Contents

A. Introduction to Australia Beverages Limited – March 2010.....................................................................2

B. The Australian bottled water manufacturing industry..............................................................................2
1. Evolution of the Australian bottled water manufacturing industry......................................................3
2. Bottled water manufacturing...............................................................................................................4
2.1 Water supply......................................................................................................................................4
2.2 Treatment...........................................................................................................................................5
2.3 Bottling and labelling..........................................................................................................................5
2.4 Packaging............................................................................................................................................5
3. Industry segmentation..........................................................................................................................6
3.1 Still water............................................................................................................................................6
3.2 Sparking water....................................................................................................................................6
4. Distribution Trends...............................................................................................................................7
5. Demand Trends....................................................................................................................................8
5.1 Non-alcoholic beverage......................................................................................................................8
5.2 Bottled water......................................................................................................................................9
6. Costs and gross margins.....................................................................................................................10
7. Industry key success factors and future production...........................................................................11
C. Industry Competition..............................................................................................................................12
1. Basis of competition...........................................................................................................................12
2. Current industry competitors.............................................................................................................13
2.1 Butlers Corporation..........................................................................................................................13
2.2 Hydrate Water Pty Limited...............................................................................................................14
2.3 International Beverages Limited.......................................................................................................14
2.4 Fountain Springs Pty Limited............................................................................................................15
D. Australian Beverages Limited.................................................................................................................16
1. History................................................................................................................................................16
2. Business Strategy................................................................................................................................16
3. Business Operations...........................................................................................................................17
3.1 Infrastructure....................................................................................................................................17
3.2 Technology and systems...................................................................................................................17
3.3 Marketing and production innovation..............................................................................................18
4. Management......................................................................................................................................18
4.1 Operations and performance...........................................................................................................18
4.2 Skills and experience.........................................................................................................................19
5. Latest developments — Apr 2010......................................................................................................20
5.1 ABL’s board confirms plans to enter Australian bottled water manufacturing industry...................20
5.2 New business opportunities.............................................................................................................20

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A. Introduction to Australia Beverages Limited – March 2010
Australian Beverages Limited (ABL) commenced soft drink manufacturing in 1937. During the 1970s and 1980s, the
company expanded its beverage portfolio by entering into other non-alcoholic beverage categories, such as fruit and
milk-based drinks. Entry into the snack food market was recently undertaken in response to declining consumption of
carbonated soft drinks (CSDs), the company’s traditional area of business strength. This move also enabled ABL to
leverage its strong distribution capabilities to supermarkets, convenience stores and hospitality channels by adding
such complementary food products to non-alcoholic beverages. Nevertheless, CSDs still accounted for 90 per cent of
company revenue in 2004.

Tom Dwyer, the current managing director, has been with the company since 2005. He joined the company at a time
when CSD growth was stagnating and shareholder confidence in the company was waning. This had resulted in the
share price declining by 15 per cent in the two years prior to his appointment. In order to restore shareholder
confidence, Dwyer established a strategic planning team within the company to assess the current product portfolio
and identify organic and acquisition growth opportunities. From this review the importance of operational excellence
was identified and strong investment was made in world class manufacturing facilities and systems. Process re-
engineering was implemented to reduce costs of manufacture and time to market.

Having finalised the integration of a snack food business acquisition just over 12 months ago, Dwyer is now aware that
he needs to identi1r further growth options given predicted continuing decline in the CSD market. In January 2010 he
asked the strategic planning team to undertake another detailed review of opportunities for future growth,
specifically identifying products and markets where the company would have the capabilities for successful entry.
Bottled water was one industry that was identified, based on its complementary nature to the existing beverage
portfolio. This industry had been identified as ‘of interest’ in the ABL’s first strategic review in 2005. At that time the
market was deemed too small and unsophisticated.

However, the Australia bottled water manufacturing industry has grown significantly since this initial review. Dwyer
has requested a detailed review to determine whether entry into the domestic bottled water manufacturing industry
is now a viable strategic option. If deemed to be a viable strategic option, Dwyer also wants a recommendation
whether the ABL should enter the industry by establishing its own operations or by targeting an existing competitor
for acquisition in order to gain immediate market share.

B. The Australian bottled water manufacturing industry

All figures are for the year ended 31 December unless otherwise stated. Bottled water is the fastest growing category
in the non-alcoholic beverage market in Australia, with sales revenue of $1,483 billion in 2009. The major segments of
the industry include bottled still and sparkling water. Within these two segments, different packaging sizes and types
are offered. Water can be purchased in a range of single or multi-serve bottles including 600 millilitre, 1 litre or 5 litre
bottles from the supermarket or convenience store. Bottled water is also available in bulk packs (that is: 10 litres or
greater) for water coolers for home or office use.

Different types of water also exist, from naturally sourced sparkling mineral waters to purified (purified water is water
that has been produced by distillation, deionization, reverse osmosis or other suitable processes) and specialty waters.
Manufacturing facilities for purified water are generally located in close proximity to major water utility suppliers to
minimise the transport distance from the water source to the purification plant. In contrast, most sparkling mineral
water manufacturing plants are necessarily concentrated in close proximity to high quality mineral springs where the
product is bottled at source, usually in regional locations. The bulky and relatively low value of the product as well as
the high costs of transport mean that the manufacturing and distribution plants need to be located where there are
major population centres.

The Australian bottled water manufacturing industry is currently in a growth stage. Growth has been achieved due to
the increase in per capita consumption of bottled water, albeit from a relatively low base compared with other more
established beverages. As consumers become more health conscious and change their drinking habits away from CSDs
to healthier beverages, bottled water would increasingly become their drink of choice.

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As a result, sales of bottled water are expected to increase. Of particular significance in the industry has been the large
number of new products that have been launched and accepted by consumers since 2005, making bottled water a
dynamic and fast growing industry.

1. Evolution of the Australian bottled water manufacturing industry

Projection figures for the industry were provided by industry experts at the recent Bottled Water Institute of
Australia’s “Future Focus’ conference

A relatively new industry, the Australian bottled water manufacturing industry evolved out of the soft drink
manufacturing industry during the 1990s. Soft drinks are those that do not contain alcohol. Soft drinks are
distinguished from hard drinks—beverages such as distilled spirits, beer or wine—by the simple fact that they do not
contain alcohol.

Given bottled water is a category within the broader non-alcoholic beverage industry, trends impacting this broader
industry also impact on bottled water. Total non-alcoholic beverage revenue in Australia was over $10 billion in 2009,
including CSDs, bottled water, fruit juices, energy drinks, sports drinks (beverage designed to help athletes rehydrate,
as well as replenish electrolytes, sugar and other nutrients, which can be depleted after strenuous training or
competition) ready to drink teas and milk beverages. Table 1 shows the market share of bottled water within non-
alcoholic beverages over the past 10 years and predicted market share to 2014.

Table 1: Australian non-alcoholic beverages market share of volume by category- 1999 to 2014
Category 1999 2004 2009 2014P
Diet CSDs 16.70% 16.50% 16.30% 16.10%
Full calorie CSDs 46.10% 41.30% 34.70% 25.30%
CSDs 62.80% 57.80% 51.00% 41.40%
Bottled Water 6.40% 9.50% 13.30% 17.40%
Milk Drinks* 8.20% 9.60% 11.90% 16.00%
Fruit Drinks** 20.70% 18.80% 16.90% 14.80%
Sports Dunks 1.50% 2.20% 3.70% 5.00%
Ready to Drink Tea/Coffee 0.40% 1.70% 2.00% 2.90%
Energy Drinks 0.00% 0.40% 1.20% 2.50%
Total non-alcoholic Beveraqes 100.00% 100.00% 100.00% 100.00%
* Includes while and flavoured full fat, skim and soy milk beverages
**Includes fruit juice and Fruit drinks

Australians consumed 963 million litres of bottled water in 2009. However, Australia consumption of bottled water is
significantly lower as compared with the total consumption of the top 10 global bottled water consuming countries.
Table 2 shows Australia’s per capita consumption compared with that of the highest consumption per capita countries
in the world.

When compared to similar markets, such as the United States, Italy, France and Spain, this data suggests that the
Australian market has potential for a higher rate of consumption and sales growth before it reaches maturity. It needs
to be noted, however, that the drivers for bottled water consumption can differ. The climate or lack of clean drinking
water impacts on consumption levels in countries such as Mexico and the United Arab Emirates. However, in Italy,
France and Austria, for example, consumption of bottle water is driven by fashion. A recent report by the Global Earth
Policy Institute concluded that global consumption of bottled water rose 56.8 per cent to 164 billion litres from 2005
to 2009.

