years by 2012," says Goodbody Stockbrokers' analyst Liam Igoe. "They felt the US market was ripe - excuse the pun. Cider was non-existent in North America at that stage, it had about 0.1pc of the beer market - a lot of Americans didn't even know what cider was, which is ironic given that it was one of the most popular drinks in the US pre-prohibition. Everyone was saying it was about to take off."

Woodchuck was the market leader when C&C bought it, delivering annual revenue growth of 20pc.

"Cider did start to lift. They were right to some extent," says Igoe. "It now has around 1pc of the total beer market, which doesn't sound like much until you consider just how huge the US is. But unfortunately for C&C, it did not participate in that growth. The market rose around them. It was driven by Boston Beer Company, which is one of the largest craft beer producers in the US.

"Boston decided to bring out its own brand of cider around 2012, Angry Orchard. This was marketed aggressively with a very good distribution system in place. It took a market leading position in a short space of time."

Igoe thinks the €150m impairment charge for the US business was conservative, and that the market has already written off double that amount. He estimates it is worth just €100,000.

Distribution problems are at the core of C&C's difficulties in the US, sources say. The country operates a three-tier market for the sale of alcohol, another after-effect of prohibition. Producers, save for a few exceptions, cannot sell directly to consumers. They must go through distributors, a huge industry in its own right which employs around 100,000 people and pushes up the cost of alcoholic products across the board.

Building relationships with distributors is difficult and costly given that many have alliances with much bigger manufacturers.

"Distribution is key in the beverage market and while technically C&C have access to the market in each of the states, by law, through independent distributors, this actually didn't help them in the end.

"It's a complicated system and each state also has its own rules governing local licences. So C&C had to work out each state in its own right and also rationalise distribution between existing Magners distributors and the ones acquired through Woodchuck, which they did and it took a bit of time.

"And all the while the older bigger guys are leaning on distributors to get their stuff on the shelves and into bars instead," says Igoe.

C&C is not the first drinks company to run aground because of its US ambitions, a source close to the company points out. "The fall of rival HP Bulmers stemmed largely from its efforts to crack America."

HP Bulmers, which owns the Bulmers brand outside of Ireland - the reason why C&C sells its cider as Magners in the UK and other parts of the world - was later bought by Heineken.

"C&C should never have attempted to build a US business independently," said the person. "It should have been done as a joint venture with a big player like Molson Coors, one with a good distribution network in place. Molson Coors is the most logical choice because it is brand-orientated and has edgier products. C&C would have given up some opportunity for profit by taking that approach, but it would also have significantly reduced the risk."

The UK and Irish distribution systems differ from the US, with no requirement for a middle-man distributor. Pubs can do deals directly with manufacturers.

This presents a different set of problems. In Britain, many pubs are tied to one manufacturer. This was not an issue when C&C first started selling Magners in the UK; the product was novel and supported by a massive marketing effort which drove consumer demand, forcing pubs' hands. But that is changing. Manufacturers are making cheaper copy-cat versions of Magners, replacing them outright in their tied pubs. As a result, the company's market share is falling in England and Wales.

C&C's attempt to buy the Spirit pub group last year represented an effort to address this. If successful the deal would have given C&C ownership of more than 1,000 pubs across the UK. But the bid was badly communicated, shocking shareholders and sending the company's share price plummeting.

The end result is that C&C is still almost totally reliant on two small markets - Scotland and Ireland - which generated 86pc of operating profit in its 2015 financial year. Its performance in both of these markets was unremarkable. In Ireland, turnover was flat, while net revenue fell 2pc. The volume of cider on sale across the island sank by 4pc.

In Scotland figures were skewed by the acquisition of Wallaces Express. Disregarding that purchase, volume fell by 4pc.

At the centre of all of this is Stephen Glancey, C&C's Scottish-born chief executive. He will have some difficult questions to answer at C&C's AGM in July.

He took over from predecessor John Dunsmore in 2012, when the purchase of Vermont Hard Cider was already in motion, so he can't be blamed for everything.

But Glancey was finance director from 2009 to 2012 and, once he took the top job, continued to invest in the US business despite obvious problems. He also helmed the disastrously communicated bid for Spirit. The company's share price has stayed flat since his appointment, while most of Ireland's other largest listed companies have seen big gains on the back of the economic recovery.

Glancey was still upbeat about both the US and UK markets on a call with journalists last week.

"In our Vermont factory, which is actually the only cidery of that scale in the US, we make products that are new to the market and are a real extension from the craft beer proposition in the US. In the US, craft beer takes about 11pc of the total beer market already. Cider is going to eat into that opportunity.

"And about 30pc of all our products now were not on the market last year. We think we are very well placed to be prudently optimistic on our future in the US," he said.

Sunday Indo Business

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