End of a 10-year hangover

By PAUL McINTYRE

Way back in October 1994, beer baron Doug Myers proclaimed that Lion Nathan was embarking on a bold gamble to enter the Chinese brewing market which would deliver the company bubbling profits.

Myers was confident that Lion Nathan would outsmart much larger international brewing companies that were still attempting to turn their Chinese joint ventures into profitable enterprises.

"We are learning from mistakes we didn't make," said Myers at the time of the deal, which saw Lion Nathan pour $100 million into a brewing joint venture in Shanghai.

"Other joint ventures are learning from mistakes they are making," he said.

Fast forward a decade and those comments seem to typify the kind of unbridled bullishness that Myers was well known for.

But this week Lion Nathan, with the blessing of its 46 per cent shareholder Kirin Corp, sold its Chinese operations for A$219 million ($232 million) to a joint venture consisting of the world's second-largest brewer, SABMiller, and Hong Kong-listed China Resources Enterprises.

In the end, the Myers idea delivered about A$200 million in accumulated losses.

"Lion Nathan was arrogant to believe they could succeed in China at a time most of the major brewing companies in China were struggling," says David McEwen, managing director of Auckland-based investment research firm IRG.

Indeed, after 10 years, six foreign brewers - of which Lion Nathan was the smallest - have nailed about 50 per cent of the market although decent profits are still a pipe dream.

There are 550 brewers in China's estimated $10.6 billion, 25 billion litre-a-year beer market, most of them local. The reality is that deep pockets are still needed to get somewhere in beer in China.

Softdrinks are no different. Yesterday, a former executive with Pepsi in the United States and part of the team who established its China business in 1987, quietly fessed up to me about Pepsi's plans back then for China: it was banking on losing money for 20 years before it hit black ink. That two-decade forecast has proven about right.

Myers' grand China plans, despite plenty of effort, have been thwarted by intense competition and the inability by any players to lift their prices.

The former Australasian boss of KFC and Pizza Hut, Gordon Cairns, who took over at Lion Nathan in 1997, has juggled continued losses from the China venture and has finally pulled up stumps, weeks before he leaves the company.

Despite China, Cairns has done very well - Lion Nathan's share price has more than doubled from A$3.20 to A$7.20 during his tenure and this week he defended the original China move.

"It was the right decision in 1995. But it proved to be too expensive for a brewer of our size. We just didn't have the deep pockets."

Cairns leaves the company on October 1 in a managed exit which will see former Nestle Australasian boss Rob Murray take over.

The decision to quit China leaves Murray without one of the brewer's biggest headaches, although only a few months ago Lion Nathan was seemingly sticking with China by pursuing a merger with one of the big beer companies.

In May, Cairns said he was aware that investors wanted the company to exit China but he was holding out for a possible deal.

"The solution for us is, can we be there, but be part of a better team, a bigger team?" Cairns told the Seven TV network four months ago. "So, instead of playing on our own, can we be part of a big team?

"Everyone is talking to everyone else because they realise the six players have got to consolidate down to about two players. So you are going to see aggregation."

In that interview, Cairns said he would be happy to enter into an alliance in China with global players such as Interbrew, Heineken, and Anheuser-Busch - all believed to have bid for Lion's China operations in the latest competitive tender.

He also said Lion Nathan was in a strong market position because the company had "built a brand new asset which people are dying to get their hands on or be part of".

In the end, Cairns couldn't find a partner willing to work with him in the Yangtze river delta region.

Back in 2000, when Lion Nathan took a big writedown on its China assets, Cairns tried to sell and was offered zip. By holding out, he has at least prevented a barrel of red ink.

With China dealt with, the brewer's focus is now on developing its wine operation and the premium beer market, an area it has been slow to exploit - a point Cairns acknowledges.

"There's been a move in all Western countries towards premium beers," he said recently. "People are drinking less, but drinking better quality. And we've been significantly behind the eight ball in not having a strong portfolio of premium beers.

"Beck's was the first real cab off the rank to strengthen our portfolio. And Heineken really complements that and gives us an enormous opportunity in the premium market."

In two weeks Cairns can kick back, beer in hand, and, as he says wryly, "grow old disgracefully" looking for "disgraceful opportunities".

Beer can do that to a man.

* Paul McIntyre is a Sydney-based journalist