Table 2: Global bottled water consumption: Litres per capita - 2005 and 2009

Country 2005 2009 Total

Italy 170.3 202.0 18.6%
Mexico 128.7 185.4 44.1%
United Arab Emirates 120.7 179.9 49.0%
France 129.0 155.8 20.8%
Sin 112.0 140.3 25.2%
Germany 110.8 137.4 24.0%
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 Switzerland 99.1 109.5 10.5%
United States 70.0 89.6 28.0%
Australia 35.3 45.5 28.9%
Global Average 17.9 26.6 48.6%

Table 3 contains consumption statistics of bottled water in Australia, showing actual consumption for the past seven
years and projected consumption for the next six years.

Table 3: Australian bottled water consumption, 2003 to 2015

200 200 200 200 200 200 200 201 201 201 201 201 2015
3 4 5 6 7 8 9 0P 1P 2P 3P 4P P
Consumption 605 677 715 765 825 906 963 102 108 115 123 131 1398
million litres 4 9 9 5 6
Consumption per 30.6 33.8 35.3 37.2 39.9 43.3 45.5 48.0 50.5 53.3 56.3 59.4 62.4
capital (litres)

Table 4 shows total industry revenue over the past seven years and projected revenue for the next six years for the
Australia bottled water manufacturing industry, compared to that of non-alcoholic beverages in total. Historical
growth in bottled water has been derived from increases in total consumption, helped along by strong customer
acceptance of new products launched over the past five years. The increase in the total Australian population together
with an increase in per capita consumption of bottled water has contributed to this historical growth. (Compared with
other developed markets, however, growth in the Australian market has been achieved from a relatively low base).
These trends are expected to continue in the future. Bottled water will therefore continue to increase as a percentage
of the non-alcoholic beverage market.

Table 4: Australian bottled water and non-alcoholic beverage revenue -2003 to 2015
2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P
Bottled water 810 920 990 1070 1200 1335 1483 1660 1877 2121 2375 2611 2796
revenue $m
Bottled water $1.34 $1.36 $1.38 $1.40 $1.45 $1.47 $1.54 $1.62 $1.72 $1.83 $1.92 $1.98 $2.00
average $ per
litre
Non-alcoholic 7199 7675 8191 8723 9250 9648 10449 11024 11619 12235 12871 13515 14177
beverages
revenue $m
Bottled water % 11.3% 12.0% 12.1% 12.3% 13.0% 13.8% 14.2% 15.1% 16.2% 17.3% 18.5% 19.3% 19.7%
of non-alcoholic
beverage

An exception to the identified growth trends, however, is the delivery of bulk water for homes and office use. This
product type is now in the mature phase of its life cycle. It has experienced low growth over the past five years as
more offices and homes install water filters as a result of improvements in filter technology. To counteract the decline
in bulk water sales to offices and homes, bottled water manufacturers have developed new distribution channels for
bulk water products. Increasingly bulk packs are sold in petrol station forecourts and supermarkets.

To date, manufacturing capacity within the industry has meant that manufacturers have been able to meet growing
demand using existing manufacturing infrastructure. Production stockpiling has not occurred which has helped
manufacturers protect their profit margins. They have been able to achieve an increased weighted average price per
litre as all production is generally sold in the year it is produced, reflecting the strong demand growth. The average
price per litre has also been influenced by new product launches during the past five years, particularly the range of
premium waters (are generally higher priced waters which have higher levels of purity or are sourced from natural
springs) and smaller, more convenient packaging sizes that achieve higher average prices.

2. Bottled water manufacturing

The Australia bottled water manufacturing industry has similar manufacturing and distribution processes to the non-
alcoholic beverages industry from which it emanates.

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2.1 Water supply
There are several sources of water for bottling, such as underground springs, wells and water storages. The source of
water plays a key role in the quantity and quality of bottled water that is produced. About 25 per cent of all bottled
water comes from water storages that is tap water) that is further treated before bottling at an average price of $2.40
per kilolitre. The other 75 percent of water comes from groundwater at an average price of around $1.00 per kilolitre.
In some Australian states, permits are required to extract groundwater. Bottled water manufacturers often contract
out the actual extraction of Water to external providers.

The price of water in Australia compared with other countries and with other products is very low. It has become the
subject of debate due to diminishing water supplies caused by extended drought conditions in Australia. To increase
water prices would be politically contentious and many consumers would argue that because water is a basic human
need it should be free. It is significant to note, however, that Australians pay a thousand times more per litre for
bottled water than they do for tap water of similar quality.

2.2 Treatment
Once water has been sourced, the next step is to filter and purify the water to remove organic compounds such as
metal ions. These compounds can contribute adversely to the taste and odour of the water and to bacteria that may
cause health problems.

Some water, mainly mineral water, is naturally carbonated at the source. However, more commonly, carbonation of
both spring and purified water takes place in the factory (where both the treatment process and bottling occur). For
other drink types (for example sparkling wines or beer) carbonation is achieved naturally during the fermentation of
sugar into alcohol. However, for sparkling Water, carbonation cannot be achieved through a fermentation process, as
no sugar is added. It is therefore achieved by injecting carbon dioxide, into the water under pressure. The pressure
increases the solubility of the water and allows more carbon dioxide to dissolve than would be possible under
standard atmospheric pressure. When the bottle is opened the pressure is released, allowing the gas to come out of
the solution, thus forming bubbles.

2.3 Bottling and labelling

After the water has been treated, and in some cases carbonated, it is transferred (if carbonated, this transfer occurs
under pressure) to a filling machine. Here, bottles or bulk containers are filled and then passed by conveyor belt to a
sealing machine. Once sealed, the bottles are packed in cardboard boxes for transport. There are currently 22 bottled
water manufacturers in Australia certified by Food Standard Australia. Some manufacturers operate on a contract
bottling basis only, providing bottling services to companies that have their own brands or to supermarkets which sell
private label products (Private label products or services are typically those manufactured or provided by one
company for offer under another company's brand. Private label goods and services are usually positioned as lower
cost alternatives). However, a number of these bottlers do have brands of their own which they sell.

2.4 Packaging
Bottled water is provided to consumers in a variety of packages. These may be glass, PET plastic (polyethylene
terephthalate) or polycarbonate bottles. Water can be purchased in a range of single or multi- serve bottles from
various outlets and is available in bulk packs for water coolers for home or office use. The technology required to
bottle water is quite basic and widely available. However, to achieve the volume of manufacturing required to be cost
competitive, the level of capital investment is large. Key improvements in technology have been focused on quality
control and automation to meet the need for greater manufacturing efficiencies and the strict health and regulatory
standards of food standards that apply across all Australian states and territories.

Environmental concerns are rising in relation to the disposal of empty drink bottles. With the increasing amount of
water being consumed, the issue of the resultant bottle waste has become significant. In Australia, of the 118000
tonnes of drink bottle plastic used every year, only 35 per cent is recycled. In South Australia, where consumers can
redeem a deposit for drink containers, the bottles made up less than 10 per cent of the state's rubbish, compared with
13.4 per cent nationally. Drink bottles also take up more space than other waste, comprising 38 per cent of total
volume of litter.

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Recycling experts believe that the recycling of empty water bottles is hampered because most bottled water is
consumed as a convenience beverage outside the home where recycling bins are not readily accessible. Following the
success of reducing the use of plastic shopping bags it is thought that the introduction of a nationwide empty bottle
deposit law would create the incentive to recycle bottles. This would also help to ease the burden on taxpayers who
pay for the cleanup of litter.

3. Industry segmentation
The Australian bottled water manufacturing industry has two clearly defined segments:

• Still water — this segment accounted for 76 per cent of consumption volume in 2009.

• Sparkling water this segment accounted for 24 per cent of consumption volume in 2009.

