Aussie market a headier brew for Lion

You can almost hear the Lion Nathan executives chirping in song from their Shortland St office ... thank goodness for Australia.

The New Zealand brewery giant eagerly announced yesterday that its after-tax earnings before abnormals had increased by 7.8 per cent in the year ended August 31.

The company's increase in profits was largely due to strong growth from its Australian operation, which now accounts for 88 per cent of its business.

But problems for Lion lie closer to home.

While Lion lapped up $315 million of froth from the Australian beer market during the 1998-99 financial year, its New Zealand and Chinese businesses suffered.

A raging Kiwi price war between DB Breweries, Melbourne-based Carlton United Breweries and Lion in the first two quarters forced beer prices down to five-year lows, costing Lion more than $17 million in lost revenue.

Beer consumption has also declined as consumers turn to trendy pre-mixed beverages.

The company's Chinese operation is losing millions, thanks to excess production by a raft of brewers and a 15 per cent drop in beer consumption. Competition from an unlicensed manufacturer of a German beer, Becks, is causing headaches for the company, too.

To maintain returns, Lion needs to find new ways to add value to its products and to increase market share and volume sales.

Lion has missed the boat in the New Zealand wine industry, while rival brewer DB got in early with Corbans. It would now cost Lion dearly to invest in an existing brand, like Montana, should it choose that strategy.

Meanwhile, Lion's spirits business is bound to pick up next year, since DB has exited most of the market. Lion also has high hopes for supermarket beer sales, which kick off from December 1.

But Lion needs to be wary of a repeat of beer price wars and aggressive competition from Carlton and DB. The Australian company has made no secret of its ambition to grab a chunk of the New Zealand supermarket sector, which is expected to account for 20 per cent of all beer sales.

Meanwhile, Lion can do little to improve its performance in China until brewers rationalise production, the economy bounces back and consumption increases. With more than 600 competitors, Lion must work on reducing operating costs and increasing volume sales.

Sadly for the New Zealand economy, the most promising area for growth lies across the Tasman.

With Australia accounting for the lion's share of the business, you almost expect Lion Nathan to gather up its skirts and flounce off there, following Bendon and chemical company Fernz, which have already shifted their centres of operation.

So far the company is promising to stay put.