Southcorp Limited

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Southcorp Limited

403 Pacific Hwy.
Artarmon
New South Wales 2064
Australia
Telephone: ( + 61) 2-9465-1000
Fax: ( + 61) 2-9465-1100
Website: http://www.southcorp.com.au

Public Company
Incorporated: 1888 as South Australian Brewing Company
Employees: 2,592
Sales: A$2.82 billion (US$1.59 billion) (2002)
Stock Exchanges: Australian
Ticker Symbol: SRP
NAIC: 111332 Grape Vineyards; 312130 Wineries

Based in New South Wales, Australia, Southcorp Limited is the world’s largest maker of premium brand wine. The company oversees a number of brand names, including three of Australia’s largest wine groups, Lindemans, and Penfolds, as well as Rose-mount Estates, acquired in 2001. Other major wine labels include Wynns and Seppelts—the company has been working to reduce its total number of branded wines to under 850 by the end of 2003. In total, Southcorp owns more than 8,000 hectares of vineyards, and is the largest single landholder in the highly prized Coonawarra region. The company’s combined volume, excluding bulk volumes, topped 22.2 million cases in 2001. The company’s core brands, including Wynns, accounted for nearly 14 million cases. The United States represents a primary market for Southcorp, absorbing more than five million cases, while Europe accounts for nearly 7.5 million cases of Southcorp-produced wine. The company also owns small winery operations in the United States, where it has formed a joint venture partnership with Robert Mondavi, and in France, where it holds the James Herrick brand. Originally a beer brewer turned diversified conglomerate—the company’s former holdings included a large water heater business—Southcorp has transformed itself into a focused wine group, completing the divestment of its water heater operations in 2002. Listed on the Australian stock exchange, Southcorp posted total group sales of A$2.82 billion (US$1.59 billion) in 2002. The company is led by former Rose-mount CEO Keith Lambert.

Brewing a Conglomerate in the 1980s

Southcorp’s transformation into one of the world’s largest wine companies nonetheless kept it close to its roots in the alcoholic beverage industry. The company started out in fact as one of the many small beer brewers in the region around Adelaide, in the state of South Australia, in the mid-19th century. West End Brewery was founded by William Clark in 1859. In 1888, West End joined with another brewery, Kent Town Brewery, and a wine and spirits merchant, Rounsevell & Simms, to form the South Australian Brewing Company. The West End brewery became the company’s main brewing site as well as the company’s core beer brand.

In 1901, the South Australian Brewing Company listed on the Australian stock exchange in 1901, and began acquiring other breweries in the region. In 1938, the company acquired its chief regional rival Walkerville Brewing Company, which had been founded in 1886. The acquisition of Walkerville gave the company another strong beer brand, Southwark, and established South Australian Brewing Company as the dominant brewer for the southern Australian region.

South Australian Brewing Company changed its name in 1971 to SA Brewing Holdings Ltd. as it began a drive to gain scale in the Australian beer market; yet by the mid-1980s, the company remained a relatively minor player, with a third-place position far behind market leader Foster’s. Finding itself with limited prospects of expanding its beer business further in the Australian market, SA Brewing sought instead to strike out in new directions.

SA Brewing entered the winery business in 1984 with the acquisition of B. Seppelt and Sons. That company stemmed from a 121 hectare plot of land purchased by German immigrant Joseph Seppelt in 1850. Seppelt originally intended to plant tobacco, but in 1852 Seppelt changed his mind and planted vines instead. By the late 1860s, Seppelt’s wine production had grown enough for the company, now led by sons Joseph and Benno, to build their first winery. That structure was replaced by a new winery in 1888, and by the beginning of the 20th century, Seppelt was producing more than two million liters of wine per year. Like much of the Australian wine industry—and consumer preference—of the period, Seppelt’s production focused on fortified wines. Expansion for the Seppelt company came in 1916 with the acquisition of Chateau Tanunda, followed two years later by the construction of a new winery at Dorrien. This expansion helped Seppelt grow into a prominent fortified wine producer by the time of its acquisition by SA Brewing.

