Australian Beverage Limited

8/9/2019 Australian Beverage Limited

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Contents

A. Introduction to Australia Beverages Limited March 2010 ................................ ................................ ... 2

B. The Australian bottled water manufacturing industry ................................ ................................ ........... 2

1. Evolution of the Australian bottled water manufacturing industry ................................ .................... 3

2. Bottled water manufacturing ................................ ................................ ................................ ............ 4

2.1 Water supply ................................ ................................ ................................ ................................ .. 5

2.2 Treatment ................................ ................................ ................................ ................................ ...... 5

2.3 Bottling and labelling ................................ ................................ ................................ ...................... 5

2.4 Packaging ................................ ................................ ................................ ................................ ....... 5

3. Industry segmentation................................ ................................ ................................ ...................... 6

3.1 Still water ................................ ................................ ................................ ................................ ....... 6

3.2 Sparking water ................................ ................................ ................................ ............................... 6

4. Distribution Trends ................................ ................................ ................................ ........................... 7

5. Demand Trends ................................ ................................ ................................ ................................ 9

5.1 Non-alcoholic beverage ................................ ................................ ................................ .................. 9

5.2 Bottled water ................................ ................................ ................................ ................................ . 9

6. Costs and gross margins ................................ ................................ ................................ ................. 117. Industry key success factors and future production ................................ ................................ ........ 11

C. Industry Competition ................................ ................................ ................................ ......................... 12

1. Basis of competition ................................ ................................ ................................ ....................... 12

2. Current industry competitors ................................ ................................ ................................ ......... 13

2.1 Butlers Corporation ................................ ................................ ................................ ...................... 13

2.2 Hydrate Water Pty Limited ................................ ................................ ................................ ........... 14

2.3 International Beverages Limited ................................ ................................ ................................ ... 15

2.4 Fountain Springs Pty Limited................................ ................................ ................................ ......... 15

D. Australian Beverages Limited ................................ ................................ ................................ ............. 16

1. History................................ ................................ ................................ ................................ ............ 16

2. Business Strategy................................ ................................ ................................ ............................ 16

3. Business Operations ................................ ................................ ................................ ....................... 17

3.1 Infrastructure ................................ ................................ ................................ ............................... 17

3.2 Technology and systems ................................ ................................ ................................ ............... 17

3.3 Marketing and production innovation................................ ................................ ........................... 18

4. Management ................................ ................................ ................................ ................................ .. 18

4.1 Operations and performance ................................ ................................ ................................ ........ 18

4.2 Skills and experience ................................ ................................ ................................ .................... 19

5. Latest developments Apr 2010 ................................ ................................ ................................ ... 20

5.1 ABLs board confirms plans to enter Australian bottled water manufacturing industry ................. 20

5.2 New business opportunities................................ ................................ ................................ .......... 20


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A. Introduction toAustralia Beverages Limited March 2010Australian Beverages Limited (ABL) commenced soft drink manufacturing in 1937. During the 1970s and 1980s, the

company expanded its beverage portfolio by entering into other non-alcoholic beverage categories, such as fruit and

milk-based drinks. Entry into the snack food market was recently undertaken in response to declining consumption of

carbonated soft drinks (CSDs), the companys traditional area of business strength. This move also enabled ABL to

leverage its strong distribution capabilities to supermarkets, convenience stores and hospitality channels by adding

such complementary food products to non-alcoholic beverages. Nevertheless, CSDs still accounted for 90 per cent of

company revenue in 2004.

Tom Dwyer, the current managing director, has been with the company since 2005. He joined the company at a timewhen CSD growth was stagnating and shareholder confidence in the company was waning. This had resulted in the

share price declining by 15 per cent in the two years prior to his appointment. In order to restore shareholder

confidence, Dwyer established a strategic planning team within the company to assess the current product portfolio

and identify organic and acquisition growth opportunities. From this review the importance of operational excellence

was identified and strong investment was made in world class manufacturing facilities and systems. Process re-

engineering was implemented to reduce costs of manufacture and time to market.

Having finalised the integration of a snack food business acquisition just over 12 months ago, Dwyer is now aware that

he needs to identi1r further growth options given predicted continuing decline in the CSD market. In January 2010 he

asked the strategic planning team to undertake another detailed review of opportunities for future growth,

specifically identifying products and markets where the company would have the capabilities for successful entry.

Bottled water was one industry that was identified, based on its complementary nature to the existing beverageportfolio. This industry had been identified as of interest in the ABLs first strategic review in 2005. At that time the

market was deemed too small and unsophisticated.

However, the Australia bottled water manufacturing industry has grown significantly since this initial review. Dwyer

has requested a detailed review to determine whether entry into the domestic bottled water manufacturing industry

is now a viable strategic option. If deemed to be a viable strategic option, Dwyer also wants a recommendation

whether the ABL should enter the industry by establishing its own operations or by targeting an existing competitor

for acquisition in order to gain immediate market share.

B. TheAustralian bottled water manufacturing industryAll figures are for the year ended 31 December unless otherwise stated. Bottled water is the fastest growing category

in the non-alcoholic beverage market in Australia, with sales revenue of $1,483 billion in 2009. The major segments ofthe industry include bottled still and sparkling water. Within these two segments, different packaging sizes and types

are offered. Water can be purchased in a range of single or multi-serve bottles including 600 millilitre, 1 litre or 5 litre

bottles from the supermarket or convenience store. Bottled water is also available in bulk packs (that is: 10 litres or

greater) for water coolers for home or office use.

Different types of water also exist, from naturally sourced sparkling mineral waters to purified (purified water is water

that has been produced by distillation, deionization, reverse osmosis or other suitable processes) and specialty

waters. Manufacturing facilities for purified water are generally located in close proximity to major water utility

suppliers to minimise the transport distance from the water source to the purification plant. In contrast, most

sparkling mineral water manufacturing plants are necessarily concentrated in close proximity to high quality mineral

springs where the product is bottled at source, usually in regional locations. The bulky and relatively low value of the

product as well as the high costs of transport mean that the manufacturing and distribution plants need to be located

where there are major population centres.

The Australian bottled water manufacturing industry is currently in a growth stage. Growth has been achieved due to

the increase in per capita consumption of bottled water, albeit from a relatively low base compared with other more

established beverages. As consumers become more health conscious and change their drinking habits away from CSDs

to healthier beverages, bottled water would increasingly become their drink of choice.


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As a result, sales of bottled water are expected to increase. Of particular significance in the indust ry has been the large

number of new products that have been launched and accepted by consumers since 2005, making bottled water a

dynamic and fast growing industry.

1. Evolution of the Australian bottled water manufacturing industryProjection figures for the industry were provided by industry experts at the recent Bottled Water Institute of

Australias Future Focus conference

A relatively new industry, the Australian bottled water manufacturing industry evolved out of the soft drink

manufacturing industry during the 1990s. Soft drinks are those that do not contain alcohol. Soft drinks are

distinguished from hard drinksbeverages such as distilled spirits, beer or wineby the simple fact that they do not

contain alcohol.

Given bottled water is a category within the broader non-alcoholic beverage industry, trends impacting this broader

industry also impact on bottled water. Total non-alcoholic beverage revenue in Australia was over $10 billion in 2009,

including CSDs, bottled water, fruit juices, energy drinks, sports drinks (beverage designed to help athletes rehydrate,

as well as replenish electrolytes, sugar and other nutrients, which can be depleted after strenuous training or

competition) ready to drink teas and milk beverages. Table 1 shows the market share of bottled water within non-

alcoholic beverages over the past 10 years and predicted market share to 2014.