3.1 Still water

Still water is generally consumed for hydration and thirst satisfaction at home, in the office or while travelling.
Convenience is a major factor in the growth of the still water segment. It is used:

• as an alternative to other packaged beverages when consumers want to moderate their calories intake and seek an
unsweetened, clean tasting and natural product. Water is the best and healthiest form of hydration as it is a fat and
calorie-free thirst quencher;

• when consumers are not satisfied with the aesthetic qualities (for example; taste; odour and colour) of their tap
water. Many people wish to drink something that is refreshing, clean and pure, and avoid certain chemicals used in
the treatment of public water supplies, such as chlorine and fluoride;

• when consumers require the convenience of bottled water for their refreshment. This is especially the case with the
development of more widespread leisure activities and the expansion of travel, for both business and pleasure; and

• for nutritional and performance benefits, such as near waters (Near water - also known as functional waters. These
are bottled water beverages which have nutrients added, such as fruit juices, vitamins or minerals to enhance the
positive health benefits associated with water) and mineral water supplements claiming to have the nutritional
components equivalent to a bowl of salad.

As shown in Table 5 below, significant growth in bottled still water in Australia has occurred over the past six years,
and this has driven most of the growth in the overall industry. As with the industry overall, the average price per litre
has increased due to the introduction of premium bottled still waters.

Table 5: Revenue and production - Still Water- 2003 to 2015

Type 2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P
Revenue 555 648 708 780 883 999 1127 1279 1472 1688 1934 2154 2323
$m
Production 516 584 619 668 720 796 847 901 958 1020 1095 1173 1252
M litre
Average $ $1.08 $1.11 $1.14 $1.17 $1.23 $1.25 $1.33 $1.42 $1.54 $1.65 $1.77 $1.84 $1.85
per litre
P Projection

3.2 Sparking water

Carbonated water was commonly known by the name of soda water until World War II. In the 1950s, new terms such
as sparkling water began to be used due to the negative perceptions associated with use of the word ‘carbon’ being
considered a chemical additive in water. Sparkling water is essentially still water into which carbon dioxide gas has
been dissolved, resulting in the formation of bubbles. Sparkling water is generally consumed as a refreshment
beverage mostly while dining out rather than for hydration or thirst satisfaction alone. In the last few years,
supermarkets have started to stock premium sparkling water brands.

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Table 6: Revenue and Production:- Sparkling water- 2003 to 2015

Type 2003 2004 2005 2006 2007 2008 2009 2010P 2011P 2012P 2013P 2014P 2015P
Revenue 255 272 282 290 317 336 356 381 405 433 441 457 473
($million)
Production 89 93 96 97 105 110 116 123 131 139 140 143 146
(million
litres)
Ave $ per $2.87 $2.92 $2.94 $2.99 $3.02 $3.05_ $3.07 $3.10 $3.10 $3.12 $3.15 $3.20 $3.24
litre

While experiencing declining growth, sparkling water is still showing some growth, albeit at much lower rates than still
water. This reflects the refreshment beverage nature of sparking water which is generally consumed at restaurants
and cafes rather than in the home. The majority of the sparkling water consumed is comprised of premium imported
spring waters, such as Eau de Vivre, which is the world’s premier sparkling water brand. As such, the average price per
litre for sparking water is substantially higher than that of still water (see Table 6). This reflects the increased cost of
manufacturing required to carbonate the water, different closure types required to retain the carbonation, the cost of
imports and the premium nature of this product. The increase in average price over the projection period reflects
estimates in foreign exchange movements. Foreign exchange experts forecast that the current high levels in the value
of the Australian dollar are not sustainable and project them to decline in the future.

4. Distribution Trends
Bottled water is sold by manufacturers to independent wholesalers, including specialist confectionary and soft drink
wholesalers as well as grocery wholesalers. Figure 1 below illustrates the current industry distribution channels.

Figure 1: Australian bottled water distribution channels – 2009

In the past few years, retailers have been increasingly buying direct from the manufacturer to reduce the cost of
goods by eliminating the wholesaler margin from their purchase price. This has been facilitated by improved
information systems that now provide timely information to manufacturers for production planning, thereby enabling
them to engage in direct sales to a larger numbers of customers.

The increase in direct distribution has been most notable amongst major industry competitors. Major retailers want to
purchase from fewer, larger companies. Beverage wholesalers, however, still play an important role in distribution for
smaller bottled water manufacturers. These smaller competitors generally have a smaller product range and are
unable to meet major retailer demands for inventory management and direct to store delivery. Table 7 shows the
share of revenue in 2009 by distribution channel.

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Table 7: Major distribution channels share of revenue- 2009

Distribution channel 2009 Rev Comments

($m)
Supermarkets & grocery 35.0% 519 Supermarkets use online ordering systems direct to
wholesale manufacturers, bypassing wholesalers in general.
Convenience stores 30.0% 445 Major growth in this channel reflecting convenience purchasing.
(including petrol Main outlet for the purchase of single-serve products.
stations)
Hospitality 15.0% 222 Dominated by higher priced spring and mineral waters. including
imported products.
Home & office delivery 9.0% 133 Bulk packaged water is the main product through this channel.
Vending machines 6.0% 90 Placed in schools, sports clubs and other public places or venues.
Other 5.0% 74 Niche value added brands only due to high transportation costs
(e.g. exports) or specific to single distribution channels.

Branding is an important differentiator in the bottled water manufacturing industry. Existing competitors that have
established brand names have an advantage over new entrants who have to spend heavily on marketing for brand
recognition.

Sales in convenience stores have always been an important distribution channel for soft drinks. This importance is
growing, not only for soft drinks but also for bottled water, driven by the trend in more frequent convenience
shopping for ‘time-poor’ consumers. Success in the convenience store channel is critical for any new product to
succeed. If the brand recognition is achieved, it is often quickly followed with brand extensions, leveraging the brand
to offer new flavours and packaging. Once consumer demand is established in the convenience store channel, the
move into the supermarket channel generally supports maintenance of profit margins, considering that supermarket
buyer power is reduced when strong product demand has been established.

Manufacturers have had to respond to significant changes in consumer buying behaviour. Product distribution,
presentation and availability has had to match these changes in order to maximise sales. Increasing quantities of
product are now distributed through convenience stores and petrol stations. For example, bulk water packs were once
sold via direct sale to offices. However, as more offices have installed their own in-built water filters, this channel has
declined and there has been a shift to bulk water sales through petrol stations and supermarkets.

A key strategy employed by non-alcoholic beverage manufacturers to lock out rivals is the placement of vending
machines and refrigeration units in distribution outlets. This ensures that their products are stocked and presented for
the best possible sales whilst making it difficult for competitors to get refrigeration space. The distribution outlet has
to invariably agree not to stock competitor products as part of the terms of using the refrigeration equipment
supplied. Vending machines are increasing in variety, size, style and sophistication, depending on where they are
located. Distributors in some locations, such as private or non-government schools, have worked with the
manufacturers to introduce the use of smart card technology for payment and therefore avoid the need for cash.

Similarly, in the hospitality arena, manufacturers have to tender for the supply of beverages to key entertainment and
sporting venues. Once a manufacturer has secured a contract with a venue, their product has guaranteed sales for a
defined period of time. Quite often, patrons are not allowed to bring in their own beverages for consumption or are
limited in the amount they are allowed to bring in, Hospitality, through restaurants and cafes, is the main distribution
channel for sparkling waters and it is also common practice for venues to be locked into one particular manufacturer.

Exports and imports represent about 5 per cent of industry production. These levels are not expected to change in the
future due to the high cost of transporting the heavy weight and bulk of water. The Australian bottled water
manufacturing industry is protected to some extent from the threat of water imports due to the high volume and low
unit value of water, even though water with no additives is exempt from tariffs. For water that has added sugar or
other sweeteners, there is a 5 per cent import tariff. The main distribution channel for imported waters is cafés and
restaurants that primarily serve premium sparkling waters.

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5. Demand Trends
Bottled water is a growing part of the non-alcoholic beverages industry. While the broader non-alcoholic beverages
industry is growing, bottled water is growing at a faster rate due to increasing awareness of health issues. Research
shows that people want better tasting and healthier alternatives to many of the soft drinks and sports drinks currently
available. Market research surveys suggest that over 90 per cent of Australians consume too many sugary and
caffeine-based drinks. As bottled water is part of this larger beverages industry, it is important to understand firstly,
the trends impacting on non-alcoholic beverage consumption overall, as well as the trends specifically impacting on
bottled water consumption.