While winemaking remained close to SA Brewing’s original business, the company began looking farther afield in the mid-1980s. In 1986, the company took a different direction, acquiring a packaging business, Gadsdens, in 1986. Gadsdens not only brought SA Brewing a new line of business, it also brought the company Ross Wilson, who had been head of Gadsdens at the time of its acquisition. Wilson quickly took over as chief executive of SA Brewing and began building the company from a modest-sized brewer into one of Australia’s top 50 industrial conglomerates.

At first, Wilson sought to increase the company winemaking operation, although in this he was initially unsuccessful. After being thwarted in a bid to buy another company, Orlando’s, Wilson set his sights on the prominent winemaker Lindemans, entering talks with its parent company Philip Morris in 1987. Founded in 1843 near Gresford in New South Wales by Dr. Henry John Lindeman, a former British Navy surgeon, that company had been one of the earliest Australian labels to export, beginning in 1858. The company was taken over by Lindeman’s sons, who acquired a new winery in Ben Ean in 1912. Lindemans went public in 1953, and in 1965 acquired two prime properties in the Coonawarra region, which was already gaining renown for the quality of its grapes. At the end of the 1960s, Lindemans added a new parcel in the Padthaway region, which quickly became another prominent Australian wine-growing area. Lindemans was acquired by Philip Morris in 1971.

SA Brewing’s hope to acquire Lindemans was thwarted when Philip Morris made a last-minute decision to keep the winemaker. Two years later, when Philip Morris again put Lindemans up for sale, SA Brewing made a new attempt to gain control of the winemaker. This time, however, the company was outbid by the Adelaide Steamship company, which also owned the Penfolds winemaking group. Instead, SA Brewing began building up its interests in other areas, notably in appliances, through the manufacture and distribution of such brand names as Regency VSA (the VSA stood for “very special appliances”)—by the early 1990s, SA Brewing had become the leading maker of household appliances, with market leadership in most of the “white-goods” categories. The company also became interested in the market for water and gas heaters, buying up Philadelphia-based Bradford White Corporation, formerly part of Nortek Inc., in 1989.

Water heaters were to become a substantial part of SA Brewing’s activities, particularly with the acquisition of another major U.S. water heater manufacturer, Mor-Flo Industries Inc., boosting the company’s worldwide operations to some 88 manufacturing plants and making the company one of that sector’s global leaders. Yet, if SA Brewing’s industrial operations made steady gains, its prospects for further expansion in its brewery division remained limited. In 1993, the company sold off the South Australian Brewing Company to Australasian beverage giant Lion Nathan. The company then changed its name to Southcorp Holdings Ltd.—the name was meant to highlight the company’s commitment to its South Australian roots.

International Wine Giant in the 21st Century

Selling off its brewery holdings had not left Southcorp dry, however. Indeed, the company by then had become Australia’s leading winemaker. In 1990, Adelaide Steamship had run into financial difficulty. Wilson jumped at the chance to buy up the Penfolds winemaking business—and beat out other potential bidders by offering to pay cash within a week. This time, Wilson’s bid was successful, and for A$400 million, the soon to be renamed Southcorp had become Australia’s leading wine-maker, with as much as a 36 percent share of the country’s wine market, and two of the Australian wine industry’s top brands, Lindemans and Penfolds.

Penfolds had also been founded by a British doctor, Christopher Penfold, who, joined by wife Mary, came to the Adelaide area in 1845. Penfold had brought with him a number of vine clippings from the south of France, which he planted around his house on a property in Magill, that was to become known as the Grange. The Penfolds quickly became known for their wines—largely fortified wines such as port and sherry—and continued to expand their vineyard. Mary Penfold took over as head of the winery after her husband’s death in 1870 and continued to expand the business, increasing its vineyard to some 50 hectares. By the time she turned over the company to her daughter, Georgina, and Georgina’s husband, Thomas Hyland, Penfolds had become one of South Australia’s largest wineries. The company grew still more strongly in the early decades of the 20th century, and by the beginning World War II, Penfolds accounted for nearly half of all Australian wine consumption.