Table 1: Australiannon-alcoholicbeverages market shareofvolumebycategory- 1999 to2014

Category 1999 2004 2009 2014P

Diet CSDs 16.70% 16.50% 16.30% 16.10%Full calorie CSDs 46.10% 41.30% 34.70% 25.30%

CSDs 62.80% 57.80% 51.00% 41.40%

Bottled Water 6.40% 9.50% 13.30% 17.40%

Milk Drinks* 8.20% 9.60% 11.90% 16.00%

Fruit Drinks** 20.70% 18.80% 16.90% 14.80%

Sports Dunks 1.50% 2.20% 3.70% 5.00%

Ready to Drink Tea/Coffee 0.40% 1.70% 2.00% 2.90%

Energy Drinks 0.00% 0.40% 1.20% 2.50%

Totalnon-alcoholic Beveraqes 100.00% 100.00% 100.00% 100.00%

* Includes while and flavoured full fat, skim and soy milk beverages

**Includes fruit juice and Fruit drinks

Australians consumed 963 million litres of bottled water in 2009. However, Australia consumption of bottled water is

significantly lower as compared with the total consumption of the top 10 global bottled water consuming countries.

Table 2 shows Australias per capita consumption compared with that of the highest consumption per capita countries

in the world.

When compared to similar markets, such as the United States, Italy, France and Spain, this data suggests that the

Australian market has potential for a higher rate of consumption and sales growth before it reaches maturity. It needs

to be noted, however, that the drivers for bottled water consumption can differ. The climate or lack of clean drinking

water impacts on consumption levels in countries such as Mexico and the United Arab Emirates. However, in Italy,

France and Austria, for example, consumption of bottle water is driven by fashion. A recent report by the Global Earth

Policy Institute concluded that global consumption of bottled water rose 56.8 per cent to 164 billion litres from 2005

to 2009.

Table2: Globalbottled water consumption: Litres per capita-2005and2009

Country 2005 2009 Total

Italy 170.3 202.0 18.6%

Mexico 128.7 185.4 44.1%

United Arab Emirates 120.7 179.9 49.0%

France 129.0 155.8 20.8%

Sin 112.0 140.3 25.2%

Germany 110.8 137.4 24.0%


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Switzerland 99.1 109.5 10.5%

United States 70.0 89.6 28.0%

Australia 35.3 45.5 28.9%

Global Average 17.9 26.6 48.6%

Table 3 contains consumption statistics of bottled water in Australia, showing actual consumption for the past seven

years and projected consumption for the next six years.

Table3: Australianbottled water consumption,2003 to2015

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0P

201

1P

201

2P

201

3P

201

4P

201

5P

Consumption

million litres

605 677 715 765 825 906 963 102

4

108

9

115

9

123

5

131

6

139

8

Consumption per

capital (litres)

30.6 33.8 35.3 37.2 39.9 43.3 45.5 48.0 50.5 53.3 56.3 59.4 62.4

Table 4 shows total industry revenue over the past seven years and projected revenue for the next six years for the

Australia bottled water manufacturing industry, compared to that of non-alcoholic beverages in total. Historical

growth in bottled water has been derived from increases in total consumption, helped along by strong customer

acceptance of new products launched over the past five years. The increase in the total Australian population together

with an increase in per capita consumption of bottled water has contributed to this historical growth. (Compared with

other developed markets, however, growth in the Australian market has been achieved from a relatively low base).

These trends are expected to continue in the future. Bottled water will therefore continue to increase as a percentage

of the non-alcoholic beverage market.

Table 4: Australianbottled water andnon-alcoholicbeverage revenue-2003 to2015

2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P

Bottled water

revenue $m

810 920 990 1070 1200 1335 1483 1660 1877 2121 2375 2611 2796

Bottled water

average $ perlitre

$1.34 $1.36 $1.38 $1.40 $1.45 $1.47 $1.54 $1.62 $1.72 $1.83 $1.92 $1.98 $2.00

Non-alcoholic

beverages

revenue $m

7199 7675 8191 8723 9250 9648 10449 11024 11619 12235 12871 13515 14177

Bottled water %

of non-alcoholic

beverage

11.3% 12.0% 12.1% 12.3% 13.0% 13.8% 14.2% 15.1% 16.2% 17.3% 18.5% 19.3% 19.7%

An exception to the identified growth trends, however, is the delivery of bulk water for homes and office use. This

product type is now in the mature phase of its life cycle. It has experienced low growth over the past five years as

more offices and homes install water filters as a result of improvements in filter technology. To counteract the decline

in bulk water sales to offices and homes, bottled water manufacturers have developed new distribution channels for

bulk water products. Increasingly bulk packs are sold in petrol station forecourts and supermarkets.

To date, manufacturing capacity within the industry has meant that manufacturers have been able to meet growing

demand using existing manufacturing infrastructure. Production stockpiling has not occurred which has helped

manufacturers protect their profit margins. They have been able to achieve an increased weighted average price per

litre as all production is generally sold in the year it is produced, reflecting the strong demand growth. The average

price per litre has also been influenced by new product launches during the past five years, particularly the range ofpremium waters (are generally higher priced waters which have higher levels of purity or are sourced from natural

springs) and smaller, more convenient packaging sizes that achieve higher average prices.

2. Bottled water manufacturingThe Australia bottled water manufacturing industry has similar manufacturing and distribution processes to the non-

alcoholic beverages industry from which it emanates.


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2.1 Water supply

There are several sources of water for bottling, such as underground springs, wells and water storages. The source of

water plays a key role in the quantity and quality of bottled water that is produced. About 25 per cent of all bottled

water comes from water storages that is tap water) that is further treated before bottling at an average price of $2.40

per kilolitre. The other 75 percent of water comes from groundwater at an average price of around $1.00 per kilolitre.

In some Australian states, permits are required to extract groundwater. Bottled water manufacturers often contract

out the actual extraction of Water to external providers.

The price of water in Australia compared with other countries and with other products is very low. It has become the

subject of debate due to diminishing water supplies caused by extended drought conditions in Australia. To increase

water prices would be politically contentious and many consumers would argue that because water is a basic human

need it should be free. It is significant to note, however, that Australians pay a thousand times more per litre for

bottled water than they do for tap water of similar quality.

2.2 Treatment

Once water has been sourced, the next step is to filter and purify the water to remove organic compounds such as

metal ions. These compounds can contribute adversely to the taste and odour of the water and to bacteria that may

cause health problems.

Some water, mainly mineral water, is naturally carbonated at the source. However, more commonly, carbonation of

both spring and purified water takes place in the factory (where both the treatment process and bottling occur). For

other drink types (for example sparkling wines or beer) carbonation is achieved naturally during the fermentation of

sugar into alcohol. However, for sparkling Water, carbonation cannot be achieved through a fermentation process, as

no sugar is added. It is therefore achieved by injecting carbon dioxide, into the water under pressure. The pressure

increases the solubility of the water and allows more carbon dioxide to dissolve than would be possible under

standard atmospheric pressure. When the bottle is opened the pressure is released, allowing the gas to come out of

the solution, thus forming bubbles.

2.3 Bottling and labelling

After the water has been treated, and in some cases carbonated, it is transferred (if carbonated, this transfer occurs

under pressure) to a filling machine. Here, bottles or bulk containers are filled and then passed by conveyor belt to a

sealing machine. Once sealed, the bottles are packed in cardboard boxes for transport. There are currently 22 bottled

water manufacturers in Australia certified by Food Standard Australia. Some manufacturers operate on a contract

bottling basis only, providing bottling services to companies that have their own brands or to supermarkets which sell

private label products (Private label products or services are typically those manufactured or provided by one

company for offer under another company's brand. Private label goods and services are usually positioned as lower

cost alternatives). However, a number of these bottlers do have brands of their own which they sell.

2.4 Packaging

Bottled water is provided to consumers in a variety of packages. These may be glass, PET plastic (polyethylene

terephthalate) or polycarbonate bottles. Water can be purchased in a range of single or multi- serve bottles from

various outlets and is available in bulk packs for water coolers for home or office use. The technology required to

bottle water is quite basic and widely available. However, to achieve the volume of manufacturing required to be cost

competitive, the level of capital investment is large. Key improvements in technology have been focused on quality

control and automation to meet the need for greater manufacturing efficiencies and the strict health and regulatory

standards of food standards that apply across all Australian states and territories.

