The boost in federal taxes on pre-mixed alcoholic drinks on Saturday night will have an impact on the businesses of a small group of companies.
Brewers, Lion Nathan and Fosters are major manufacturers and distributors of these alcopops or Ready To Drink products (RTDs), as is Coca Cola Amatil which is the fastest growing newcomer.
For Lion Nathan, the impact will be minor because RTDs and liquor consist of a small part of its business: but it does distribute Bacardi. Fosters has a much bigger involvement, but beer and wine dominate its operations, while Coca Cola Amatil has been pushing heavily into alcohol through premium beer and dark sprits and could be the company most impacted in the short term.
News of the sharp rise in the tax from midnight Saturday will get the pencils out at broking houses and the various companies, as well as the major retailers and pub groups, such as Woolworths, Coles (Wesfarmers) and Metcash, and the various listed pub managers.
The increase is the first tax hike of the Rudd Government and there will be little opposition to it, despite the lobbying strength of some of the groups involved.
The increase is expected to raise more than $2 billion in extra revenue over the next four years and media reports yesterday said part of the extra funds would be used to fund Australia’s largest ever investment in preventive health, focusing on alcohol, smoking, diet and exercise.
The reports said the plan will be known as the National Preventative Health Strategy and the final cost (estimated in the hundreds of millions of dollars) will be revealed in the May 13 federal budget.
That holds open the possibility that tobacco excise will rise to pay for part of the new program.
Under the tax increase, the level of excise charged on RTDs has been lifted from $39.36 per litre of alcohol content to $66.67.
It means RTDs will now be taxed at the same rate as spirits, closing a loophole introduced with the GST in 2000 by the Howard Government (and not closed) whereby the excise is lower when the product is purchased pre-mixed than when it is mixed fresh.
For all these RTD products aren’t company killers (not like the loss of the Victorian poker machine licences are for Tabcorp and Tattersall’s), but they were new growth, or the fastest growing product in their portfolios.
Whether the increase curtails sales in the medium to longer term is debatable, but the companies involved can’t expect any joy from the Federal Opposition to the move: binge drinking is now a major social issue and, like smoking, increasing the cost to the consumer is acceptable, even if it increases inflation.
Investors in Pacific Equity Partners funds which bought Independent Liquor in New Zealand last year won’t be too happy either. Independent is the largest producer of RTDs in Australasia. PEP paid well over $1.1 billion.
PEP’s website said about Independent:
"Independent Liquor (IL) is a leading manufacturer and distributor of alcoholic beverages, with a particular focus in the ready-to-drink (RTD) category, the fastest growing segment of the Australasian alcoholic beverages industry. Approximately 60% of IL sales are in Australia and 40% in NZ. Across the two countries, white and dark spirit RTDs represent 65% of sales.
"In NZ, IL has 3 of the top 6 dark RTD brands and 4 of the top 6 white RTD brands. Its main competitors in RTDs are Lion Nathan and Maxxiuum (distributor of Jim Beam). In Australia, IL has the close No.2 dark RTD brand and No.1 white RTD brand. Its main competitors are Diageo and Maxxiuum.
"Independent Liquor also produces a selection of beer, wine and spirits under its own brands, and is beginning to distribute licensed brands in some markets."
Lion Nathan didn’t mention RTDs in its February trading update, while Fosters didn’t break down the contribution from the product for growth figures for sales of Beer, Cider Spirits/RTDs for Australia, Asia Pacific(as it did several years ago) in its interim report in the same month.
"AAP BCS EBITS increased 9.4% to $433.4 million with good growth in Australia and a lower contribution from the Pacific. EBITS included a $17.8 million profit on the sale of properties adjacent to the Abbotsford brewery site and $4.9 million in Australian logistics transformation costs."
However in March, as binge drinking, especially by younger consumers, moved to the forefront of national debate, Fosters rushed out a statement on march 20 that started:
"Foster’s today announced it would immediately move to cease the production and marketing of added energy and higher alcohol RTD (Ready to Drink) products in Australia.
"Foster’s will voluntarily cease manufacturing and marketing alcohol beverages containing ‘energy’ additives such as caffeine and taurine. In addition, the company has formally committed to a voluntary limit of two standard drinks (20 grams of alcohol) per single serve container and 7% alcohol by volume across its RTD product portfolio."
Obviously it could feel the pressure growing.
UK based global grog giant, Diaego’s Bundaberg Rum label in Australia, is a heavy marketer of RTDs to younger male consumers through its support for rugby union and cricket and extensive marketing during games. Diaego also controls global vodka brand, Smirnoff and the Johnny Walker brand of whisky and Bailey’s Irish Cream, among other products. Johnny Walker is a big advertiser during cricket games on Australian TV, aimed at young male viewers.
Diaego said in its February profit statement that:
"Ready to drink net sales were down 1%. Strong growth of Bundaberg and Cola in Australia and Smirnoff ready to drink in Brazil and Africa offs
