A Grange way to run a business A Grange way to run a business


    On May 2, the day after Penfolds launched the 1997 vintage of its flagship red, Grange Shiraz, Keith Lambert flew into Adelaide to address an AICD luncheon.

    The Southcorp Wines managing director and CEO was at full throttle.

    Before lunch he drove up to Magill Winery, where Penfolds will relocate the making of Grange, developed by Max Schubert in 1951.

    Lambert is proud of the splendid winery, overlooking suburban Adelaide from the foothills of the Mt Lofty Ranges, and exudes confidence and enthusiasm as he addresses 300 business executives at the Hyatt Adelaide that day, after a half hour session with new South Australian Premier Mike Rann ("he was surprised that we didn't ask him for anything" ).

    But beneath the pinstripe blue suit and the Canadian accent, and despite his confidence, Lambert cannot be altogether happy with the way things are going at Southcorp after its merger with his Rosemount Estate last year. The company's share price has fallen. At the time of writing it was around $5.75-$5.90, down from around $7.30 a few months ago.

    Southcorp analysts don't seem too worried about this, however. One (who asked not to be named) feels Lambert is pursuing the right strategies after the merger - albeit a merger in Rosemount's general favour. One factor that hit Southcorp shares hard was the bad 2000 vintage, likely to be followed by a shortfall in tonnage in the 2002 vintage due to a cooler summer.

    Given the enormous strength of Southcorp's premium brands, this Sydney analyst feels Lambert is heading in the right direction and now must execute his policies of rationalisation. However he also feels that the new Southcorp is not communicating adequately with the marketplace. One of the reasons that one of Southcorp's biggest competitors, BRL-Hardy, is outperforming Southcorp is BRL's dominance of the cask market, which still represents something like 48 per cent of the Australian wine market by volume.

    And the merger was a most curious one. Most industry observers see it as a reverse takeover, where the smaller company, Rosemount, ended up with the lion's share of the business and senior jobs. Southcorp staff, including some of their best winemakers, have been jumping ship faster than Afghan refugees. Rosemount executives, including Lambert, have succeeded to many of the top jobs.

    Many in the industry, and probably Lambert (who doesn't say so) think that Southcorp was getting slothful, and now he's swinging the axe. People, brands, wineries and other assets are going. Maybe it's to pay for the $1.5 billion merger, maybe it was necessary, but probably it's a consequence of both in an industry that is hugely competitive.

    Think of this. The four biggest players, Southcorp, BRL-Hardy, Orlando Wyndham and Berringer Blass, have more than 80 percent of the $2 billion domestic wine market. And that's out of some 1475 Australian wineries, growing at the rate of one new winery every 73 hours.

    Lambert, who joined Rosemount in 1998, sees the industry's salvation in exports, and Rosemount has a startlingly good track record here.

    The company was started by New Guinea coffee planter and trader Robert Oatley in 1968. He had horse properties in the Upper Hunter Valley, near Muswellbrook, and like many wealthy men, was interested in good wine. Hence Rosemount winery and its first vineyards were planted in the Upper Hunter area.

    Oatley not only had a shrewd eye for horse flesh. He picked good men. His choice for managing director of his new winery was former Penfolds winemaker Chris Hancock, who has helped Oatley and his son Sandy drive the business aggressively ever since. Hancock chose Lindemans winemaker Philip Shaw as chief winemaker. Shaw has just moved from the Hunter Valley to Magill in South Australia, and now presides over all of the winemaking of the merged Southcorp/Rosemount entity.

    It is interesting to look at the respective entries of Oatley and Lambert in Who's Who in Australia. Oatley has a six line listing; Lambert has 17 lines, which reveals he was born in Edinburgh, Scotland, and educated in western Ontario, Canada, and at the Harvard Business School. In Canada he worked for several breweries, including Molsons, then came to Australia in 1993, when he became Senior Vice President of Fosters. One of the reasons for the change was that he met Rosalind Oatley, daughter of Robert Oatley, on a trans-Pacific airline flight, and married her. He is now 47 and they have two daughters and a son, 14.

    Lambert is now finishing off the merger and the messy bits, which saw Southcorp shed its packaging arms ($1 billion) and water heating arms ($600 million) and become a pure wine maker and marketer. The strength that Rosemount brought to Southcorp was, essentially, the ability to make and market premium wines at high profit margins. Exports underpin the company's performance, which next year should see them achieve 70 per cent of their revenues from outside Australia.

    This was a tactic that the Oatleys, Hancock and Shaw as winemaker showed could really deliver results. Rosemount made good to great wines, marketed and PR'd them relentlessly in the United State and the United Kingdom. When they got the results, they parlayed these results back to Australia: "Look what our Australian wines did on world markets." It was brilliant marketing in an industry that until less than a decade ago was almost frozen by export shyness.