Environmental concerns are rising in relation to the disposal of empty drink bottles. With the increasing amount of

water being consumed, the issue of the resultant bottle waste has become significant. In Australia, of the 118000

tonnes of drink bottle plastic used every year, only 35 per cent is recycled. In South Australia, where consumers can

redeem a deposit for drink containers, the bottles made up less than 10 per cent of the state's rubbish, compared with

13.4 per cent nationally. Drink bottles also take up more space than other waste, comprising 38 per cent of total

volume of litter.


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Recycling experts believe that the recycling of empty water bottles is hampered because most bottled water is

consumed as a convenience beverage outside the home where recycling bins are not readily accessible. Following the

success of reducing the use of plastic shopping bags it is thought that the introduction of a nationwide empty bottle

deposit law would create the incentive to recycle bottles. This would also help to ease the burden on taxpayers who

pay for the cleanup of litter.

3. Industry segmentationThe Australian bottled water manufacturing industry has two clearly defined segments:

Still water this segment accounted for 76 per cent of consumption volume in 2009.

Sparkling water this segment accounted for 24 per cent of consumption volume in 2009.

3.1 Still water

Still water is generally consumed for hydration and thirst satisfaction at home, in the office or while travelling.

Convenience is a major factor in the growth of the still water segment. It is used:

as an alternative to other packaged beverages when consumers want to moderate their calories intake and seek an

unsweetened, clean tasting and natural product. Water is the best and healthiest form of hydration as it is a fat and

calorie-free thirst quencher;

when consumers are not satisfied with the aesthetic qualities (for example; taste; odour and colour) of their tap

water. Many people wish to drink something that is refreshing, clean and pure, and avoid certain chemicals used in

the treatment of public water supplies, such as chlorine and fluoride;

when consumers require the convenience of bottled water for their refreshment. This is especially the case with the

development of more widespread leisure activities and the expansion of travel, for both business and pleasure; and

for nutritional and performance benefits, such as near waters (Near water - also known as functional waters. These

are bottled water beverages which have nutrients added, such as fruit juices, vitamins or minerals to enhance the

positive health benefits associated with water) and mineral water supplements claiming to have the nutritional

components equivalent to a bowl of salad.

As shown in Table 5 below, significant growth in bottled still water in Australia has occurred over the past six years,

and this has driven most of the growth in the overall industry. As with the industry overall, the average price per litre

has increased due to the introduction of premium bottled still waters.

Table5: Revenueand production- StillWater-2003 to2015

Type 2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P

Revenue

$m

555 648 708 780 883 999 1127 1279 1472 1688 1934 2154 2323

Production

M litre

516 584 619 668 720 796 847 901 958 1020 1095 1173 1252

Average $

per litre

$1.08 $1.11 $1.14 $1.17 $1.23 $1.25 $1.33 $1.42 $1.54 $1.65 $1.77 $1.84 $1.85

P Projection

3.2 Sparking waterCarbonated water was commonly known by the name of soda water until World War II. In the 1950s, new terms such

as sparkling water began to be used due to the negative perceptions associated with use of the word carbon being

considered a chemical additive in water. Sparkling water is essentially still water into which carbon dioxide gas has

been dissolved, resulting in the formation of bubbles. Sparkling water is generally consumed as a refreshment

beverage mostly while dining out rather than for hydration or thirst satisfaction alone. In the last few years,

supermarkets have started to stock premium sparkling water brands.


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Table6: Revenueand Production:- Sparkling water-2003 to2015

Type 2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P

Revenue

($million)

255 272 282 290 317 336 356 381 405 433 441 457 473

Production

(million

litres)

89 93 96 97 105 110 116 123 131 139 140 143 146

Ave $ per

litre

$2.87 $2.92 $2.94 $2.99 $3.02 $3.05_ $3.07 $3.10 $3.10 $3.12 $3.15 $3.20 $3.24

While experiencing declining growth, sparkling water is still showing some growth, albeit at much lower rates than still

water. This reflects the refreshment beverage nature of sparking water which is generally consumed at restaurants

and cafes rather than in the home. The majority of the sparkling water consumed is comprised of premium imported

spring waters, such as Eau de Vivre, which is the worlds premier sparkling water brand. As such, the average price per

litre for sparking water is substantially higher than that of still water (see Table 6). This reflects the increased cost of

manufacturing required to carbonate the water, different closure types required to retain the carbonation, the cost of

imports and the premium nature of this product. The increase in average price over the projection period reflects

estimates in foreign exchange movements. Foreign exchange experts forecast that the current high levels in the value

of the Australian dollar are not sustainable and project them to decline in the future.

4. Distribution TrendsBottled water is sold by manufacturers to independent wholesalers, including specialist confectionary and soft drink

wholesalers as well as grocery wholesalers. Figure 1 below illustrates the current industry distribution channels.

Figure 1: Australianbottled water distributionchannels 2009

In the past few years, retailers have been increasingly buying direct from the manufacturer to reduce the cost of

goods by eliminating the wholesaler margin from their purchase price. This has been facilitated by improved

information systems that now provide timely information to manufacturers for production planning, thereby enabling

them to engage in direct sales to a larger numbers of customers.

The increase in direct distribution has been most notable amongst major industry competitors. Major retailers want to

purchase from fewer, larger companies. Beverage wholesalers, however, still play an important role in distribution for

smaller bottled water manufacturers. These smaller competitors generally have a smaller product range and are

unable to meet major retailer demands for inventory management and direct to store delivery. Table 7 shows the

share of revenue in 2009 by distribution channel.


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Table7: Major distributionchannels shareofrevenue-2009

Distributionchannel 2009 Rev

($m)

Comments

Supermarkets & grocery

wholesale

35.0% 519 Supermarkets use online ordering systems direct to

manufacturers, bypassing wholesalers in general.

Convenience stores

(including petrol

stations)

30.0% 445 Major growth in this channel reflecting convenience purchasing.

Main outlet for the purchase of single-serve products.

Hospitality 15.0% 222 Dominated by higher priced spring and mineral waters. including

imported products.Home & office delivery 9.0% 133 Bulk packaged water is the main product through this channel.

Vending machines 6.0% 90 Placed in schools, sports clubs and other public places or venues.

Other 5.0% 74 Niche value added brands only due to high transportation costs

(e.g. exports) or specific to single distribution channels.

Branding is an important differentiator in the bottled water manufacturing industry. Existing competitors that have

established brand names have an advantage over new entrants who have to spend heavily on marketing for brand

recognition.

Sales in convenience stores have always been an important distribution channel for soft drinks. This importance is

growing, not only for soft drinks but also for bottled water, driven by the trend in more frequent convenience

shopping for time-poor consumers. Success in the convenience store channel is critical for any new product to

succeed. If the brand recognition is achieved, it is often quickly followed with brand extensions, leveraging the brand

to offer new flavours and packaging. Once consumer demand is established in the convenience store channel, the

move into the supermarket channel generally supports maintenance of profit margins, considering that supermarket

buyer power is reduced when strong product demand has been established.

Manufacturers have had to respond to significant changes in consumer buying behaviour. Product distribution,

presentation and availability has had to match these changes in order to maximise sales. Increasing quantities of

product are now distributed through convenience stores and petrol stations. For example, bulk water packs were once

sold via direct sale to offices. However, as more offices have installed their own in-built water filters, this channel has

declined and there has been a shift to bulk water sales through petrol stations and supermarkets.

A key strategy employed by non-alcoholic beverage manufacturers to lock out rivals is the placement of vending

machines and refrigeration units in distribution outlets. This ensures that their products are stocked and presented for

the best possible sales whilst making it difficult for competitors to get refrigeration space. The distribution outlet has

to invariably agree not to stock competitor products as part of the terms of using the refrigeration equipment

supplied. Vending machines are increasing in variety, size, style and sophistication, depending on where they are

located. Distributors in some locations, such as private or non-government schools, have worked with the

manufacturers to introduce the use of smart card technology for payment and therefore avoid the need for cash.

