Food and beverage manufacturer Lion has announced its trading update for the half year ended 31 March 2013 in conjunction with parent company Kirin Holdings’ first half announcement. Lion said it saw a decline in its dairy and drinks sector and a “challenging” environment for its beer products.

“Like all retail and consumer goods businesses we continue to be challenged by low consumer sentiment and subdued discretionary spending in our key geographies,” said Stuart Irvine, Lion CEO.

“This environment is exacerbated in our Dairy and Drinks business, where we face heightened competition and margin pressure in price-driven categories such as white milk, everyday cheese and juice. We expect this to intensify in the latter half of our financial year, due to increased milk input costs,” Mr Irvine said.

Dairy and Drinks

Lion said its Dairy and Drinks division saw revenues decline 5.5 per cent to $1,243.9 million in the first half, delivering operating earnings before interest and tax (EBIT) of $44 million, a decrease of 11.6 per cent.

The Company said the market remained “highly competitive” in price-driven categories such as white milk, juice and everyday cheese, with “continued discounting, product rationalisation and expansion of retailer-owned brands crimping margins”. Lion said that while it continues to pursue opportunities to optimise its cost-base and improve competitiveness, it remains “a long way from achieving an acceptable return on invested capital”, with revenue pressure offsetting efficiency gains.

The challenge for Lion in its Dairy and Drinks business has come in part from the success of competitor Devondale-Murray Goulburn (Devondale-MG). Australian Food News reported in April 2013 that Devondale-MG had signed a ten year contract with supermarket group Coles to supply milk for the supermarket’s private label, ousting Lion as a supplier.

Lion said its brands continued to perform well in higher value dairy segments such as dairy beverages and specialty cheese. A “star” of the portfolio, Dare, continued its growth and Lion said the product is now the number four non-alcoholic-beverage brand in the convenience channel, behind Coke, V and Red Bull.

The Yoplait and Farmers Union brands continued to do well, according to Lion, while specialty cheese brands South Cape and Tasmanian Heritage both grew in volume and value.

Lion said it also continued to pursue new growth opportunities through innovation – launching Kakao in the dairy beverages category and MACS in the non-alcoholic-beverages category.

Beer, spirits and wine

Lion said its Beer, Spirits and Wine divisions in Australia and New Zealand increased revenues 20.7 per cent to $1,445.5 million, and delivered EBIT of $410.5 million, an increase of 21.7 per cent.

“In our Australian Beer, Spirits and Wine business we have continued to gear our portfolio to the growth segments of the market and innovate to reignite interest in the beer category – including the recent launch of Tap King, a new in-home draught beer offering,” Mr Irvine said.

Australian alcohol

While the beer market remained “challenging” with pack volumes down 3.2 per cent, Lion said the addition of new international premium and craft brands to its portfolio saw volumes increase 12.1 per cent. The Company said improvements in mix from resulting “portfolio premiumisation” increased revenues by 23.5 per cent to $1,147.1 million.

Lion said its new mid-strength innovation Hahn Super Dry 3.5 continued its double digit growth, and that strong performances were also recorded by the Hahn Super Dry and XXXX Summer Bright Lager brands.

The Company said its craft portfolio continued to grow, with Little Creatures Pale Ale growing volume by 15 per cent, and new addition to the James Squire portfolio, 150 Lashes Pale Ale, growing over 160 per cent.

Lion said its premium international brands all grew volume, including Heineken, Stella Artois, Becks, Budweiser, Guinness, Kilkenny and Corona Extra. The Company said Corona Extra recorded double-digit growth off a large base.

While wine remained a small part of Lion’s Australian business, the company said it saw volume improvements in this sector through strong improvements from owned-brands Knappstein and Wither Hills, as well as third-party agency brands distributed through Fine Wine Partners, Villa Maria and Bollinger.

New Zealand alcohol

Lion said that while the beer market decline had slowed and volumes were not flat compared to the previous year, the competitiveness of the overall alcohol market continued to intensify, particularly in wine, and contributed to a 3 per cent volume decline in New Zealand. In this environment, Lion said it continued to “manage its business for the long term” through a balance of volume, pricing and mix, and increased revenues 6.8 per cent to NZ$373.9 million.

During the first half, Lion said it saw strong performances from new innovations across both beer and wine. Lion’s craft trademark Mac’s benefited from the addition of new variants to the portfolio, while its wine label Two Tracks experience growth from the introduction of ‘Keg Wine’ – a new dispensing innovation, which provides wine by the tap on premise. Lion said it also saw strong growth from its US wine label MacRostie, as the Company extended sales focus outside California and increased distribution throughout the US.

Initiatives to “improve competitiveness”

Lion said it would continue to pursue its strategy of “investing in its people, brands and product assets to drive sustainable results over the long term”.

“We will continue to invest in initiatives to further improve our efficiency and competitivenss, however we cannot achieve sustainable growth with a focus on costs alone,” Mr Irvine said.

“The strength of our brands and our consumer insights remain pivotal, and will enable us to build comprehensive category and channel strategies to unlock sustainable value for both Lion and our customers. This means we will continue to invest in growing brands and innovating to give consumers more reasons to choose from our portfolio,” Mr Irvine said.