By Tim O’Shannassy and Justin Pierce

Acknowledgement

Introduction

Endeavour Group Limited (Endeavour Group) was founded in 2019 as a proposed demerger from the Woolworths Group Limited (Woolworths Group) (2021). Endeavour Group was Australian Stock Exchange (ASX) listed in 2021 and soon soared to become part of the ASX top 50 companies (Greenblat, 2021), valued at $10.8 billion (Wilmot, 2021).

The demerger of Endeavour Group from Woolworths Group was a complex transaction and one of the largest demergers in Australian corporate history (Endeavour Group, 2021). In putting the proposal to shareholders, Woolworths Group Chairman, Gordon Cairns, reported a phased approach to the demerger, beginning with a restructure of the Woolworths drinks business in 2019.  Following a merger with the ALH Group in the same year (p. 4), Cairns suggested the demerger would increase shareholder value “…through a greater focus on each business’ core customer offering and growth opportunities.” (Woolworths Group, 2021, p. 3)  At the time of writing, his predictions appeared to ring true as the Endeavour Group raised to a 52-week high of AUD $7.92, following its listing price of AUD $6.02 (a 31.56% increase).  Woolworths, and its main joint venture partner, Bruce Mathieson Group (BMG), each retained 14.6%, while existing Woolworths Group shareholders were granted an equal amount of scrip for their existing shares (Woolworths Group, 2021).

The demerger allowed Woolworths Group to focus on its core business assets in food—both consumer and business customers—in stores and online, as well as wholesale operations, everyday needs, peripheral services (e.g., insurance and mobile), as well as fulfilment operations (Woolworths Group, 2021).  In turn, the Endeavour Group has a more focused portfolio of businesses in the beverage industries.  Endeavour Group balances traditional brick and mortar retail with online retail, and pubs and gambling.  The two main assets include Dan Murphy’s, and BWS, which are supported by Pinnacle Drinks that boasts more than 700 alcoholic beverage brands, and more than 300 global partnerships, all distributed via Dan Murphy’s, BWS, Shorty’s Liquor, and Jimmy Brings (Pinnacle Drinks, 2021).  In addition, the portfolio is supported by endeavourX, the digital platforms, loyalty programs, and fulfilment platforms, providing a solid digital capability to the Endeavour Group (Woolworths Group, 2021).

A Moment in Corporate History of Great Uncertainty

War in Ukraine has unsettled Europe politically again, impacting the price of oil, gas, wheat, nickel, iron ore and other commodities (Wright, 2022).  These political and economic events in Europe are contributing to global post pandemic inflationary pressure with implications for interest rates, economic growth and unemployment if left unchecked (Wright, 2022).

Against this background the Albanese Government has been elected in May 2022 after Liberal Governments under Tony Abbot, Malcolm Turnbull, and Scott Morrison from September 2013 to May 2022.  There is much on the national political agenda with implications for business.  These are significant Australian political moments in shaping economy and society for the future as the nation emerges from the Covid-19 pandemic.

The importance of climate change to the Australian electorate was evident with the election of Green members to four seats in the House of Representatives, and Teal independents in long-held Liberal seats Kooyong, Higgins, Goldstein, Wentworth and more.

Energy market reforms since 2009 have largely been a national failure in the eyes of some commentators, with concern rising in the community at the lack of progress on renewables as well as the lack of reliability of renewables (Dunsevic, 2022).  There remains ongoing concerns with steep recent rises in electricity and gas prices for industry and households, with concerns on interruption to supply.

The Australian corporate scene influenced by the union-controlled superannuation funds is increasingly taking an interest in corporate social responsibility and social impact, and this has unsettled the traditionally pro-business Liberal Party of Australia.  Sustainability, corporate social responsibility, reliable and cost effective energy supply, and technology are important to Australian business.

Post-election 2022 there is much conjecture in the media on the impact of inflationary pressures and interest rates on the Australian property market and economy.

In the OECD inflation was 9.2 per cent for the year to April, with energy prices up 32.5 per cent and food prices up 11.5 per cent—war in Ukraine was an influence here.  Australian inflation is expected to be 5.9 per cent in December—something not seen in Australia for some years, well above the target band of 2 to 3 per cent (Dunsevic, 2022).  Australian real wages are in decline, while on the counter side unemployment is under 4%—the lowest level seen in 50 years (Dunsevic, 2022).  Poor weather, bush fires, war in Ukraine and supply chain constraints have all contributed to fresh food, construction costs and petrol prices increasing in Australia (Greenblat, 2022).