Similarly, in the hospitality arena, manufacturers have to tender for the supply of beverages to key entertainment and

sporting venues. Once a manufacturer has secured a contract with a venue, their product has guaranteed sales for a

defined period of time. Quite often, patrons are not allowed to bring in their own beverages for consumption or are

limited in the amount they are allowed to bring in, Hospitality, through restaurants and cafes, is the main distribution

channel for sparkling waters and it is also common practice for venues to be locked into one particular manufacturer.

Exports and imports represent about 5 per cent of industry production. These levels are not expected to change in the

future due to the high cost of transporting the heavy weight and bulk of water. The Australian bottled water

manufacturing industry is protected to some extent from the threat of water imports due to the high volume and low

unit value of water, even though water with no additives is exempt from tariffs. For water that has added sugar or

other sweeteners, there is a 5 per cent import tariff. The main distribution channel for imported waters is cafs and

restaurants that primarily serve premium sparkling waters.


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5. Demand TrendsBottled water is a growing part of the non-alcoholic beverages industry. While the broader non-alcoholic beverages

industry is growing, bottled water is growing at a faster rate due to increasing awareness of health issues. Research

shows that people want better tasting and healthier alternatives to many of the soft drinks and sports drinks currently

available. Market research surveys suggest that over 90 per cent of Australians consume too many sugary and

caffeine-based drinks. As bottled water is part of this larger beverages industry, it is important to understand firstly,

the trends impacting on non-alcoholic beverage consumption overall, as well as the trends specifically impacting on

bottled water consumption.

5.

1 Non-alcoholic beverageConsumption of non-alcoholic beverages in Australia increased from 179.7 litres per capita in 2005 to 228.5 litres per

capita in 2009. Per capita consumption trends for all non-alcoholic beverages generally follows consumption patterns

in the United States. On that basis, there are still significant opportunities for growth in all non-alcoholic beverages,

including CSDs. Currently, Australian per capita consumption is 63 per cent of the US consumption level.

Increasing awareness of the obesity problem in Australia, as well as the firmly established focus toward health and

wellbeing, is ensuring strong future growth for healthy beverages, This has resulted in the introduction of sugar-free

or diet CSDs. However, many older Australians are not switching to sugar-free versions of the CSD5 they used to drink.

Instead, they are moving to alternative beverages. Hence the general decline in the consumption of CSDs has also

been accompanied by a rise in the consumption of beverages that are perceived to be healthy, such as fresh fruit

juices, flavoured milks, energy drinks, sports drinks and ready-to-drink teas.

Changing lifestyle trends, health consciousness and a growing caf culture have also contributed to an increased

demand for these alternative beverages. For example:

y Freshly squeezed fruit juices, with fresh flavour attributes being preferred by the consumer. With the emergenceof juice bars and a greater focus by manufacturers in establishing juice brands, consumption of juice products has

increased. In the United Kingdom and United States, juice bar sales represent about 5 per cent of total juice sales

in those countries. However, in Australia, juice bars are still only an emerging distribution outlet and offer a good

opportunity for new product development and growth.

y Ready-to-drink teas, with their antioxidant properties being promoted, have become a popular health drink. TheAustralian market for this product is currently 2 million litres per annum and predicted to grow to as much as 20

million litres over the next few years, particularly as the Australian population ages. Product development

includes a variety of flavoured ready-to-drink teas.

y Flavoured milk is a growth beverage. Data shows that Australians are each drinking, on average, nearly 0.7 litresmore flavoured milk per annum than a year ago. Perceived health benefits of milk have contributed to this

growth, and this is expected to drive continued growth in the future. Milk sales have increased by 6.7 per cent

with low fat brands performing particularly well. Last year, each Australian, on average, drank 9.5 litres of

flavoured milk - more than the per capita figure for any other country.

y Both energy (Beverages that are designed to give the consumer a burst of energy by using a combination ofmethylxanthines (including caffeine), vitamins and herbal ingredients) and sports drinks (Purified water with

additives similar to those of sports drinks with the aim of providing hydration during sport) are growing products

in a society that is increasingly health conscious and aspiring to be more active. Energy drinks have had double

digit growth since 2006 and the sports drink market has grown 14 per cent on volume and 20 per cent on revenue

compound annual growth over the last three years.

5.2 Bottled water

Bottled water consumption has increased significantly over the past six years, but is still significantly below

consumption levels of other developed countries including Europe and the United States. This indicates further

opportunities for growth in Australia, primarily at the expense of CSDs and fruit based drinks, given the rising concern

surrounding the link between CSD consumption and obesity, especially in children.

One possible reason for the lower per capita consumption of bottled water by Australians is the relatively good quality

of tap water available. Tap water contains fluoride ions which have a positive effect on tooth decay. The drinking of

bottled water, which is distilled (Distillation is the process of eliminating impurities by heating a liquid until it boils,


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capturing and cooling the resultant hot vapours, and collecting the condensed vapours) to remove element such as

fluoride, is believed to be contributing to an increase in the risk of tooth decay. However, most people continue to

cook with tap water and this should provide sufficient fluoride to prevent tooth decay. Alternatively, some people

wish to avoid exposure to fluoride, particularly systemic ingestion of fluoride in drinking water, and may choose such

bottled water for its absence of fluoride. Nevertheless, surveys show that there is an increasing concern about the

quality of tap water in Australia and that this is driving some growth in bottled water consumption.

Growth is further supported by concerns about alcohol consumption and associated drink-driving accidents which has

encouraged the consumption of non-alcoholic beverages, such as bottled water, when dining out.

Females consume about 58 per cent of all bottled water in Australia. Young people, in particular females aged

between 18 and 35 years, are the largest consumers of bottled water. In general, bottled water consumers are more

health conscious and socially aware. Studies have found that younger generations are far more diligent in drinking

their recommended daily intake of water and men are less likely to think about water consumption on a daily basis

than women. In addition, for young women, image is an important factor in determining consumption behaviour.

Figure2: Australianbottled water consumptionbyagegroup,2009

Age Group Consumption% Age Group Consumption%

18-24 14.8% 45-54 18.5%

25-34 23.0% 55-64 9.0%

35-44 25.8% 65-older 8.9%

Due to the increase in health consciousness, water has also become a fashion accessory. Some consumers now carry abottle of water with their mobile phone and iPod. Packaging is therefore critical. Small plastic bottles are preferable

for many consumers as they are re-sealable, perceived to be more contemporary and can fit in car-cup holders. The

convenience factor means that the most popular pack size is around 600 ml, as shown in Table 8 below. This is an

important consideration for convenience when travelling for business or leisure. In fact, it is the convenience aspect

that has to some extent, driven the growth in bottled water.

Table8: Australian still water revenue shareby pack size

Pack Size 1999 2004 2009 2014 P

0 750m1 47.3% 52.3% 57.3% 60.3%

1-2 litre 22.8% 27.5% 32.6% 34.6%

Bulk 299% 202% 10.1% 4.9%

Increased future consumption of bottled water in the home is likely to result from continued growth in household

disposable income in Australia. This disposable income growth will also sustain growth of takeaway foods and

restaurant meals, both of which tend to increase consumption of bottled water and fruit juice. 1-lowever, while

currently experiencing positive growth, total household expenditure on consumable goods is expected to slow in the

future. This will adversely affect growth in discretionary spending on all beverages. However, a factor which

contributes positively to growth in the sales of bottled water is the climate. The gradual warming of Australias climate

is expected to support further growth in water consumption.