Company Perspectives:

Southcorp is one of the most awarded wine companies in international exhibitions. It has a strong and growing position in the United States, United Kingdom, European and Australasian markets.

Following the war, Jeffery Penfold Hyland took over as head of the company and recognized the changing tastes of Australian wine consumers, who had begun to turn from fortified wines to more sophisticated table wines. Penfolds began shifting its own business toward table wines, and by 1951 had begun receiving international recognition for its wines, in particular, for its highly prized Grange label. Penfolds went public in 1962; the Penfold Hyland family remained at the head of the company until the mid-1970s, when control was transferred to Tooth & Co. Penfolds continued to grow into the 1980s, buying up a number of other wineries, including Wynns in 1985.

Penfolds and Lindemans marketed a number of strong-selling lesser quality labels in addition to their higher-quality and premium wines; in the early 1990s, however, Southcorp began to focus its wine business toward the higher end of the wine market, in part because the low Australian land costs enabled the company to compete strongly against its French and American counterparts on the worldwide export market. Until the mid-1990s, the Australian wine industry had focused primarily on the domestic market. Southcorp, however, put together an international market force to bring its wines worldwide. Southcorp’s marketing muscle was also to play a primary role in shifting international perceptions of Australian wine—by the end of the 1990s, Australia had gained worldwide recognition as a producer of fine quality wine. The country’s wines were particularly prized because Australia’s climate enabled Southcorp to present wines of consistent quality. The United States proved particularly appreciative of the company’s wines and by 1995 Southcorp was selling more than 500,000 cases in the United States per year.

Southcorp’s industrial operations continued to grow throughout the decade—in 1995, the company acquired May tag’s operations in Australia and New Zealand, and Southcorp also began rolling out its Regency VSA brand in the North American market. By the mid-1990s, the company’s sales had topped A$2.5 billion—and rose to more than A$3.5 billion by the beginning of the next decade.

By then, however, Southcorp had already begun its transformation. The Southcorp of the first half of the 1990s had been operated largely as a holding company with a diversified collection of international business. In the mid-1990s, Southcorp began to restructure its operations, regrouping around a reduced number of core operations, which included winemaking, water heaters, and appliances packaging. At the same time, the parent company began to take on a more active management role in each business unit, seeking to create a single, unified corporate culture under the Southcorp name. By 1997, the company’s reorganization was well underway, and in reflection of this, the company dropped the word “holdings” from its name, becoming, simply, Southcorp Limited.

Yet Southcorp’s attention was increasingly focused on its fast-growing wine business, reorganized under the name Southcorp Wines in 1994. Although that division comprised a vast number of labels—well over one thousand by the end of the decade—Southcorp carefully maintained each wine’s individual identity. The company’s large and profitable industrial businesses also allowed the company to focus on improving the quality of its wines, rather than immediate profits, as it expanded production to include a full range of wines and wine prices. By the late 1990s, most of the company’s brands were in short supply, selling out within months of their release.

In 1997, Southcorp began an ambitious investment program, earmarking some A$405 million (US$245 million) over a five-year period in order to double its red wine production, including expanding its vineyard and winery operations. The company also began acquiring vineyards outside of Australia, notably in France, where it began producing the La Pelouse label in the Languedoc-Roussillon region. The company remained in that region in order to acquire another winemaker, James Herrick, in 1999. By then, Southcorp had added land in California as well, where it began planting a new vineyard.

Southcorp began to sell off its industrial operations at the end of the 1990s, shedding its appliances division in 1999. The company’s water heater business was next to go at the beginning of the new decade, a process completed early in 2002. Meanwhile, the company’s investment program, coupled with the low Australian dollar, had depressed the company’s share price, making it attractive prey for one of the fast-growing global drinks giants in what many saw as the early days of the consolidation of the worldwide wine industry.

