There's nothing like a warm fuzzy glow from doing some deals. And foreign control of Vegemite has long been a lightning rod for economic nationalists who have railed long and hard about just how many of our iconic brands are owned offshore. Think Arnott's biscuits, Bonds T-shirts and UGG boots, to name just a few.
Foreign owners mean profits flowing abroad, the argument goes. So Bega Cheese, established on the far south coast of NSW, buying back the farm with the purchase of a clutch of brands from Kraft, such as Vegemite, its processed cheeses and other odds and ends such as Bonox and JoOsh mayonnaise, ranks high on the emotion stakes.
But putting the emotion to one side, Bega is spending a large chunk buying a clutch of assets that bring with them deep-seated challenges, not just in their end markets but in their path to market. Bega, which is valued in the sharemarket at $750 million after the shares surged 13 per cent on the Kraft acquisition, is spending $460 million to gain a front row seat in the supermarket wars, even though just how it will pay for it may take another month or two to clarify.
And the challenges cannot be under-estimated. The reality is Vegemite is a mature product that is being pressured by changing breakfast trends along with challenger spreads such as Nutella, the chocolate-based spread that in recent years has squeezed not just Vegemite and peanut butter, but other traditional favourites, such as honey and jam.
Then there is the more fundamental problem of age. Vegemite might be a "heritage" product popular with those aged over 25 years, but this brings with it the core challenge of revitalising a product that is approaching 100 years old: how to appeal to each new generation of consumers?
Dealing with the shrinking number of retail chains and their clout in determining your financial fortunes is nothing new for Bega, but that doesn't make it any easier to navigate the consolidation of power in your prime route to market.
But making sense of Bega's deal with Kraft is difficult since the matter of brand ownership is up in the air. Bega gets the Vegemite brand, for example, but not access to the Kraft moniker beyond year end. Or maybe it will. This is one of the issues yet to be clarified. It will lose access to the Kraft name in peanut butter where Kraft has built up The Good Nut brand and JoOsh in the retail mayonnaise market. But beyond that, the details are yet to be finalised.
A royalty deal may be struck, although at the very least Bega will probably have to up its marketing spend to let us know what its new brands are and why we should keep buying its products and not the next brand along on the supermarket shelf.
As Bega said when giving the rationale for the purchase, the options to buy more businesses in the dairy industry are finite at what it reckons is a fair price. And when it looks to buy, it wants a stable core business with good growth prospects. That is the spiel it gave to investors on Thursday when explaining the whys and wherefores, but generating the "growth" with the line-up of products it is buying is where the question marks are.
As a sub-contractor, making Kraft cheese products, this put Bega in the box seat to talk to Kraft about whether it made sense for a foreign-controlled group to retain ownership of iconic – but regional – brands like Vegemite, which is well known in Australia and New Zealand but the expatriate population won't really give Bega much chance to fire up sales in Europe, let alone Asia.
But nut-based spreads in Asia could be a different equation, Bega reckons. And here's the rub. Nutella has captured the "youth" market. Bringing control of Vegemite back onshore might bring tears to the eyes of the Dick Smith's of this world, but the reality is that unless Bega can tackle Nutella by both renewing the appeal of Vegemite and peanut butter, among the under-25s, then it will have bought a wonderful business with great cashflow but with limited growth.
According to Euromonitor data, chocolate spreads – read Nutella – has emerged as a $100 million product category in Australia, taking share from all and sundry. Yeast-based spreads such as Vegemite have been broadly flat along with jams. A renewed focus on health has given the peanut butter segment and honey a new lease on life the past few years, with low-salt variations of peanut butter and the likes of cashew and almond butter also helping the category's fortunes. And it is here that the unknown "asset" within the businesses being acquired – the research and development along with the product development team within the Kraft spreads businesses – comes into play as this will drive much of the true "value" of the deal for shareholders over the years ahead.