Bottled water is well positioned to benefit from the shift in consumer preferences towards healthier and natural

drinks. Spring water is particularly popular in Australia because it is perceived to have come from a natural, pristine

environment. This is reinforced by marketing that emphasises the pure and natural image of water. As well as

purchasing more bottled water, consumers are also prepared to pay more; with 69 per cent of consumers recently

surveyed believing quality is more important than price. New product development activities are targeting changing

consumer lifestyle needs and the trend towards purchase convenience. There are now numerous bottled water

brands available in Australia, from international beverage brands to boutique rain farms. The huge variety of waters

and sources means that the bottled water market has a broad demographic reach. According to a recent consumer

survey, at least 99 per cent of all Australians have tried or purchased bottled water in the last 12 months.

The Australian bottled water manufacturing industry has pursued sales growth by developing products for niche

markets. Smaller producers can supply relatively small segments with specialist or premium products. Given the


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continuing concern about the use of artificial colourings, flavourings and preservatives, the industry is expected to

develop a range of premium products better suited to the demands of the health conscious consumer. For example,

pet owners can now buy vitamin-fortified water specifically formulated for their canine companion.

6. Costs and gross marginsBottled water has the highest profit margins of all non-alcoholic ready-to-drink beverages. This is due in part to the

strong growth that the industry has achieved. Manufacturers are also able to sell all production in a year. Industry

rivalry is relatively low, particularly as the major competitors are focused on supplying through different distribution

channels. A percentage breakdown of costs in 2009 is as follows:

y55.2 per cent for purchases of supplies;

y 26.8 per cent for marketing, distribution and selling costs;y 12.1 per cent for wages;y 4.1 per cent depreciation and administration costs; andy 1.8 per cent for utilities and rent.A net margin of 16.3 per cent was achieved by the industry in 2009. Purchases include water supplies, labels and other

packaging materials such as glass and plastic resin bottles and closures which are generally purchased on 5 year

contracts. One of the key costs is polyester (PET) resin for bottles; however, there is no forward market (A forward

market enables producers to lock in prices for a defined period of time, thereby providing certainty of costs) for PET

resin. As a commodity, PET resin has been subject to price rises over recent years, as the price of oil has increased.

This is reflected in the minor decline in gross and net margins experienced by manufacturers in 2009, as shown in

Table 9 below. Overall, however, the cost to create bottled water is relatively inexpensive. Therefore, water is a moreprofitable product than other non-alcoholic beverage categories.

Table 9: Fiveyear weightedaverageindustrygross andnet margins

2005 2006 2007 2008 2009

Gross margin% 31.3% 31.9% 31.1% 31.5% 30.7%

Net margin% 16.6% 16.9% 16.5% 16.7% 16.3%

Current levels of profitability are expected to continue. However, it is noted that as sales through the supermarket

distribution channel increase, so too will the buyer power of these large retailers and this may have a negative impact

on profitability levels. At a recent presentation, ABLs managing director, Tom Dwyer, commented: The increasing

power of major or retailers will squeeze the small competitors in both the food and beverage businesses. Without

modem technology, smart systems and economies of scale, it will be very difficult for small manu facturers to generate

an acceptable return on capital employed and maintain current levels of profitability.

7. Industry key success factors and future productionIndustry experts summarise the following areas as critical to future success in the Australian bottled water

manufacturing industry:

y Distributionand placement: Control of distribution channels through an established and comprehensive networkof distribution outlets to gain access to end consumers is essential to ensure timely delivery, low costs and

maximised product reach through effective placement. If not operating in a niche market, manufacturers must

become a major competitor in the wider market. In general, a major competitor needs to have at least 20 per

cent share of at least one distribution channel.

y Effective market orientation, product promotion,and advertising: Market research, product development andspeed-to-market are important capabilities. Successful competitors need to be able to clearly segment the market

and develop products that reflect the requirements of different customer groups. The ability to effectively

promote their brand and provide label and packaging design is also important. First movers with effective

distribution have an advantage in that new competitors need to spend heavily on marketing to catch up. The

effectiveness of strong advertising, a sophisticated distribution chain and a focused strategy is critical in

influencing consumer choice. Strong brand names contribute to the appeal of bottled water as an accessory as

well as building a products reputation for quality. Having these attributes allows manufacturers to win market

share within particular consumer segments and charge premium prices.


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y Economies ofscope: Breadth of product range enables efficiencies in distribution, marketing and administration.Such efficiencies are gained when a competitor uses its manufacturing process to produce a wide range of

beverage brands (and possibly also complementary products) which are provided as part of a total solution to the

various distribution channel customers. Being a total beverage provider to major customers is becoming more

important as these major customers are increasing in concentration and prefer to deal with fewer larger

manufacturers.

y Economies of scale: Economies of scale are very important for a low value product since high volumes must beproduced and sold to maintain profitability, Manufacturers must have effective cost controls and access to the

most efficient manufacturing and distribution processes, tracking technology and techniques to monitor sales and

respond accordingly. Economies of scale are particularly important for competitors who have undifferentiatedproducts. Since unit manufacturing costs are an important element of profitability, it follows that economies of

scale, based upon critical mass, are also important. Some manufacturers have commenced contract bottling for

smaller industry participants in order to secure manufacturing volumes.

At the recent annual Australian Beverage Congress, Alan Vaughan, an independent industry expert of 30 years

experience, presented an extensive insight into the bottled water market and its future direction.

Vaughan concluded his presentation with this comment: The Australian and global beverage industries are in a period

of growth and major transformation. In general, there has been a switch away from carbonated thinks to beverages

with less sugar and additional functional benefits. To the younger customer, the older brands are looking a little staid,

with bottled water and energy thinks viewed as more cool and exciting. This is reflected in marketing and advertising

campaigns. People these days are working harder and have greater commitments. Bottled water and energy thinksare replacing other traditional beverages because they provide refreshment as well as a functional benefit, such as re-

invigoration, replenishing hydration and energy levels, improving mental alertness and enhancing concentration.

These beverages appeal to everyone from partygoers to office workers, through to truck drivers.

C. Industry Competition1. Basis of competitionThe basis of competition for non-alcoholic drinks are primarily price, convenience and taste. The main basis of

competition by which bottled water competes against other beverages, such as CSDs, fruit drinks, sports drinks and

energy drinks, is health appeal. Given zero or very low sugar content, both still water and near waters have

successfully developed an image of being healthier than other drinks and this has driven growth in the industry. To a

degree, home filters also serve as a source of competition, although mainly against the bulk water segment. Tap wateris also an external competitor, with a clear advantage in price.

Beverage marketing and display are beginning, to undergo dramatic change. There will always be the major

conventional media promotions, but the consumer market is becoming much more time sensitive and there is a high

level of competition from substitute products, mainly other non-alcoholic beverages. The major ways for industry

participants to differentiate and compete successfully include:

y Branding, image and breadth of product range: Recent growth in bottled water is related to the successfulpositioning of a number of brands as fashion accessories. Both media support behind the brand and the design of

the bottle including the label contribute to the appeal of a product. Breadth of product range is also important as

concentration of major customers continues, Large retail buyers (both in the supermarket and convenience store

channels) prefer to deal with large manufacturers or suppliers that can provide a large product range.

y Packaging: Convenience is a key benefit of bottled water. Hence bottle size, shape and functionality form a basisof competition. Bottles are designed with particular uses in mind, for instance some water bottles have a pop-top

cap for ease of use when playing sport or training.

y Distribution coverage: An ability to satisfy the needs of retailers, and obtain favourable terms such aspromotional programs and stock positioning is important. Market share dominance of distribution channels is

important as it allows manufacturers to diffuse the power of large buyers and maintain strong profitability levels.

The ability to secure shelf space in convenience stores is also important, given that success in the convenience

store channel is a precursor to getting new products into supermarkets.


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y Taste: Especially at the premium end of the market, taste can be a basis of competition for both still and sparklingwaters.

y Useofmarket data: Access to and use of market data is also important. The larger the competitor the more likelythey are able to afford retail check-out scanning data to understand what its customers are buying. In this way,

manufacturers can ensure retailers replenish their stock as required. This provides larger manufacturers with an

advantage of responsiveness and flexibility as they make use of this information and respond quickly.

