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. Last Updated: 07/27/2016

Foster's Profit Hit by Wine Price Wars

MELBOURNE, Australia -- Hit by a price war in the United States wine industry, Australian beer and wine seller Foster's Group said Tuesday its first-half net profit was "less than acceptable."

The group reported a fiscal first-half profit to Dec. 31, 2003, of $581 million, well up on the $255 million net profit it made in the same period in the previous year.

However, the latest profit included a $353 million one-time gain, mostly related to the sale of its pubs and leisure business.

"I'll be the first to admit that the level of earnings this half has been less than acceptable," said chief executive officer Ted Kunkel, who announced on Monday he will step down before the end of 2004 at age 60. But he added he was "cautiously optimistic" about an improvement in the U.S. market, where Foster's has been heavily discounting its wines.

"We believe we are at the bottom of the cycle," Kunkel said.

Wine earnings in the United States were hit hard by oversupply in California, cheaper competitors and industrial action by supermarket workers.

The U.S. wine business, Beringer Blass, booked earnings before interest, tax and amortization of $138 million, down 21 percent. Analysts believe earnings before interest, tax and amortization give a reliable measure of a company's performance.

Amid a mature Australian beer market, Foster's marched into the U.S. wine market four years ago with its $1.5 billion purchase of Beringer Wines, expecting to reap bigger profits from the faster-growing premium wine industry.

Profits from wine initially rose as Foster's continued to invest in the industry, pushing its contribution to almost half of total company earnings. But margins and sales have slid in the last year as consumers opted for cheaper wine at $1.99 per bottle.

Kunkel said a major review of the Beringer Blass Wine Estate has been launched to look at ways of cutting costs in areas ranging from grape-buying through to logistics and distribution. Foster's Australian beer business, Carlton & United, improved its earning before interest, tax and amortization by 8.6 percent to $219 million, thanks mainly to sales of premium beers.

The group's net sales revenue from continuing operations fell 3.8 percent to $1.49 billion from $1.54 billion.

Foster's said its board expects to announce a successor for departing CEO Kunkel before the current financial year ends on June 30. Kunkel will remain with the company until that date.

The company did not name any candidates, but the head of Foster's main beer unit, Trevor O'Hoy, has been speculated as a leading contender.