    Lambert recognises that the big opportunity remains in export, and he's bullish about the prospects for both Southcorp and the rest of the industry. Domestic consumption is climbing very slowly, and remains at less than 20 litres per head per annum (we are drinking twice as much per capita as the bigger UK and US markets). The UK is Australia's largest export market. The market leader is Orlando's Jacob's Creek, with over three million cases, but Southcorp is in there, though their European volume declined 4.2 per cent to 3.3 million cases, revenue increased by 10.8 per cent to $200 million and EBITA increased 33 per cent to 34.4 million, last year.

    Lambert's export strategy is to concentrate on three core brands, which are the company's crown jewels. They are Rosemount, Lindemans and of course Penfolds, into which the company is now driving a lot of resources and effort. Lambert says: "With two months remaining in the current financial year, we are confident that the growth of these core brands will exceed the average 23 per cent annual growth achieved over the past five years. Leading the growth is Penfolds, which we are confident will exceed the target we announced at our interim results in February of 30 per cent growth."

    Southcorp has some excellent brands and makes some of Australia's best wines. One of Lambert's aims is to get domestic retail shelf space which reflects the company's market share of around 30 per cent. That may be a tough call, but it is a tough and competitive - some would say cut-throat - marketplace out there today.

    It is exports, and increasingly the American market, that Lambert is looking to for growth. That's why he is onto the phone from his home at leafy Mosman in Sydney when he wakes in the morning, talking to staff, to agents and to chief winemaker Phil Shaw.

    Lambert is a man who knows where he is going (he and the rest of the family have around 20 per cent equity in this company which has a market capitalisation of $4 billion).

    It's tempting to think that the sharemarket, which has lauded BRL-Hardy for some years, has underestimated Southcorp. But that's why Keith Murray Lambert (BA, Hons) is out to prove himself.

    And when he's not driving the merged Southcorp/Rosemount group, he's into travel (one would have thought this was a given), wine (ditto, he likes Rosemount Show Chardonnay and has just discovered the virtues of Lindeman's Pyrus Coonawarra red ... you might say he liked the wine so much he bought the company), snow skiiing and boating.

    A big mother of a wine

    Lambert presides over Australia's biggest winemaker, which produces Australia's most famous wine icon, Penfolds Grange Shiraz. Only the company accountants know how profitable this amazing brand is, but I can give you an educated guess.

    Penfolds always unchain Grange at five years age, so the 1997 vintage has just been released. Australia's most famous red wine went on sale on May 1 and, if you are lucky enough to be allocated a bottle by your friendly retailer, based on how much you bought from him over the past year, it should cost you around $300, maybe more.

    Grange is made to a quality, not quantity, budget and is an extraordinary marketing icon which has captured public imagination in a way no other Australian wine has done. Maybe that's why a bottle of the first vintage, 1951, recently fetched $27,000 at auction (the owner won't be able to drink it, by the way, as even its maker acknowledges that the 1951 wine, made by the late Max Schubert, is well over the hill. The entire range of wines (1951-1996) is now commanding around $100,000 at auction.

    The profitability of premium reds has not been lost on either Southcorp Wines or its parent company. Southcorp has geared up for a massive increase in red wine production, which is good news for red wine drinkers both here and overseas, not to mention Southcorp shareholders.

    So what's the 1997 Grange like? Naturally, it's a big mother of a wine, rich and extremely full bodied and tannic. It's probably not quite as good as the 1996 and 1998, but still very good. The colour is a vibrant plum red with tremendous concentration of flavours and strong, berry fruit. It has excellent balance, length of flavour and masterful use of new American oak.

    When Max Schubert made the first vintages American oak, rather than the traditional French oak, it was all he could find in the aftermath of World War II. In 1957 Penfolds' management ordered Max Schubert to stop producing Grange, which he thought of as his effort to emulate the top Bordeaux wines of France (as he didn't have enough Cabernet Sauvignon he turned to Shiraz, or Hermitage as it was called at the time). In secret at the Magill Estate winery, Adelaide, Schubert produced volumes of the wine, with the acquiescence of his cellar hands, in 1957, 1958 and 1959. In 1960, as the accolades came rolling in as the earlier Grange wines matured, Penfolds' management relented and allowed Schubert to officially resume production. He died in 1994.

    I estimate that the profit margin for Southcorp wines for an average vintage of Grange is around $10 million. On top of that is the value of the other brands it drags behind it, which is enormous.

    Robert Mayne


    The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.

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