2. Current industry competitorsThe Australian bottled water manufacturing industry is dominated by large beverage manufacturers. Two of the major

competitors are subsidiaries of global food and beverage conglomerates that are also major competitors in the non-alcoholic beverage market. Table 10 summarises the market share of the industry competitors in 2009. It should be

noted that Australian Beverage Limited (ABL) is not currently in the Australian bottled water manufacturing industry,

despite being a major competitor in the Australian non-alcoholic beverage market.

Table 10: Market sharebydistributionchanneland major competitors -2009

Competitor Total

market

share

Supermarkets

& grocery

wholesalers

Convenience

stores

Hospitality Home &

office

delivery

Vending

machines

Others

*

(35%) (30%) (15%) (9%) (6%) (5%)

Butlers 26.9% 27.0% 35.0% 25.0% 15.0% 30.0% 0%

Hydrate Water 26.3% 38.0% 22.0% 20.0% 15.0% 35.0% 0%

International

Beverages

18.3% 20.0% 17.0% 35.0% 0% 15.0% 0%

Fountain Springs 12.0% 10.0% 10.0% 5.0% 15.0% 0% 70.0%

Other** 16.5% 5.0% 16.0% 15.0% 55.0% 20.0% 30.0%

Total Market

Share

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*Other includes export sales and use of purified water for medical procedures (for example: dental etc)

**Other competitors comprise small, locally based water manufacturers. No single entity has greater than 2 per cent

market share

The industry has grown significantly to date. To keep industry profitability levels relatively high, the industrys major

competitors have tended to dominate one or two distribution channels only, rather than all channels. In this way, they

hope to avoid strong head-to-head competition. This has assisted in keeping the overall level of industry rivalry

relatively low to date. However, this is expected to change in the future as consumption growth begins to slow.

Several new competitors have entered the market over the last five years. Moreover, industry consolidation has

occurred, Major industry competitors have acquired smaller competitors to increase economies of scale, scope,

market share and profitability. In 2009, the four largest competitors accounted for approximately 82 per cent of

industry revenue. No major change is expected to this trend in the future as further consolidation will be difficult due

to the relatively high market shares held by the four major companies. Regulatory concerns about restriction of

competition will also affect further consolidation.

Two of the competitors, Butlers Corporation and International Beverages, are owned by global food and beverage

conglomerates that use Australia as the base for their non-alcoholic beverages operations in Asia. Industry experts

believe that acquisition of either of these companies, to be used as a mode of entry into the industry and gain

significant market share, is not possible. The parent companies will be unwilling to sell their Australian operations.

The major industry competitors are summarised below.

2.1 Butlers Corporation

A wholly owned subsidiary of a large multi-national listed company, Butlers Corporation commenced operations in the

United Kingdom in the 1 800s as the official chocolatier to the King. Operations were expanded throughout the 20th

century to include other types of confectionary, biscuits, snack foods and non-alcoholic beverages. Geographic

expansion was also undertaken. Butlers Corporation is now a global giant in its chosen products.


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Butlers established its operation in Australia during the 1950s. It has held the majority market share in the Australian

confectionary, non-alcoholic beverage and snack food industries for the past 20 years. The company entered the

Australian bottled water manufacturing industry during the 1980s through the acquisition and consolidation of several

state-based water manufacturers. This helped Butlers to become the first bottled water manufacturer to have

national distribution.

Butlers has strong distribution capabilities given its broad product range. It is the largest supplier to convenience

stores and the second largest to the hospitality distribution channels. Growth in its market share of the supermarket

channel has also been strong over recent years, in particular through its well known still water brand Olympus. The

company also holds significant market share in the sparkling water segment, having obtained the Australian license forEau de Vivre, the world's leading sparkling water brand.

One of the areas of focus for Butlers is innovation for all its beverages. This includes a large of number of soft drinks

such as flavoured mineral waters, flavoured milks and fruit juices. Its broad product offering that includes

complementary shack products, has been leveraged to achieve strong sales in convenience stores and through

vending machines.

2.2 Hydrate Water Pty Limited

Hydrate Water is a privately owned company that originated in 1993 in Queensland. The company has access to

natural springs in Queensland, New South Wales and Victoria, and a long term agreement with key water utilities in

these states to access water when required. It distributes nationally from ISO 9002 quality accredited manufacturing

facilities in Queensland, New South Wales, Victoria and Western Australia.

The company has products in the sparkling and still water segments. The products include energy thinks, fruit juices

and a limited range of high quality carbonated soft drinks. It is also the manufacturer of the leading brand of still

water, H20, that is sold through the supermarket distribution channel. Hydrate is seeking a stronger presence in

convenience channels. Its business model focuses on using its finds to support retailers so that the retailers can offer

promotions, rath.er than spending on direct consumer advertising. The company has recently begun investigating the

use of scanned retail data to monitor sales trends and adjust production volumes accordingly. This investigation into

scanning data is due to having run out of inventory at the end of last financial year when the manufacturing plant was

closed for annual cleaning and maintenance. As a result, the company had lost some market share.

A number of the companys water products are targeted to the sporting and energy think consumer. One of its best

known brands, Viva!, has a 72 per cent market share in sports water products. Hydrate Water has been able to

leverage the high brand recognition of Viva! to successfully introduce flavoured water. Similarly, Hydrate Water sells

the leading brand in sparkling mineral water and has again leveraged this brand by introducing a number of flavoured

mineral waters, including diet drinks. Both these initiatives have resulted in above average market growth for the

company.

The company is particularly well known in the industry for its packaging innovation and engineering design capability.

Hydrate Water developed Pop Tops - small plastic bottles that were very successful with young children as they fit

perfectly into lunch boxes and have the advantage of being re-sealable. The Pop Top range increased its bottling

turnover by 50 per cent. This product won the coveted Australian dietician award for Best New Product when

launched. It also received the Australian Health Foundation endorsement for its diet drinks. In addition, the company

has been commended by dieticians for promoting products that address the increasing concerns of childhood obesity

linked to CSDs. Hydrate Water was also the first company to introduce stackable bulk water packs for sale through

supermarkets.

The management team at Hydrate Water have extensive industry experience, having a collective 80 years in the

industry between them. Operations manager, Simon Miles, is well regarded in the industry and is currently the

chairman of the Bottled Water Institute of Australia. Current owner, Jack Wells, has indicated he wishes to retire in

the next five years, and has been grooming Simon Miles as his successor. An offer for acquisition was received from

International Beverages last year, but Wells turned down the offer as he did not want to sell the Australian business

he established to an international company.


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2.3International Beverages Limited

International Beverages is the wholly owned subsidiary of a large multinational company and sells fruit juices, energy

and sports drinks, water and soft drinks. Its initial entry into the Australian market was through fruit drinks. During the

industry consolidation in the 1 990s, the company entered the bottle water manufacturing industry through

acquisition.

Through its parent company, International Beverages has the licence to sell the worlds leading brand of bottled still

water Aqua Grande, in Australia and New Zealand. The company also sells the imported sparkling water brand San

Vitale one of the most popular mineral waters bottled at the source. This product, in particular, has given the

company a strong share of the hospitality channel.

Company growth has been driven by new product development and product extensions which have leveraged existing

capabilities and focussed on specific consumer requirements. The companys latest successful product launch is

calcium enriched water targeted at aged care facilities and nursing homes for women at risk of osteoporosis, a bone

degeneration disease.

2.4 Fountain Springs Pty Limited

Fountain Springs is a Sydney based company that has access to a naturally rising spring located in the Snowy

Mountains in southern New South Wales. To date, the company has been unable to secure distribution and shelf

space in major Australian retail outlets, This is because its product range is limited to only two pack sizes, 600ml and 2

litres. An export strategy was therefore developed with the assistance of the Australian Trade Commission (Austrade).

Fountain Springs is now Australias largest exporter of spring water and better known overseas than in Australia.