5.1 Non-alcoholic beverage

Consumption of non-alcoholic beverages in Australia increased from 179.7 litres per capita in 2005 to 228.5 litres per
capita in 2009. Per capita consumption trends for all non-alcoholic beverages generally follows consumption patterns
in the United States. On that basis, there are still significant opportunities for growth in all non-alcoholic beverages,
including CSDs. Currently, Australian per capita consumption is 63 per cent of the US consumption level.

Increasing awareness of the obesity problem in Australia, as well as the firmly established focus toward health and
wellbeing, is ensuring strong future growth for ‘healthy’ beverages, This has resulted in the introduction of sugar-free
or diet CSDs. However, many older Australians are not switching to sugar-free versions of the CSD5 they used to drink.
Instead, they are moving to alternative beverages. Hence the general decline in the consumption of CSDs has also
been accompanied by a rise in the consumption of beverages that are perceived to be healthy, such as fresh fruit
juices, flavoured milks, energy drinks, sports drinks and ready-to-drink teas.

Changing lifestyle trends, health consciousness and a growing ‘café culture’ have also contributed to an increased
demand for these alternative beverages. For example:

 Freshly squeezed fruit juices, with fresh flavour attributes being preferred by the consumer. With the emergence
of juice bars and a greater focus by manufacturers in establishing juice brands, consumption of juice products has
increased. In the United Kingdom and United States, juice bar sales represent about 5 per cent of total juice sales
in those countries. However, in Australia, juice bars are still only an emerging distribution outlet and offer a good
opportunity for new product development and growth.
 Ready-to-drink teas, with their antioxidant properties being promoted, have become a popular ‘health’ drink. The
Australian market for this product is currently 2 million litres per annum and predicted to grow to as much as 20
million litres over the next few years, particularly as the Australian population ages. Product development
includes a variety of flavoured ready-to-drink teas.
 Flavoured milk is a growth beverage. Data shows that Australians are each drinking, on average, nearly 0.7 litres
more flavoured milk per annum than a year ago. Perceived health benefits of milk have contributed to this
growth, and this is expected to drive continued growth in the future. Milk sales have increased by 6.7 per cent
with low fat brands performing particularly well. Last year, each Australian, on average, drank 9.5 litres of
flavoured milk - more than the per capita figure for any other country.
 Both energy (Beverages that are designed to give the consumer a burst of energy by using a combination of
methylxanthines (including caffeine), vitamins and herbal ingredients) and sports drinks (Purified water with
additives similar to those of sports drinks with the aim of providing hydration during sport) are growing products
in a society that is increasingly health conscious and aspiring to be more active. Energy drinks have had double
digit growth since 2006 and the sports drink market has grown 14 per cent on volume and 20 per cent on revenue
compound annual growth over the last three years.

5.2 Bottled water

Bottled water consumption has increased significantly over the past six years, but is still significantly below
consumption levels of other developed countries including Europe and the United States. This indicates further
opportunities for growth in Australia, primarily at the expense of CSDs and fruit based drinks, given the rising concern
surrounding the link between CSD consumption and obesity, especially in children.

One possible reason for the lower per capita consumption of bottled water by Australians is the relatively good quality
of tap water available. Tap water contains fluoride ions which have a positive effect on tooth decay. The drinking of
bottled water, which is distilled (Distillation is the process of eliminating impurities by heating a liquid until it boils,

9
capturing and cooling the resultant hot vapours, and collecting the condensed vapours) to remove element such as
fluoride, is believed to be contributing to an increase in the risk of tooth decay. However, most people continue to
cook with tap water and this should provide sufficient fluoride to prevent tooth decay. Alternatively, some people
wish to avoid exposure to fluoride, particularly systemic ingestion of fluoride in drinking water, and may choose such
bottled water for its absence of fluoride. Nevertheless, surveys show that there is an increasing concern about the
quality of tap water in Australia and that this is driving some growth in bottled water consumption.

Growth is further supported by concerns about alcohol consumption and associated drink-driving accidents which has
encouraged the consumption of non-alcoholic beverages, such as bottled water, when dining out.

Females consume about 58 per cent of all bottled water in Australia. Young people, in particular females aged
between 18 and 35 years, are the largest consumers of bottled water. In general, bottled water consumers are more
health conscious and socially aware. Studies have found that younger generations are far more diligent in drinking
their recommended daily intake of water and men are less likely to think about water consumption on a daily basis
than women. In addition, for young women, image is an important factor in determining consumption behaviour.

Figure 2: Australian bottled water consumption by age group, 2009

Age Group Consumption % Age Group Consumption %

18-24 14.8% 45-54 18.5%
25-34 23.0% 55-64 9.0%
35-44 25.8% 65-older 8.9%
Due to the increase in health consciousness, water has also become a fashion accessory. Some consumers now carry a
bottle of water with their mobile phone and iPod. Packaging is therefore critical. Small plastic bottles are preferable
for many consumers as they are re-sealable, perceived to be more contemporary and can fit in car-cup holders. The
convenience factor means that the most popular pack size is around 600 ml, as shown in Table 8 below. This is an
important consideration for convenience when travelling for business or leisure. In fact, it is the convenience aspect
that has to some extent, driven the growth in bottled water.

Table 8: Australian still water revenue share by pack size

Pack Size 1999 2004 2009 2014 P

0 — 750m1 47.3% 52.3% 57.3% 60.3%
1-2 litre 22.8% 27.5% 32.6% 34.6%
Bulk 299% 202% 10.1% 4.9%

Increased future consumption of bottled water in the home is likely to result from continued growth in household
disposable income in Australia. This disposable income growth will also sustain growth of takeaway foods and
restaurant meals, both of which tend to increase consumption of bottled water and fruit juice. 1-lowever, while
currently experiencing positive growth, total household expenditure on consumable goods is expected to slow in the
future. This will adversely affect growth in discretionary spending on all beverages. However, a factor which
contributes positively to growth in the sales of bottled water is the climate. The gradual warming of Australia’s climate
is expected to support further growth in water consumption.

Bottled water is well positioned to benefit from the shift in consumer preferences towards healthier and natural
drinks. Spring water is particularly popular in Australia because it is perceived to have come from a natural, pristine
environment. This is reinforced by marketing that emphasises the pure and natural image of water. As well as
purchasing more bottled water, consumers are also prepared to pay more; with 69 per cent of consumers recently
surveyed believing quality is more important than price. New product development activities are targeting changing
consumer lifestyle needs and the trend towards purchase convenience. There are now numerous bottled water
brands available in Australia, from international beverage brands to boutique ‘rain farms’. The huge variety of waters
and sources means that the bottled water market has a broad demographic reach. According to a recent consumer
survey, at least 99 per cent of all Australians have tried or purchased bottled water in the last 12 months.

The Australian bottled water manufacturing industry has pursued sales growth by developing products for niche
markets. Smaller producers can supply relatively small segments with specialist or premium products. Given the

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continuing concern about the use of artificial colourings, flavourings and preservatives, the industry is expected to
develop a range of premium products better suited to the demands of the health conscious consumer. For example,
pet owners can now buy ‘vitamin-fortified’ water specifically formulated for their canine companion.

6. Costs and gross margins

Bottled water has the highest profit margins of all non-alcoholic ready-to-drink beverages. This is due in part to the
strong growth that the industry has achieved. Manufacturers are also able to sell all production in a year. Industry
rivalry is relatively low, particularly as the major competitors are focused on supplying through different distribution
channels. A percentage breakdown of costs in 2009 is as follows:
 55.2 per cent for purchases of supplies;
 26.8 per cent for marketing, distribution and selling costs;
 12.1 per cent for wages;
 4.1 per cent depreciation and administration costs; and
 1.8 per cent for utilities and rent.

A net margin of 16.3 per cent was achieved by the industry in 2009. Purchases include water supplies, labels and other
packaging materials such as glass and plastic resin bottles and closures which are generally purchased on 5 year
contracts. One of the key costs is polyester (PET) resin for bottles; however, there is no forward market (A forward
market enables producers to lock in prices for a defined period of time, thereby providing certainty of costs) for PET
resin. As a commodity, PET resin has been subject to price rises over recent years, as the price of oil has increased.
This is reflected in the minor decline in gross and net margins experienced by manufacturers in 2009, as shown in
Table 9 below. Overall, however, the cost to create bottled water is relatively inexpensive. Therefore, water is a more
profitable product than other non-alcoholic beverage categories.

