FREE KIC - NO. 55 MAY 10
IS THERE METHOD IN THE MAGNERS?
In September 2006 on a visit to the Bulmer’s factory in Clonmel I had the opportunity to have lunch with the Chief Executive Maurice Pratt. That pleasant lunch gave me the idea for Opinion piece 12 "Magners Magic".
I would love to be able to report back that my 2006 analysis had been accurate but unfortunately that is not the case. Back then I wrote "I think that the analyst community may still be underestimating just how big this brand might be." In fact it turns out that I was the one overestimating the strength of the Magners brand.
In my 2006 Opinion Piece I mentioned that C&C felt they needed to increase cider capacity from 200m litres to 500m litres. I had my "spare capacity-oholic" moment and said that I thought that they might need the capacity. I must have been on the cider when I wrote that because in 2008 they sold 176m litres. In other words they did not need any additional capacity.
I was wrong in a number of ways. First of all I overestimated the potential size of the premium cider market in the UK. Secondly I overestimated the market share that Heineken would achieve with their "Bulmers" brand. Thirdly I underestimated the importance of distribution (in particular the way pubs are owned and controlled) and fourthly I was wrong to think that Magners could become anywhere as near a dominant brand as Bulmers in Ireland.
There are only two things that I can claim to have got right. First of all I believed that “Bulmers” would remain the dominant cider brand in Ireland and secondly I believed that cider was not a fad and was likely to keep on growing.
I never sold my shares because even though I realised that I had overestimated the potential of Magners I still believed that it was a good brand and the drop from €12 to €4 seemed to happen in what felt like a very short space of time. At €4 I felt I had the comfort of knowing that Bulmers in Ireland remained a dominant player and a cash generating machine. I felt that Bulmers alone was worth at least €500m because it was generating operating profits of at least €50m. I felt that the stock market was once again going through that process of going from one extreme to another. It was going from extreme optimism to extreme pessimism. I hoped that ultimately a new realism would recognise the continuing strengths that I still believed in.
I did not know what to think in November 2008 when a whole new management team was put in place. I was comforted by the fact that they were the people that had caused so many of the problems for Magners by boosting the Bulmers brand in the UK. Little did I think that they would engage in a whirlwind of activity that has significantly changed the overall structure of the business.
As I mentioned at the beginning I recently met the new Chief Executive for the first time. He brought us up to date with his thinking at the annual results presentation. I listened closely to his analysis and I am once again making a judgement call that the new team’s strategy of buying more cider exposure and getting into lager is a reasonable one. I am also making a judgement call that they got a good price for the sale of their spirits brands.
Management still believe that there is a major opportunity to sell cider internationally. I think it is sensible to exclude this from the current discussion.
In conclusion I just want to say that when I bought the shares at €2.54 in November 2004 I think I would not have been too upset if I had known the shares would be trading at €3.20 in 2010 (paying a reasonable dividend along the way). It is only because they went to €14 in 2006 that I have a sense of disappointment. Long term investing sure can be a bit of a roller coaster!