Fosters Start Changes in the Beverages Industry - Essay Example

Fosters Start Changes in the Beverages Industry Wine is considered as one of the best selling alcoholic beverages in the world. Wines serve the whole world as part of their daily living. As we can see nowadays, wines are giving a big help in our earnings. Since wine businesses are deliberately earning thousands of bucks every year, this would already spoon feed our families. The delightful taste of wines attracts everyone especially the teenagers, which considered as the target consumers nowadays. It’s been proved that these Millennial Consumers were joining the category as core wine drinkers and that many of them are starting with red wine (“Monthly Article”, 2008,). The growth of wines in the market urged Fosters to move in these wine industries, and he earns more than expected compared to its previous business, the beer company. In the USA, it’s been stated that its continuous growth in the past 30 years has enjoyed and has never experienced two years of falling demand. But this summed up had changed when overcapacity in the production of wines occurred. And unfortunately, this instance is now the source of many of Foster’s problems. Beringer Blass Wine Estates (2004), for instance, consolidated some production and warehousing facilities, wrote down the book value of excess bulk wine inventory, and selected "non-strategic vineyards" in California and Australia to put up for sale. Same with what happened to Fosters when he encountered the overcapacity in his production, forcing Fosters to make changes before his wine business will automatically descends By the first half of 2003, Fosters earnings had dropped to 64 percent due to deep price cutting since other wine business, or its competitors had cut away their profit margins. The immediate fall of earnings of Fosters obliged him to cut costs levelled with the costs of its competitors. But Fosters didn’t engage immediately in planned change before its wine business got into trouble. Fosters was expecting that, sooner, the sales he produced on the preceding years will continue on the following years. But he rather experienced more difficulties and therefore cleared that Fosters needed to undergo significant changes to get back on track. The first he does was the appointment of a new chief executive, Trevor O’Hoy, which also headed the wine business. Their main focussed under the new chief executive, which are the biggest threats to Fosters successfully carrying out this change program, was focussed on cutting costs and improving efficiencies. An established company in a maturing market is likely to see the best return from investments in cost cutting – but this has to be balanced with investments that will grow the top line – typically a mixture of selling more to existing clients (market penetration) finding new clients both locally and internationally (market development) and creating new profitable products and services (product development) (“Costs Cutting”, 2008). To maintain their cash flows, Fosters need to bargain the prices of good wines, which was likely to be stable for some time in the market. To improve their efficiencies, Fosters aim for a “least-cost production model” which includes reviewing the entire global change. According to Rau (2001), In order to comply with the least cost model, they need to develop LCT model, which tracks the costs of liquidation of a company and then compares these costs to other resolution options. In this sense, the company could lessen the threat of insolvency. Since market prices are still followed, Fosters need to support the share price, and their proposed on-market share buy back. In 2004, the company intended to reinvest half of the estimated savings of $60-85 million into the business, and they intended to introduce a program of continual innovation and move to release new competitive products. The wine business needs to diversify their products and if they want to have a good sale, locating a good target market is necessary. Since, nowadays, the target consumers are the Millennial Consumers, Fosters should develop a diversification with these young people. According to Reynolds (2005), diversification is another strategy to influence production and associated costs. A firm or plant may sell different products. Since the new chief executive, O’Hoy, was intending to produce new products, which are the mixed drinks or non alcoholic beverages, by producing these two outputs will find them necessary to allocate costs to the outputs. This O’Hoy’s idea would definitely split from the wine business, because the two business models are considerably different. But even if this product is from different sources, it is necessary for the company to produce other products than maintaining the wines only. Same with the case, Fosters is engaged in Beer Company on the previous years and then he perceived with the wine industries. If Fosters succeeded the new world in wine industries, then, it is not a shock for him to succeed his new career (having additional drinks in their company). Fosters must face all the radical changes that occur nowadays. If Fosters intended to have planned change immediately, the wine industry will not suffer a lot. The best thing to be done in this circumstance is to produce other products besides wines. Since wines are falling on demand, and the overcapacity suffered by Fosters leads to a least turnover on revenue, it is necessary for them to produce additional products that would cover up their losses. O’Hoy’s planned on producing non-alcoholic beverages was a good planned and this would expand their future sales production. In lieu with the costs cutting plans, if they don’t satisfied with the price changes, they should find a target market that would fit the original prices of their wines. Like searching for wealthy persons, as we know that, they (wealthy persons) intended to buy products at higher prices than that of products costing cheap prices. In this case, they wouldn’t lessen the quality of their wines and normal production will follow. But it is much necessary to produce more products than sticking with only one, since it is difficult to classify when the changes in our living will will occur. If Fosters made an immediate action, probably, he will not suffer a lot in its business. But like what the cases had mentioned radical changes are continuous to expand without knowing when it will come. REFERENCES Beringer Blass Wine Estates. (2004). Yahoo! Search. Retrieve from September 21, 2008, from http://winebusiness.com/Html/MonthlyArticle.cfm?dataid=36272 Costs Cutting. (2008). Yahoo! Search. Retrieve from September 21, 2008, from http://www.ibisassoc.co.uk/cost-cutting.htm Monthly Article. (2008). Yahoo! Search. Retrieve from September 21, 2008, from http://winebusiness.com/Html/MonthlyArticle.cfm?dataid=36272 Rau, R.A. (2001). Audit of the Least Cost Test Model. Federal Deposit Insurance Corporation (FDIC). Washington D.C., 20434. Reynolds, L.R. (2005). Production and Costs. Alternative Microeconomics (pp.3). Read More