Table 9: Five year weighted average industry gross and net margins

2005 2006 2007 2008 2009

Gross margin% 31.3% 31.9% 31.1% 31.5% 30.7%
Net margin% 16.6% 16.9% 16.5% 16.7% 16.3%

Current levels of profitability are expected to continue. However, it is noted that as sales through the supermarket
distribution channel increase, so too will the buyer power of these large retailers and this may have a negative impact
on profitability levels. At a recent presentation, ABL’s managing director, Tom Dwyer, commented: ‘The increasing
power of major or retailers will squeeze the small competitors in both the food and beverage businesses. Without
modem technology, smart systems and economies of scale, it will be very difficult for small manufacturers to generate
an acceptable return on capital employed and maintain current levels of profitability.’

7. Industry key success factors and future production

Industry experts summarise the following areas as critical to future success in the Australian bottled water
manufacturing industry:

 Distribution and placement: Control of distribution channels through an established and comprehensive network
of distribution outlets to gain access to end consumers is essential to ensure timely delivery, low costs and
maximised product reach through effective placement. If not operating in a niche market, manufacturers must
become a major competitor in the wider market. In general, a major competitor needs to have at least 20 per
cent share of at least one distribution channel.
 Effective market orientation, product promotion, and advertising: Market research, product development and
speed-to-market are important capabilities. Successful competitors need to be able to clearly segment the market
and develop products that reflect the requirements of different customer groups. The ability to effectively
promote their brand and provide label and packaging design is also important. First movers with effective
distribution have an advantage in that new competitors need to spend heavily on marketing to catch up. The
effectiveness of strong advertising, a sophisticated distribution chain and a focused strategy is critical in
influencing consumer choice. Strong brand names contribute to the appeal of bottled water as an accessory as
well as building a products reputation for quality. Having these attributes allows manufacturers to win market
share within particular consumer segments and charge premium prices.

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 Economies of scope: Breadth of product range enables efficiencies in distribution, marketing and administration.
Such efficiencies are gained when a competitor uses its manufacturing process to produce a wide range of
beverage brands (and possibly also complementary products) which are provided as part of a total solution to the
various distribution channel customers. Being a total beverage provider to major customers is becoming more
important as these major customers are increasing in concentration and prefer to deal with fewer larger
manufacturers.
 Economies of scale: Economies of scale are very important for a low value product since high volumes must be
produced and sold to maintain profitability, Manufacturers must have effective cost controls and access to the
most efficient manufacturing and distribution processes, tracking technology and techniques to monitor sales and
respond accordingly. Economies of scale are particularly important for competitors who have undifferentiated
products. Since unit manufacturing costs are an important element of profitability, it follows that economies of
scale, based upon critical mass, are also important. Some manufacturers have commenced contract bottling for
smaller industry participants in order to secure manufacturing volumes.

At the recent annual Australian Beverage Congress, Alan Vaughan, an independent industry expert of 30 years’
experience, presented an extensive insight into the bottled water market and its future direction.

Vaughan concluded his presentation with this comment: ‘The Australian and global beverage industries are in a period
of growth and major transformation. In general, there has been a switch away from carbonated thinks to beverages
with less sugar and additional functional benefits. To the younger customer, the older brands are looking a little staid,
with bottled water and energy thinks viewed as more cool and exciting. This is reflected in marketing and advertising
campaigns. People these days are working harder and have greater commitments. Bottled water and energy thinks
are replacing other traditional beverages because they provide refreshment as well as a functional benefit, such as re-
invigoration, replenishing hydration and energy levels, improving mental alertness and enhancing concentration.
These beverages appeal to everyone from partygoers to office workers, through to truck drivers.’

C. Industry Competition

1. Basis of competition
The basis of competition for non-alcoholic drinks are primarily price, convenience and taste. The main basis of
competition by which bottled water competes against other beverages, such as CSDs, fruit drinks, sports drinks and
energy drinks, is health appeal. Given zero or very low sugar content, both still water and near waters have
successfully developed an image of being healthier than other drinks and this has driven growth in the industry. To a
degree, home filters also serve as a source of competition, although mainly against the bulk water segment. Tap water
is also an external competitor, with a clear advantage in price.

Beverage marketing and display are beginning, to undergo dramatic change. There will always be the major
conventional media promotions, but the consumer market is becoming much more time sensitive and there is a high
level of competition from substitute products, mainly other non-alcoholic beverages. The major ways for industry
participants to differentiate and compete successfully include:

 Branding, image and breadth of product range: Recent growth in bottled water is related to the successful
positioning of a number of brands as fashion accessories. Both media support behind the brand and the design of
the bottle including the label contribute to the appeal of a product. Breadth of product range is also important as
concentration of major customers continues, Large retail buyers (both in the supermarket and convenience store
channels) prefer to deal with large manufacturers or suppliers that can provide a large product range.
 Packaging: Convenience is a key benefit of bottled water. Hence bottle size, shape and functionality form a basis
of competition. Bottles are designed with particular uses in mind, for instance some water bottles have a pop-top
cap for ease of use when playing sport or training.
 Distribution coverage: An ability to satisfy the needs of retailers, and obtain favourable terms such as
promotional programs and stock positioning is important. Market share dominance of distribution channels is
important as it allows manufacturers to diffuse the power of large buyers and maintain strong profitability levels.
The ability to secure shelf space in convenience stores is also important, given that success in the convenience
store channel is a precursor to getting new products into supermarkets.

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 Taste: Especially at the premium end of the market, taste can be a basis of competition for both still and sparkling
waters.
 Use of market data: Access to and use of market data is also important. The larger the competitor the more likely
they are able to afford retail check-out scanning data to understand what its customers are buying. In this way,
manufacturers can ensure retailers replenish their stock as required. This provides larger manufacturers with an
advantage of responsiveness and flexibility as they make use of this information and respond quickly.

2. Current industry competitors

The Australian bottled water manufacturing industry is dominated by large beverage manufacturers. Two of the major
competitors are subsidiaries of global food and beverage conglomerates that are also major competitors in the non-
alcoholic beverage market. Table 10 summarises the market share of the industry competitors in 2009. It should be
noted that Australian Beverage Limited (ABL) is not currently in the Australian bottled water manufacturing industry,
despite being a major competitor in the Australian non-alcoholic beverage market.

Table 10: Market share by distribution channel and major competitors -2009
Competitor Total Supermarkets Convenience Hospitality Home & Vending Others
market & grocery stores office machines *
share wholesalers delivery
(35%) (30%) (15%) (9%) (6%) (5%)
Butlers 26.9% 27.0% 35.0% 25.0% 15.0% 30.0% 0%
Hydrate Water 26.3% 38.0% 22.0% 20.0% 15.0% 35.0% 0%
International 18.3% 20.0% 17.0% 35.0% 0% 15.0% 0%
Beverages
Fountain Springs 12.0% 10.0% 10.0% 5.0% 15.0% 0% 70.0%
Other** 16.5% 5.0% 16.0% 15.0% 55.0% 20.0% 30.0%
Total Market 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Share
*Other includes export sales and use of purified water for medical procedures (for example: dental etc)
**Other competitors comprise small, locally based water manufacturers. No single entity has greater than 2 per cent
market share

The industry has grown significantly to date. To keep industry profitability levels relatively high, the industry’s major
competitors have tended to dominate one or two distribution channels only, rather than all channels. In this way, they
hope to avoid strong head-to-head competition. This has assisted in keeping the overall level of industry rivalry
relatively low to date. However, this is expected to change in the future as consumption growth begins to slow.

Several new competitors have entered the market over the last five years. Moreover, industry consolidation has
occurred, Major industry competitors have acquired smaller competitors to increase economies of scale, scope,
market share and profitability. In 2009, the four largest competitors accounted for approximately 82 per cent of
industry revenue. No major change is expected to this trend in the future as further consolidation will be difficult due
to the relatively high market shares held by the four major companies. Regulatory concerns about restriction of
competition will also affect further consolidation.

Two of the competitors, Butlers Corporation and International Beverages, are owned by global food and beverage
conglomerates that use Australia as the base for their non-alcoholic beverages operations in Asia. Industry experts
believe that acquisition of either of these companies, to be used as a mode of entry into the industry and gain
significant market share, is not possible. The parent companies will be unwilling to sell their Australian operations.

The major industry competitors are summarised below.

