Supermarket retailer Woolworths Limited (ASX: WOW) has taken a baby step into China, with the acquisition of Summergate Fine Wines & Spirits and Pudao Wines.
It's one of the first steps offshore by an Australian supermarket retailer – not including New Zealand. Summergate is the largest alcoholic drinks distributor in China, and according to the chief of Woolworths Liquor Group (WLG), Brad Banducci, generates annual sales of around US$40 million.
Mr Banducci has told the Australian Financial Review (AFR) it is a low risk way for the retailer to begin building a business in China, "It is strategically important. It is an opportunity for us to build a long-term business in a market which has huge opportunity and is close to us."
Australia's recent signing of a Free Trade Agreement (FTA) with China could also enhance the deal. As part of the FTA, tariffs of 14% to 20% on wine will be removed over four years.
Summergate has 13 offices and 11 distribution centres, and the two founders, Ian Ford and Brendan O'Toole will remain with the business for at least three years. The company distributes around 80 global brands into China, including wines from 12 different countries as well as Perrier sparkling water, Vittel still water and numerous spirit brands.
Combine that with Woolworths existing contacts, distribution agreements and expertise in distribution – including 1,300 Dan Murphy's and BWS stores across Australia and New Zealand – and the deal looks like a sensible strategy.
Apart from Pudao Wines' two retail stores in Beijing and Shanghai, Woolworths is not likely to be outlaying massive amounts of capital on property, although the retailer has declined to say how much it the acquisition has cost.
Unlike Woolworths' 2013 bid for Hong Kong's supermarket retailer ParknShop, which was estimated to be priced between $3 and $4 billion, the acquisition of Summergate is likely to be in the millions.
Woolworths eventually pulled out of the ParknShop bid, rumoured to be on pricing grounds.
In summary, for a smallish outlay, the retailer has established a toehold in China, which it can either expand upon, introducing new products, more points of presence or go the whole hog and roll out retail alcoholic beverage stores. Should it not work out, Woolworths could sell out and try something else, without blowing up tons of shareholder's funds.