In the past two years, the companys bottled water exports have grown sales revenue significantly, having secured a

contract with the major UK supermarket chain Besco. Growth is also expected through its expansion into UK

convenience stores and petrol station channels which is planned for later this year. The UK was the first export market

for Fountain Springs where it was able to leverage the perception of Australia as clean and natural. Since developing

this UK market, the company has also been successful in developing business in the Middle East, South East Asia and

the United States. Given the cost of transport to these export markets, Fountain Springs has a niche strategy and sells

only premium grade water in the 600m1 and 2 litre pack size at a higher price.

However, market research shows that there is still very low consumer awareness of its products and brand in

Australia. To raise awareness, a cause-related marketing strategy has been adopted. Under this program, the

company donates a percentage of its profits to partner charities in its chosen markets. This has been central to the

growing market awareness of the company in its selected markets. It leverages the networks and relationships of its

partners to develop new business and sales.

As a result of the companys success in overseas markets their brand Aqua Caliente is now being stocked in selected

school canteens in Australia as a natural alternative to sugar laden CSDs and fruit juices. Given Fountain Springs did

not have the capability to distribute directly to schools, it entered a distribution arrangement with a school food

provider. The company also altered its cause-related marketing strategy whereby it would donate a proportion of all

bottled water sales in each canteen to the school. The money was to be used by the schools to purchase new

equipment or facilities for the school.

Despite the success of its export strategy, the company has had mixed financial results over the past few years. This

has been largely due to set up costs associated with its export business and distribution arrangements in the UK. It is

rumoured that the company is in financial difficulty. Rumours abound that bankers have been requesting monthly

audits of the cash position so that the company can maintain its line of credit. In addition, it is believed that its major

UK supermarket customer, Besco, is demanding price reductions therefore squeezing margins for the company. Poor

hedging of foreign exchange transactions with the companys UK debtors has also contributed to its declining financial

position.


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D. Australian Beverages Limited1. HistoryAustralian Beverages Limited (ABL), formerly known as Australian Soft Drinks Limited, commenced operations in 1937.

The antecedent company was established by a group of enterprising pharmacists who had previously made

carbonated soft drinks in their pharmacies which were then offered for sale in sealed bottles. The first manufacturing

plant opened in Sydney in 1938. Business began slowly, but the arrival of American soldiers in Australia in 1942 had a

significant impact on both sales and market acceptance of carbonated soft drinks. Australian Soft Drinks initiated its

move into non-carbonated soft drink beverages in 1984 when it began manufacturing fruit drinks. This followed the

acquisition of a fruit juice manufacturer in Victoria. The fruit drinks business expanded nationally over the next 10years. In 1990, Australia Soft Drinks entered the milk drink market with the purchase of manufacturing facilities from a

dairy co-operative. The company officially changed its name to Australian Beverages Limited upon listing on the

Australian Stock Exchange (ASX) in 1996, to reflect the broader beverage base of the business.

In the years since its ASX listing, ABL has adopted a multi-beverage strategy wherein its product range has been

expanded to cover all categories of the non-alcoholic beverage market. However, bottled water remains outside this

product range. The company has also moved into the manufacture and distribution of snack food products through its

acquisition of several small businesses in 2004. It thins to strengthen distribution relationships with convenience

stores and hospitality channels. These developments have resulted in ABLs revenue composition to change from 90

per cent CSD-based in 2000 to 68 per cent CSD-based in 2009. The aim is to further reduce dependence on CSDs

by20l5. ABL intends to increase its market share of non-CSD beverage products so that CSDs will represent less than

50 per cent of company revenue as part of its multi-beverage strategy.

2. Business StrategyABLs vision is To satisfy Australias thirst by being a manufacturer of non-alcoholic beverages for every occasion in

every location. The company aims to achieve this vision by pursuing the following strategic goals for the 2007 to 2012

period:

y offer a wide range of products in the non-alcoholic beverage and complementary markets;y grow the companys share of the non-alcoholic beverage market to move from the second largest to the largest

competitor in this market. This goal will be achieved by:

y offering a wider range of products;y increasing per capita consumption of non-alcoholic beverages through product and packaging innovation;y expansion into new non-CSD beverage categories;

y extend key customer relationship capabilities and grow product availability. This goal will be achieved througheffective placement of refrigerated drink equipment and outlet expansion. This strategy would help the company

to establish a major presence in all major non-alcoholic beverage distribution channels;

y maintain world best practices throughout the companys operations to deliver cost discipline, low cost leadershipand timely responsiveness to changing market demand; and

y ensure that the companys operations are environmentally and economically sustainable.At a recent strategy presentation to market analysts, managing director, Tom Dwyer, outlined the companys

intention to be a major competitor in all categories of the non-alcoholic beverage market. He stated that ABL hopes to

achieve this aim by being the supplier of choice for the distribution channels of supermarkets, convenience stores and

hospitality outlets.

It is hoped that ABLs position in the snack food market, which it recently entered via acquisition, would be made

stronger by another potential acquisition in line with the general consolidation already taking place in the food and

beverage supply industry in Australia. Such an acquisition would add further breadth to the companys total product

offering to its customers in all major distribution channels. Of all the competitors, ABL would provide the greatest

share of beverage and snack foods.


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By offering a broader product range, ABL expects to leverage its market power in soft drinks to sales of related

products. It also aims to control product supply, apply discounts, introduce loyalty rebates or promotions, and secure

conditions of use on supplied refrigeration equipment. As more Australians now drink different beverages at different

times of the day, Dwyer highlighted his belief that a modem beverage company needs to be highly flexible in

manufacturing, distribution and marketing as well as be able to operate in all product areas.

3. Business OperationsABL is currently the second largest competitor in the broader non-alcoholic beverage industry in Australia, not far

behind the industry leader, Butlers Corporation. ABLs large size has enabled the company to take advantage of

economies of scale, making it worthwhile to invest in state-of-the-art systems and technology. This helps the company

to track and monitor product demand through the various sales channels, enabling manufacturing operations to

respond accordingly. Flexible response is also backed up by sophisticated distribution systems.

ABL has about 40 per cent of the packaged soft drink market in Australia. This scale enables the company to justify the

significant investment needed to create one of the most highly automated warehousing and distribution systems in

Australia. Industry analysts expect that the cost reductions and increased speed to market generated by these systems

will give the company an even greater advantage over its competitors and provide a solid base for its continuing

expansion. Being a major supplier to the non-alcoholic beverage market has afforded ABL significant power over its

customers. It has enabled the company to retain cost reductions achieved through efficiency gains rather than pass

them onto the retailers. These efficiency gains have enabled the company to enjoy higher profitability levels than the

industry overall, and supported continuous investment to improve technology and infrastructure.

3.1 Infrastructure

In 2008, ABL undertook a significant infrastructure investment. A major manufacturing plant that can process over one

billion drinks per year was built in New South Wales. The company also introduced a state-of-the-art automated

warehouse system in its Victorian distribution centre that significantly reduced employee levels by 75 per cent from

200 down to 50. A similar reduction in labour is expected when the system is implemented in New South Wales.

Modem warehouses are also operated in Perth and Brisbane. In the past, ABL had offered contract bottling services to

smaller competitors. However, its own growth has meant that it can no longer offer this service as it needs the

bottling capacity for its own manufacturing operations.

3.2 Technology and systems

A core element of ABLs multi-beverage strategy is its ability to deliver products quickly to retailers. This requires

efficient distribution systems, particularly among very small retailers, such as convenience stores (which form about

half the market). A significant investment in IT means that the company now offers vendor managed inventory (VMI)

to its major customers in the distribution channels of supermarkets, convenience stores and hospitality outlets.

Through this system, vendors can manage their own inventory in accordance with an agreed set of inventory

parameters established at the start of each year. ABL undertakes all inventory replenishment and management

functions for a nominated period which includes providing assistance with merchandise presentation. Customer

service representatives periodically ensure that services are being delivered as required. As business conditions

change, these representatives also have the authority, within defined parameters, to amend agreed arrangements.