2.1 Butlers Corporation

A wholly owned subsidiary of a large multi-national listed company, Butlers Corporation commenced operations in the
United Kingdom in the 1 800s as the official chocolatier to the King. Operations were expanded throughout the 20th
century to include other types of confectionary, biscuits, snack foods and non-alcoholic beverages. Geographic
expansion was also undertaken. Butlers Corporation is now a global giant in its chosen products.

13
Butlers established its operation in Australia during the 1950s. It has held the majority market share in the Australian
confectionary, non-alcoholic beverage and snack food industries for the past 20 years. The company entered the
Australian bottled water manufacturing industry during the 1980s through the acquisition and consolidation of several
state-based water manufacturers. This helped Butlers to become the first bottled water manufacturer to have
national distribution.

Butlers has strong distribution capabilities given its broad product range. It is the largest supplier to convenience
stores and the second largest to the hospitality distribution channels. Growth in its market share of the supermarket
channel has also been strong over recent years, in particular through its well known still water brand ‘Olympus’. The
company also holds significant market share in the sparkling water segment, having obtained the Australian license for
Eau de Vivre, the world's leading sparkling water brand.

One of the areas of focus for Butlers is innovation for all its beverages. This includes a large of number of soft drinks
such as flavoured mineral waters, flavoured milks and fruit juices. Its broad product offering that includes
complementary shack products, has been leveraged to achieve strong sales in convenience stores and through
vending machines.

2.2 Hydrate Water Pty Limited

Hydrate Water is a privately owned company that originated in 1993 in Queensland. The company has access to
natural springs in Queensland, New South Wales and Victoria, and a long term agreement with key water utilities in
these states to access water when required. It distributes nationally from ISO 9002 quality accredited manufacturing
facilities in Queensland, New South Wales, Victoria and Western Australia.

The company has products in the sparkling and still water segments. The products include energy thinks, fruit juices
and a limited range of high quality carbonated soft drinks. It is also the manufacturer of the leading brand of still
water, H20, that is sold through the supermarket distribution channel. Hydrate is seeking a stronger presence in
convenience channels. Its business model focuses on using its finds to support retailers so that the retailers can offer
promotions, rath.er than spending on direct consumer advertising. The company has recently begun investigating the
use of scanned retail data to monitor sales trends and adjust production volumes accordingly. This investigation into
scanning data is due to having run out of inventory at the end of last financial year when the manufacturing plant was
closed for annual cleaning and maintenance. As a result, the company had lost some market share.

A number of the company’s water products are targeted to the sporting and energy think consumer. One of its best
known brands, ‘Viva!’, has a 72 per cent market share in sports water products. Hydrate Water has been able to
leverage the high brand recognition of ‘Viva!’ to successfully introduce flavoured water. Similarly, Hydrate Water sells
the leading brand in sparkling mineral water and has again leveraged this brand by introducing a number of flavoured
mineral waters, including diet drinks. Both these initiatives have resulted in above average market growth for the
company.

The company is particularly well known in the industry for its packaging innovation and engineering design capability.
Hydrate Water developed ‘Pop Tops’ - small plastic bottles that were very successful with young children as they fit
perfectly into lunch boxes and have the advantage of being re-sealable. The ‘Pop Top’ range increased its bottling
turnover by 50 per cent. This product won the coveted Australian dietician award for ‘Best New Product’ when
launched. It also received the Australian Health Foundation endorsement for its diet drinks. In addition, the company
has been commended by dieticians for promoting products that address the increasing concerns of childhood obesity
linked to CSDs. Hydrate Water was also the first company to introduce stackable bulk water packs for sale through
supermarkets.

The management team at Hydrate Water have extensive industry experience, having a collective 80 years in the
industry between them. Operations manager, Simon Miles, is well regarded in the industry and is currently the
chairman of the Bottled Water Institute of Australia. Current owner, Jack Wells, has indicated he wishes to retire in the
next five years, and has been grooming Simon Miles as his successor. An offer for acquisition was received from
International Beverages last year, but Wells turned down the offer as he did not want to sell the Australian business
he established to an international company.

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2.3 International Beverages Limited
International Beverages is the wholly owned subsidiary of a large multinational company and sells fruit juices, energy
and sports drinks, water and soft drinks. Its initial entry into the Australian market was through fruit drinks. During the
industry consolidation in the 1 990s, the company entered the bottle water manufacturing industry through
acquisition.

Through its parent company, International Beverages has the licence to sell the world’s leading brand of bottled still
water Aqua Grande, in Australia and New Zealand. The company also sells the imported sparkling water brand San
Vitale one of the most popular mineral waters bottled at the source. This product, in particular, has given the
company a strong share of the hospitality channel.

Company growth has been driven by new product development and product extensions which have leveraged existing
capabilities and focussed on specific consumer requirements. The company’s latest successful product launch is
calcium enriched water targeted at aged care facilities and nursing homes for women at risk of osteoporosis, a bone
degeneration disease.

2.4 Fountain Springs Pty Limited

Fountain Springs is a Sydney based company that has access to a naturally rising spring located in the Snowy
Mountains in southern New South Wales. To date, the company has been unable to secure distribution and shelf
space in major Australian retail outlets, This is because its product range is limited to only two pack sizes, 600ml and 2
litres. An export strategy was therefore developed with the assistance of the Australian Trade Commission (Austrade).
Fountain Springs is now Australia’s largest exporter of spring water and better known overseas than in Australia.

In the past two years, the company’s bottled water exports have grown sales revenue significantly, having secured a
contract with the major UK supermarket chain Besco. Growth is also expected through its expansion into UK
convenience stores and petrol station channels which is planned for later this year. The UK was the first export market
for Fountain Springs where it was able to leverage the perception of Australia as ‘clean and natural’. Since developing
this UK market, the company has also been successful in developing business in the Middle East, South East Asia and
the United States. Given the cost of transport to these export markets, Fountain Springs has a niche strategy and sells
only premium grade water in the 600m1 and 2 litre pack size at a higher price.

However, market research shows that there is still very low consumer awareness of its products and brand in
Australia. To raise awareness, a cause-related marketing strategy has been adopted. Under this program, the company
donates a percentage of its profits to partner charities in its chosen markets. This has been central to the growing
market awareness of the company in its selected markets. It leverages the networks and relationships of its partners
to develop new business and sales.

As a result of the company’s success in overseas markets their brand ‘Aqua Caliente’ is now being stocked in selected
school canteens in Australia as a natural alternative to sugar laden CSDs and fruit juices. Given Fountain Springs did
not have the capability to distribute directly to schools, it entered a distribution arrangement with a school food
provider. The company also altered its cause-related marketing strategy whereby it would donate a proportion of all
bottled water sales in each canteen to the school. The money was to be used by the schools to purchase new
equipment or facilities for the school.

Despite the success of its export strategy, the company has had mixed financial results over the past few years. This
has been largely due to set up costs associated with its export business and distribution arrangements in the UK. It is
rumoured that the company is in financial difficulty. Rumours abound that bankers have been requesting monthly
audits of the cash position so that the company can maintain its line of credit. In addition, it is believed that its major
UK supermarket customer, Besco, is demanding price reductions therefore squeezing margins for the company. Poor
hedging of foreign exchange transactions with the company’s UK debtors has also contributed to its declining financial
position.

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D. Australian Beverages Limited

1. History
Australian Beverages Limited (ABL), formerly known as Australian Soft Drinks Limited, commenced operations in 1937.
The antecedent company was established by a group of enterprising pharmacists who had previously made
carbonated soft drinks in their pharmacies which were then offered for sale in sealed bottles. The first manufacturing
plant opened in Sydney in 1938. Business began slowly, but the arrival of American soldiers in Australia in 1942 had a
significant impact on both sales and market acceptance of carbonated soft drinks. Australian Soft Drinks initiated its
move into non-carbonated soft drink beverages in 1984 when it began manufacturing fruit drinks. This followed the
acquisition of a fruit juice manufacturer in Victoria. The fruit drinks’ business expanded nationally over the next 10
years. In 1990, Australia Soft Drinks entered the milk drink market with the purchase of manufacturing facilities from a
dairy co-operative. The company officially changed its name to Australian Beverages Limited upon listing on the
Australian Stock Exchange (ASX) in 1996, to reflect the broader beverage base of the business.

