On the block alcopop maker Independent Liquor sees law change wiping out more than a quarter of its profits

By Gareth Vaughan

Up for sale and heavily indebted alcopops maker Independent Liquor says proposals included in the Alcohol Reform Bill, currently before a parliamentary select committee, would make a substantial portion of its product range unlawful, eliminate over one-quarter of its profitability and see it "uniquely affected" by the proposed reforms.

Owned by Australia’s Pacific Equity Partners and Hong Kong-based Unitas Capital, Independent Liquor is up for sale with expressions of interest - either for full or partial bids - due with the owner's adviser, investment bank UBS, tomorrow.

The private equity owners bought Independent Liquor, a maker and distributor of ready to drink alcoholic beverages (RTDs) such as Woodstock Bourbon, Cody's and Vodka Cruiser, beer such as Carlsberg and Toborg, and spirits such as Black Heart Rum and Kentucky Bourbon, in a NZ$1.26 billion leveraged buy-out in December 2006. The deal followed the death of founder Michael Erceg - who started Independent Liquor in 1987 - in a helicopter crash. Erceg’s widow, Lynette, retained a 13 % stake.

The group's financial statements for the year to September 2010 show net finance costs of NZ$86.5 million on borrowings of NZ$692.7 million.

The Australian Financial Review has suggested Japan's Asahi, Kirin and Suntory as possible bidders, alongside China's Bright Foods, whose subsidiary Bright Dairy owns 51% of Synlait Milk, and Coca-Cola Amatil.

Grim picture  on impact of proposed reforms painted

Independent Liquor is understood to be forecasting strong growth in earnings before interest, tax, depreciation and amortisation (ebitda) from its existing annual level of about NZ$100 million in sales documents circulated to potential bidders. However, in a submission to Parliament's Justice and Electoral Select Committee on the Alcohol Reform Bill, Independent Liquor paints a grim picture of what proposals in the Bill could do to its profitability if they are passed unchanged into law.

The Bill is the Government's legislative response to the Law Commission's report on alcohol legislation, Alcohol in Our Lives: Curbing the Harm. Introducing the Bill to Parliament, Justice Minister Simon Power said RTDs have strong appeal to youth, and therefore a high potential for harm to this group.

Power said the Bill would enable the Government to regulate the size and strength of RTDs through proposed limits of 5% on alcohol content and 1.5 standard drinks.

Independent Liquor says in a submission, under managing director Peter Murphy's name, that the 5% alcohol content and 1.5 standard drinks thresholds are of particular concern to it.

'More than one quarter of profit to go'

The submission argues that there is "strong evidence" that a significant portion of consumers will respond to the proposed reforms by drinking pure spirits, wine and beer instead of RTDs with alcohol content above 5%.

"This distortion of consumer purchasing behaviour will have a substantial and disproportionately large impact upon Independent Liquor itself - rendering a substantial proportion of its product range unlawful and eliminating over one-quarter of its profitability."

Independent Liquor estimates the New Zealand market for RTDs is about 59 million litres a year, or 12% of all alcoholic beverages sold by both volume and by alcohol content. The company says sales of its RTDs comprise more than half its business by both volume and revenue. Independent Liquor, which started operating in Australia in 2000, had sales of NZ$414.4 million in the year to September 2010. Independent Liquor also has some operations in Canada, has opened an office in California and has been testing the Chinese market.

The regulatory threat to Independent Liquor's New Zealand business comes after the Australian Government hiked the excise tax levied on RTDs by 70% in 2008. Independent Liquor says Australian Bureau of Statistics figures show this led to a 30% drop in annual consumption of RTDs to 13.1 million litres. In contrast, consumption of spirits rose 13%, beer rose 1.7%, wine rose 2.2%, whilst overall alcohol consumption fell just 0.1%.

"Of Independent Liquor's total sales volumes by litre of RTDs in New Zealand, approximately 50-60% are of RTDs with an alcohol content of above 5%," Independent Liquor says. "Flavoured Beverages Group (Independent Liquor's parent) forecasts that the direct financial impact of the proposed reform would eliminate over a quarter of Independent Liquor's EBITDA (earnings before interest, tax, depreciation and amortisation)."

Changes would 'render products unlawful' and customers could 'simply buy spirits and mix their own drinks'

The company argues that because all of its RTD brands are already supplied in multiple alcohol strength variants, both above and below 5%, the proposed reforms will simply render a large proportion of its product range unlawful with no readjustment or competitive response possible. And it goes as far as arguing that consumers who choose to drink RTDs with alcohol content above 5% have an obvious potential substitute if their favourite drink is banned, by simply buying bottles of spirits and mixing their own drinks.

"The proposed reforms would also have a disproportionately large impact on Independent Liquor relative to its competitors," the company maintains. Independent Liquor names its main RTD competitors as Lion Nathan, Jim Beam, DB Breweries, The Mill, Hancocks and Pernod.

"Consumers will not simply switch to RTDs with a lower alcohol content but will substitute to spirits, beer and wine," it argues.

"Because Independent Liquor's business is focused to a large extent upon RTDs, whereas its competitors are all diversified businesses for which beer, wine and soft drink are core products, it will be uniquely affected by the reforms."

"For these reasons, the proposed cap on RTD alcohol content would be distortionary and unfair."

'Higher prices, less choice & poorer service'

Independent Liquor says retailers' pocket margins from RTDs of about 16% to 18% compared with margins from spirits of just 5% to 7%. The company goes on to say that the proposed reforms  will likely eliminate over a quarter of its New Zealand revenues impacting its ability to promote, discount, advertise, market and fund product innovations. And all of this will, Independent Liquor says, weaken the competitive tension it brings to the New Zealand wholesale liquor markets.

"For New Zealand consumers, this will mean higher prices, less choice and poorer service."

The Justice and Electoral Select Committee has received more than 5,000 submissions on the Bill, which it's due to report back to the House by August 30.

Introducing the Bill to Parliament, Power said New Zealand needs a safe and responsible drinking culture and that late 1980s and 1999 liberalisation of the sale of alcohol hadn't worked.

"Excessive drinking and intoxication contributes to our crime rate, our injury rate and affects our general health. It impacts on workplace productivity and contributes to family violence and child abuse," Power said.

"The direct cost to Government of alcohol-related harm in New Zealand has been put as high as NZ$1.2 billion per year. The costs to New Zealand society are significantly greater."

The first reading of the Bill, which also proposes to lift the off-licence alcohol purchase age from 18 to 20,  passed by 114 votes to three.

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