The VMI system is only possible where there is networked access to real time scanning data, made available as

products are checked out at the store. This means that the company receives immediate information and is able to

reshuffle its manufacturing requirements so as to respond to changes iii demand for any stocked item.

Knowledge of stock movements and sales is also linked to an extensive database of customer information.

Competitions are regularly run to collect customer information that can be used not only to understand who is buying

certain products, but also to contact customers electronically and via SMS for special offers. Such an activity can assist

in clearing slow moving products, as well as targeting marketing information to specific customer groups.


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3.3 Marketing and production innovation

ABLs multi-beverage strategy also involves tailoring marketing campaigns to customer groups and to beverages for

different times of the day. The companys range of products is able to match the various consumer beverage needs at

different times of the day. For example, fruit juice for the morning, coffee for the afternoon and sparkling water for

the evening. ABL recently acquired several coffee bean businesses to capitalise on the growth of the coffee market in

Australia. Iii response to key consumption patterns that the company continuously monitors, it is exploring a new

product idea ready-to-drink chilled coffee- to be offered through convenience stores. ABL is expecting strong

growth for this product, given this market has not achieved the level of growth in Australia as that achieved in the

United States.

A strong product development team tests new products in small markets to assess their viability. Using focus groups

and market research, the team monitor changes in consumer tastes and behaviours. An alliance with a United States-

based food and beverage conglomerate is in place to monitor trends in the United States, since Australian consumer

behaviour usually follows trends in that country. Investment in market research has kept ABLs product development

at the forefront of global trends. This has resulted in the company winning numerous industry innovation and

marketing awards over a long period of time. ABL expects to extend its beverage product development capability into

the food industry, as it grows its range of snack foods thereby extending the breadth of products offered to major

customers.

A key focus of the product development team is further development of diet beverages. This would help to maintain

market share for CSDs while stemming any negative perception associated with being a major CSD supplier and the

link of CSDs to growing obesity levels. ABL was the first Australian beverage manufacturer to introduce sugar-freedrinks using Stevia, a natural sugar replacement. Stevia is extracted from a native plant of Paraguay in South America.

It is a natural product compared with the chemically synthesised artificial sweeteners, such as aspartame, that are

used in most diet drinks. ABL had to wait two years to get Australian Food St andard approval to use Stevia, despite the

fact that the product had already been approved by the Therapeutic Goods Administration.

Product development also extends to packa ging innovation. However, while some innovations are developed in-

house, ABL prefers to work together with key suppliers and service providers to develop packaging ideas. This is

because packaging innovation requires a high degree of engineering design capability, something which is not a core

strength of the company. As part of the collaborative process, ABL provides the market, customer and trend

information to packaging specialists to develop into new concepts. A recent packaging innovation success entailed

working with suppliers to reduce the weight and amount of PET used in bottle plastic by 20 per cent and thereby

reduce the cost of packaging.

4. ManagementCurrent managing director, Tom Dwyer, has a strong background in the beverages market. He spent 20 years working

in senior roles with the international food and beverage giant, Butlers Corporation. These roles covered sales,

marketing and operations. He was also the head of the Australian business operations for several years. Constant cost

cutting at Butlers and a lack of autonomy due to increasing head office involvement in the Australian operations

motivated his move to ABL. Upon joining the company, Dwyer established an internal strategic planning team to

assess the current product portfolio and identify organic and acquisition growth options within this product range.

4.1 Operations and performance

Operational improvements were achieved through strong investment in world class manufacturing facilities and

systems as well as process re-engineering to reduce time-to-market. Just as importantly, Dwyer led the charge incollecting customer information and investing in the systems that would enable data to be used in product and

market development decisions. Building this approach over 10 years has meant that the company now has a strong

innovation culture and there is a continuous focus on new product development. Ideas can come from all employees

and if the data supports the concept, investment is made in testing the concept. If an idea actually gets to market, the

employee who presented the idea receives an immediate bonus. However, all employees participate in a company

share scheme, making success a shared goal.

ABL also has a strong performance focus. Return on investment and market share are performance measures used in

all business units. Recognising that some beverage categories have better profitability than others, different


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benchmark levels are applied to different categories. Benchmarks for the different categories are set based on

understanding the performance of leading US and European beverage manufacturers. The company employs rigorous

financial and compliance reporting systems and is proud of its ability to complete end-of-month reports in half a day.

Compliance with relevant legislation is paramount as is a focus on sustainability in four key areas: the environment,

employees, workplace and community. The company is proud of the fact that it was the first Australian beverage

manufacturer to implement triple bottom line reporting. ABL is very conscious of the impact that its packaging has on

landfill. It has several projects underway to find out ways to reduce its environmental impact.

ABL operates a decentralised organisational structure. Each major beverage category and the new snack food business

operate as separate business units. The leaders of each business unit leader hold strategic and decision-makingauthority over the products and manufacturing operations within their portfolio. To maximise efficiencies, the various

business units are supported by a centralised shared-services function for product distribution, receivables, payables,

payroll, reporting and capital expenditure management.

4.2 Skills and experience

It is critical that the business unit leaders have the commercial acumen and technical skills to operate these business

units on a stand-alone basis. Limited support is provided by Head Office in terms of product strategy and

manufacturing operations. In the recent acquisition of the snack food business by AEL, access to the required technical

skills became an issue when the incumbent managing director and manufacturing manager resigned within 12 months

of the acquisition. These resignations created a significant skills gap in the business. ABL had to quickly recruit

replacements for these key roles, offering to pay higher than market salaries to lure staff away from competitor

companies. Ensuring availability and retention of the right skills for the business would be an important considerationin future acquisitions.

Senior executives of ABL are active participants in industry bodies. The company is a member of the Beverage Council

of Australia which has been proactive in approaching the government, particularly in relation to health and obesity

issues. Such involvement provides the company with a better understanding of public policy and its implications for

the business as well as the ability to shape the policy debate to maximise business outcomes. Currently, the senior

executive group of ABL is working on assessing options and developing a healthier policy for CSD placement and

promotion to children and young adults.

Employing and training the right people in customer service roles continues to be a challenge for the companys

management. ABL has grown rapidly and has had to integrate employees from acquired organisations. This has

required a significant investment in training and development. All new employees must complete a week-long

induction program which provides an overview of the range of activities conducted by the company. New sales and

customer service representatives must also undertake a week of training each year to update their skills in using

company technology and systems. This ensures that the data they enter into the system is correct and meaningful for

further analysis and reporting. A graduate employment program is also in place. The graduates are rotated through

different business units. Each graduate spends six months working in a business unit over a two year period. Following

this training, an assessment is made of their capability and an appropriate career plan developed.


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5. Latest developments Apr 20105.1 ABLs board confirms plans to enter Australian bottled water manufacturing industry

In assessing ABLs options for future growth, the board confirmed that bottled water is a critical category to have in its

beverage range to meet its strategic goal of having a beverage for every occasion. The board requested ABLs strategy

team to evaluate the attractiveness of entering the Australian bottled water manufacturing industry.

The board has requested the preparation of a business case outlining whether the company should enter the industry

by establishing its own operations or targeting an existing competitor for acquisition in order to gain immediate

market share. If the recommendation is to make an acquisition, the strategy team should assess potential acquisition

targets from existing competitors within the industry and summarise the potential implementation issues related to

an acquisition. In particular, the board has requested that the target company for acquisition should fit the following

criteria:

y Strong brand recognition that ABL can leverage by adding to its existing product range.y Broad coverage of various distribution channels which would complement ABLs existing channels.y Low cost, high quality manufacturing capability with capacity for further growth.y Access to an unlimited supply of high quality water to support growth.The strategy team has identified two companies for review against these criteria. These are Hydrate Water and

Fountain Springs. The board has requested that Dwyer and the senior management team provide a recommendation

at the next Board meeting as to which company to target for acquisition.

Australian Beverage Limited

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