In the years since its ASX listing, ABL has adopted a multi-beverage strategy wherein its product range has been
expanded to cover all categories of the non-alcoholic beverage market. However, bottled water remains outside this
product range. The company has also moved into the manufacture and distribution of snack food products through its
acquisition of several small businesses in 2004. It thins to strengthen distribution relationships with convenience
stores and hospitality channels. These developments have resulted in ABL’s revenue composition to change from 90
per cent CSD-based in 2000 to 68 per cent CSD-based in 2009. The aim is to further reduce dependence on CSDs
by20l5. ABL intends to increase its market share of non-CSD beverage products so that CSDs will represent less than
50 per cent of company revenue as part of its multi-beverage strategy.

2. Business Strategy
ABL‘s vision is ‘To satisfy’ Australia’s thirst by being a manufacturer of non-alcoholic beverages for every occasion in
every location’. The company aims to achieve this vision by pursuing the following strategic goals for the 2007 to 2012
period:

 offer a wide range of products in the non-alcoholic beverage and complementary markets;
 grow the company’s share of the non-alcoholic beverage market to move from the second largest to the largest
competitor in this market. This goal will be achieved by:
 offering a wider range of products;
 increasing per capita consumption of non-alcoholic beverages through product and packaging innovation;
 expansion into new non-CSD beverage categories;
 extend key customer relationship capabilities and grow product availability. This goal will be achieved through
effective placement of refrigerated drink equipment and outlet expansion. This strategy would help the company
to establish a major presence in all major non-alcoholic beverage distribution channels;
 maintain world best practices throughout the company’s operations to deliver cost discipline, low cost leadership
and timely responsiveness to changing market demand; and
 ensure that the company’s operations are environmentally and economically sustainable.

At a recent strategy presentation to market analysts, managing director, Tom Dwyer, outlined the company’s
intention to be a major competitor in all categories of the non-alcoholic beverage market. He stated that ABL hopes to
achieve this aim by being the supplier of choice for the distribution channels of supermarkets, convenience stores and
hospitality outlets.

It is hoped that ABL’s position in the snack food market, which it recently entered via acquisition, would be made
stronger by another potential acquisition in line with the general consolidation already taking place in the food and
beverage supply industry in Australia. Such an acquisition would add further breadth to the company’s total product
offering to its customers in all major distribution channels. Of all the competitors, ABL would provide the greatest
share of beverage and snack foods.

16
By offering a broader product range, ABL expects to leverage its market power in soft drinks to sales of related
products. It also aims to control product supply, apply discounts, introduce loyalty rebates or promotions, and secure
conditions of use on supplied refrigeration equipment. As more Australians now drink different beverages at different
times of the day, Dwyer highlighted his belief that a modem beverage company needs to be highly flexible in
manufacturing, distribution and marketing as well as be able to operate in all product areas.

3. Business Operations
ABL is currently the second largest competitor in the broader non-alcoholic beverage industry in Australia, not far
behind the industry leader, Butlers Corporation. ABL’s large size has enabled the company to take advantage of
economies of scale, making it worthwhile to invest in state-of-the-art systems and technology. This helps the company
to track and monitor product demand through the various sales channels, enabling manufacturing operations to
respond accordingly. Flexible response is also backed up by sophisticated distribution systems.

ABL has about 40 per cent of the packaged soft drink market in Australia. This scale enables the company to justify the
significant investment needed to create one of the most highly automated warehousing and distribution systems in
Australia. Industry analysts expect that the cost reductions and increased speed to market generated by these systems
will give the company an even greater advantage over its competitors and provide a solid base for its continuing
expansion. Being a major supplier to the non-alcoholic beverage market has afforded ABL significant power over its
customers. It has enabled the company to retain cost reductions achieved through efficiency gains rather than pass
them onto the retailers. These efficiency gains have enabled the company to enjoy higher profitability levels than the
industry overall, and supported continuous investment to improve technology and infrastructure.

3.1 Infrastructure
In 2008, ABL undertook a significant infrastructure investment. A major manufacturing plant that can process over one
billion drinks per year was built in New South Wales. The company also introduced a state-of-the-art automated
warehouse system in its Victorian distribution centre that significantly reduced employee levels by 75 per cent from
200 down to 50. A similar reduction in labour is expected when the system is implemented in New South Wales.
Modem warehouses are also operated in Perth and Brisbane. In the past, ABL had offered contract bottling services to
smaller competitors. However, its own growth has meant that it can no longer offer this service as it needs the
bottling capacity for its own manufacturing operations.

3.2 Technology and systems

A core element of ABL’s multi-beverage strategy is its ability to deliver products quickly to retailers. This requires
efficient distribution systems, particularly among very small retailers, such as convenience stores (which form about
half the market). A significant investment in IT means that the company now offers vendor managed inventory (VMI)
to its major customers in the distribution channels of supermarkets, convenience stores and hospitality outlets.
Through this system, vendors can manage their own inventory in accordance with an agreed set of inventory
parameters established at the start of each year. ABL undertakes all inventory replenishment and management
functions for a nominated period which includes providing assistance with merchandise presentation. Customer
service representatives periodically ensure that services are being delivered as required. As business conditions
change, these representatives also have the authority, within defined parameters, to amend agreed arrangements.

The VMI system is only possible where there is networked access to real time scanning data, made available as
products are checked out at the store. This means that the company receives immediate information and is able to
reshuffle its manufacturing requirements so as to respond to changes iii demand for any stocked item.

Knowledge of stock movements and sales is also linked to an extensive database of customer information.
Competitions are regularly run to collect customer information that can be used not only to understand who is buying
certain products, but also to contact customers electronically and via SMS for special offers. Such an activity can assist
in clearing slow moving products, as well as targeting marketing information to specific customer groups.

17
3.3 Marketing and production innovation
ABL’s multi-beverage strategy also involves tailoring marketing campaigns to customer groups and to beverages for
different times of the day. The company’s range of products is able to match the various consumer beverage needs at
different times of the day. For example, fruit juice for the morning, coffee for the afternoon and sparkling water for
the evening. ABL recently acquired several coffee bean businesses to capitalise on the growth of the coffee market in
Australia. Iii response to key consumption patterns that the company continuously monitors, it is exploring a new
product idea — ready-to-drink chilled coffee- to be offered through convenience stores. ABL is expecting strong
growth for this product, given this market has not achieved the level of growth in Australia as that achieved in the
United States.

A strong product development team tests new products in small markets to assess their viability. Using focus groups
and market research, the team monitor changes in consumer tastes and behaviours. An alliance with a United States-
based food and beverage conglomerate is in place to monitor trends in the United States, since Australian consumer
behaviour usually follows trends in that country. Investment in market research has kept ABL’s product development
at the forefront of global trends. This has resulted in the company winning numerous industry innovation and
marketing awards over a long period of time. ABL expects to extend its beverage product development capability into
the food industry, as it grows its range of snack foods thereby extending the breadth of products offered to major
customers.

A key focus of the product development team is further development of ‘diet’ beverages. This would help to maintain
market share for CSDs while stemming any negative perception associated with being a major CSD supplier and the
link of CSDs to growing obesity levels. ABL was the first Australian beverage manufacturer to introduce sugar-free
drinks using Stevia, a natural sugar replacement. Stevia is extracted from a native plant of Paraguay in South America.
It is a natural product compared with the chemically synthesised artificial sweeteners, such as aspartame, that are
used in most diet drinks. ABL had to wait two years to get Australian Food Standard approval to use Stevia, despite the
fact that the product had already been approved by the Therapeutic Goods Administration.

Product development also extends to packaging innovation. However, while some innovations are developed in-
house, ABL prefers to work together with key suppliers and service providers to develop packaging ideas. This is
because packaging innovation requires a high degree of engineering design capability, something which is not a core
strength of the company. As part of the collaborative process, ABL provides the market, customer and trend
information to packaging specialists to develop into new concepts. A recent packaging innovation success entailed
working with suppliers to reduce the weight and amount of PET used in bottle plastic by 20 per cent and thereby
reduce the cost of packaging.

4. Management
Current managing director, Tom Dwyer, has a strong background in the beverages market. He spent 20 years working
in senior roles with the international food and beverage giant, Butlers Corporation. These roles covered sales,
marketing and operations. He was also the head of the Australian business operations for several years. Constant cost
cutting at Butlers and a lack of autonomy due to increasing head office involvement in the Australian operations
motivated his move to ABL. Upon joining the company, Dwyer established an internal strategic planning team to
assess the current product portfolio and identify organic and acquisition growth options within this product range.