Key Dates:

1859:: West End Brewery is founded in Adelaide, Australia.
1888:: West End merges with fellow brewer Kent Town and wine merchant Rounsevell & Simms to form the South Australian Brewing Company.
1938:: Company becomes leading brewer in South Australia with acquisition of Walkerville Brewing Company.
1971:: Company changes name to SA Brewing Holdings.
1984:: Company acquires B. Seppelt & Sons, a winemaker, as part of a diversification drive.
1986:: Company acquires Gadsdens, a packaging company.
1989:: Company acquires Bradford White, a U.S.-based water heater business.
1990:: Company acquires Penfolds Wine Group, which includes Lindemans winery.
1992:: South Australian Brewing Company is sold to Lion Nathan.
1993:: Company acquires Mor-Flo Industries, becoming one of the world’s leading water heater manufacturers.
1994:: Southcorp Holdings becomes the new corporate name.
1997:: Restructuring drive is undertaken; company changes name to Southcorp Limited.
1999:: Company sells off household appliances business and begins regrouping around core wine business.
2001:: Company merges with Rosemount Estates and becomes world’s largest premium brand winemaker.
2002:: Southcorp begins joint venture with Robert Mondavi Corporation; completes sell-off of non-wine holdings.
2003:: Southcorp announces its intention to focus on its higher-margin, premium wines.

Instead, Southcorp struck first, buying up family-owned Rosemount Estates, one of the youngest but fastest-growing of Australia’s winemakers. Rosemount was founded in 1968 by former coffee trader Bob Oatley who bought a plot of land in Denman, New South Wales. Oatley originally intended to breed horses and operate a cattle ranch. Then Oatley learned that the Denman site had been operated as a vineyard starting in the mid-1860s, producing gold-medal winning wines. By the end of World War I, however, the estate, named Rosemount, had been sold off and converted to pasture for the region’s cattle industry. Oatley and his three children decided to replant the Rosemount property, and began to make their first wines in 1974. By the early 1980s, Rosemount had achieved an international reputation, in particular for its Chardonnay. The company grew strongly, moving into the top 10 of Australian wine producers by the mid-1990s.

The marriage of Oatley’s daughter Rosalind to Canadian Keith Lambert in 1996 marked a turning point for Rosemount. Lambert, a top executive with Foster’s Brewing Company, took over as CEO of Rosemount and convinced the company to take out a loan of A$100 million—equivalent to its total sales in 1997—in order to double its capacity. The family agreed, despite the risk, and Lambert set about building Rosemount into one of the country’s leading winemakers, doubling production to more than three million cases by 2000.

Southcorp paid a total of A$1.5 billion to acquire Rosemount, half of which went to the Oatley family in the form of a 13 percent share in Southcorp. The merger soon took the appearance of a reverse-takeover, however, as Keith Lambert took over as CEO of Southcorp Wines, then, after the company shed the rest of its non-wine holdings, as head of Southcorp itself.

Now the world’s largest premium wine company, and one of the largest of all wine producers, Southcorp continued to rise in 2002, particularly in the United States, where its Lindemans and Rosemount brands cracked that country’s top 20 wine brands. In that year, Southcorp launched a joint venture with California’s Robert Mondavi Corporation, which some observers viewed as a prelude to a future merger between the two wine giants.

Yet by January 2003, profits had dropped some 97 percent over the previous year. Lambert, whose father-in-law remained on the board of directors, was forced to resign, and the company began plans to trim its wine portfolio in order to emphasize its higher-margin brands. Despite these difficulties, Southcorp remained committed to staying atop the worldwide wine industry.

Principal Divisions

Lindemans; James Herrick; Penfolds; Rosemount Estates; Seppelt; Wynns.

Principal Competitors

Diageo PLC; Seagram Company Ltd.; Christian Dior S.A.; Suntory Ltd.; Snow Brand Milk Products Company Ltd.; Sapporo Breweries Ltd.; Fomento Economico Mexicano S.A. de CV; Pernod Ricard S.A.; Dr. August Oetker KG; Allied Domecq PLC; FConstellation Brands Inc.; fenaco; Danisco A/S; Brown-Forman Corp.; Foster’s Group Ltd.; Canandaigua Wine Co.; UST Inc.; E and J Gallo Winery; Takara Shuzo Company Ltd.; Eckes AG.