4.1 Operations and performance

Operational improvements were achieved through strong investment in world class manufacturing facilities and
systems as well as process re-engineering to reduce ‘time-to-market’. Just as importantly, Dwyer led the charge in
collecting customer information and investing in the systems that would enable data to be used in product and market
development decisions. Building this approach over 10 years has meant that the company now has a strong
innovation culture and there is a continuous focus on new product development. Ideas can come from all employees
and if the data supports the concept, investment is made in testing the concept. If an idea actually gets to market, the
employee who presented the idea receives an immediate bonus. However, all employees participate in a company
share scheme, making success a shared goal.

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ABL also has a strong performance focus. Return on investment and market share are performance measures used in
all business units. Recognising that some beverage categories have better profitability than others, different
benchmark levels are applied to different categories. Benchmarks for the different categories are set based on
understanding the performance of leading US and European beverage manufacturers. The company employs rigorous
financial and compliance reporting systems and is proud of its ability to complete end-of-month reports in half a day.
Compliance with relevant legislation is paramount as is a focus on sustainability in four key areas: the environment,
employees, workplace and community. The company is proud of the fact that it was the first Australian beverage
manufacturer to implement triple bottom line reporting. ABL is very conscious of the impact that its packaging has on
landfill. It has several projects underway to find out ways to reduce its environmental impact.

ABL operates a decentralised organisational structure. Each major beverage category and the new snack food business
operate as separate business units. The leaders of each business unit leader hold strategic and decision-making
authority over the products and manufacturing operations within their portfolio. To maximise efficiencies, the various
business units are supported by a centralised shared-services function for product distribution, receivables, payables,
payroll, reporting and capital expenditure management.

4.2 Skills and experience

It is critical that the business unit leaders have the commercial acumen and technical skills to operate these business
units on a stand-alone basis. Limited support is provided by Head Office in terms of product strategy and
manufacturing operations. In the recent acquisition of the snack food business by AEL, access to the required technical
skills became an issue when the incumbent managing director and manufacturing manager resigned within 12 months
of the acquisition. These resignations created a significant skills’ gap in the business. ABL had to quickly recruit
replacements for these key roles, offering to pay higher than market salaries to lure staff away from competitor
companies. Ensuring availability and retention of the right skills for the business would be an important consideration
in future acquisitions.

Senior executives of ABL are active participants in industry bodies. The company is a member of the Beverage Council
of Australia which has been proactive in approaching the government, particularly in relation to health and obesity
issues. Such involvement provides the company with a better understanding of public policy and its implications for
the business as well as the ability to shape the policy debate to maximise business outcomes. Currently, the senior
executive group of ABL is working on assessing options and developing a ‘healthier’ policy for CSD placement and
promotion to children and young adults.

Employing and training the right people in customer service roles continues to be a challenge for the company’s
management. ABL has grown rapidly and has had to integrate employees from acquired organisations. This has
required a significant investment in training and development. All new employees must complete a week-long
induction program which provides an overview of the range of activities conducted by the company. New sales and
customer service representatives must also undertake a week of training each year to update their skills in using
company technology and systems. This ensures that the data they enter into the system is correct and meaningful for
further analysis and reporting. A graduate employment program is also in place. The graduates are rotated through
different business units. Each graduate spends six months working in a business unit over a two year period. Following
this training, an assessment is made of their capability and an appropriate career plan developed.

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5. Latest developments — Apr 2010

5.1 ABL’s board confirms plans to enter Australian bottled water manufacturing industry
In assessing ABL’s options for future growth, the board confirmed that bottled water is a critical category to have in its
beverage range to meet its strategic goal of having a beverage for every occasion. The board requested ABL’s strategy
team to evaluate the attractiveness of entering the Australian bottled water manufacturing industry.

The board has requested the preparation of a business case outlining whether the company should enter the industry
by establishing its own operations or targeting an existing competitor for acquisition in order to gain immediate
market share. If the recommendation is to make an acquisition, the strategy team should assess potential acquisition
targets from existing competitors within the industry and summarise the potential implementation issues related to
an acquisition. In particular, the board has requested that the target company for acquisition should fit the following
criteria:

 Strong brand recognition that ABL can leverage by adding to its existing product range.
 Broad coverage of various distribution channels which would complement ABL’s existing channels.
 Low cost, high quality manufacturing capability with capacity for further growth.
 Access to an unlimited supply of high quality water to support growth.

The strategy team has identified two companies for review against these criteria. These are Hydrate Water and
Fountain Springs. The board has requested that Dwyer and the senior management team provide a recommendation
at the next Board meeting as to which company to target for acquisition.

Sensitive to the problems experienced with the company’s acquisition of its snack food business, the board has
requested the identification of possible implementation risks in relation to the potential acquisition of these identified
companies. Further, a detailed implementation plan needs to be drawn up at the outset with recommendations to
resolve the potential issues identified. It is commonly known that ABL had not previously been a part of the Australia
bottled water manufacturing industry as it was deemed too small. Going ahead with entry into this industry via an
acquisition would therefore require an explanation to existing company employees as to the reasons for the change in
strategy. One such reason is to defray the company’s reliance on CSDs. It would also be important to show the positive
benefits to the company’s reputation by reducing the reliance on CSDs and fruit juices give the link between these
beverages and diabetes and obesity. Over recent years, ABL had been widely criticised by leading dieticians and health
professionals for its role in confributing to these health issues, particularly in children. The company’s recent
employee survey indicated dissatisfaction with the way reasons for the acquisition of the snack food business were
communicated to employees. The board did not want a repeat of this poor employee communication.

Dwyer also recognised that a plan for generating some quick wins by the potential new bottled water business would
lessen concern over the acquisition and assist employees to appreciate the value being added to ABL’s total
operations. Short and long-term incentives would need to be developed for shared-services staff to ensure a seamless
integration of the acquired bottled water business to realise back-office synergies. This was an area that had been
handled particularly badly by the company in the past. Dwyer knew that he needed his employees to be in favour of
the potential acquisition if it was going to be successfully integrated into the rest of the company’s activities.

5.2 New business opportunities

In preparation for a successful acquisition, ABL’s new product development team has developed the concept of
‘Eternal Water’ — where consumers purchase a refill for their water bottle by swiping their credit or debit card
through a filling machine to obtain the refill of water. The company plans to install bulk chilled water containers in
public places, such as parks, train stations and schools, so that consumers refill their bottles rather than throwing
them away. This would also help to reduce the landfill problems caused by plastic bottles. When the consumer
eventually want to dispose of the bottle after a recommended number of refills, either a bottle return deposit will be
given or a refund will be provided on the next purchase through multiple distribution channels. Used bottles will be
recycled. For schools, it is planned to link the smart card technology to student’s access to photocopying and other
incidental purchases at the school.

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ABL has also recently acquired Abbots Refrigeration, This company specialises in the rental and servicing of
commercial refrigeration equipment supplying to major food and beverage manufacturers for placement in hotels,
bottle shops, petrol stations and cafes. A natural addition to ABL’s cold drink and vending machine business unit,
acquiring Abbots Refrigeration enables the company to gain additional access to modem systems and expertise in the
supply and servicing of cold drink equipment. Customer service is improved through better maintenance and
refurbishment of cold drink equipment which is necessary to support ABL’s goal of targeting expansion into other non-
traditional outlets. In return for agreeing to stock 85 per cent of the refrigeration units’ space with ABL’ s total
beverage product range, ABL provides outlets with the refrigeration unit at no rental fee. To date, some 5000 of these
units have been placed in supermarkets, convenience stores (including petrol stations) and hospitality outlets (for
example, major sporting grounds).

Acquiring Abbots Refrigeration also supports the company’s targeted expansion into pharmacies which has been
identified as a growth opportunity within the convenience store channel. AI3L is currently undergoing negotiations
with several pharmacy groups to place cold storage cabinets (small to medium-sized refrigerated units) into their
chain of stores stocked with a range of ‘health’ drinks, including bottled water. With over 5000 pharmacies in
Australia, this strategy is expected to increase sales. The convenient placement of the cold storage cabinets, close to
where customers often wait while their doctor’s prescription is being filled, enables them to purchase a drink with
relative ease. If successful, a similar deal could be negotiated with Australia Post for inclusion in Post Office outlets
nationally.

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