On 3 May 2022 the Reserve Bank of Australia increased the cash rate 25 basis points to 0.35 per cent with the Reserve Bank Governor Philip Lowe stating, subsequent to the May board meeting, further increases to the cash rate are imminent.  Bank wholesale funding costs are moving higher, resulting in higher fixed mortgage rates and variable mortgage rates for households (Gluyas, 2022).  This will impact consumer confidence and future consumer spending with more of the household budget going to mortgage payments and fewer household dollars available for liquor and gaming.

There remains conjecture on the economic growth forecasts for Australia first quarter 2022 yielding gross domestic product growth of 0.8 per cent; the annual growth rate for the year is expected in the range 3.8 per cent with the sum of commentator and policy maker views being the Australian economy remains strong (Dunsevic, 2022).

Australian business is increasingly aware of the need to work for shareholders and be seen to be having a positive social impact.  The importance of the responsible service of alcohol and responsible gambling is important to the operation of retail liquor stores and hotels (Endeavour Group, 2021).  The Australian corporate scene is also increasingly aware of the importance of indigenous employment opportunity.

The application of digital technology to business strategy is increasingly prominent, with online retailing an increasingly contested space that continues to evolve (Boreham, 2022).  Digital connection, loyalty programs and online platforms are central to customer connection and brand development (Endeavour Group, 2021). There is increasing use of data analytics and artificial intelligence to inform digital strategy (Temple & Webster, 2021).

There are a range of Acts that apply to stock exchange listed corporations and liquor and gaming licence holders in Australia, with significant consequences for serious breaches.  The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) oversee the ASX, the financial services scene, and merger and acquisition (M & A) activity.  The Australian Foreign Investment Review Board oversees foreign investment in ASX listed companies.  The Australian Competition and Consumer Commission (ACCC) oversees trade practices.  The Australian company tax rate is comparatively high at 30 per cent with the United States currently at 21 per cent.  The Competition and Consumer Act 2010 gives protection to consumers articulating fair trading and competition law. The Corporation’s Act 2001 communicates corporation’s law and director’s duties.

The Industry Environment

Pubs, Bars and Nightclubs

The pubs, bars and night clubs sector sells alcoholic beverages to consume either on (e.g., public bar) or off premises (e.g., bottle shop drive through).  These venues may also provide gaming facilities, betting facilities, live entertainment and/or food service (Wheeler, 2022).  Endeavour Group comprises 9.6 per cent of this industry.  Major sources of revenue in this industry sector are 40.3 per cent liquor for consumption on premises, 18.9 per cent purchase of liquor for consumption off-premises, 21.6 per cent wagering and gaming, 14.7 per cent non-alcoholic beverages and meals, and 4.5 per cent other.  There is an expected growth in domestic tourism in the short to medium term which will assist this industry sector, helping to improve enterprise and employee numbers.  Venues with gaming facilities are facing competition from online betting agencies.  There is also a five-year trend to reduce alcohol consumption impacting industry profitability adversely, and this is likely to continue (Wheeler, 2022).

Liquor Retail

The liquor retail industry sells beer, wine, spirits, and ready-to-drink (RTD) mixers in packaged bottles and cans for consumption away from liquor store premises (Endeavour Group, 2021); sales activity takes place through brick-and-mortar retail outlets and online (Reeves, 2021).

In the liquor retail industry choices available to buyers are a selection of high turnover, low margin packaged products with the option of some high margin premium products (e.g., Penfolds Grange, Henschke Hill of Grace; Australian craft beer).  Responsible service of alcohol is a priority for operators in this industry (Endeavour Group, 2021).  Demand for pubs and bars has declined over the past five years, and especially in 2020 and 2021 due to CoViD19 (Reeves, 2021), but is expected to improve in 2021-2022 by just over 10 per cent (Wheeler, 2022).  Buyers face few barriers to switching between liquor outlets, but are buoyed in Australia by its ‘drinking culture’ (Munro, Munro & de Wever, 2009).

First tier suppliers are liquor wholesalers, and second tier suppliers are wineries, spirit manufacturers and breweries.  Australia has seen a rise of craft breweries (Terrill & Leith, 2022) and boutique distilleries (Boyd, 2019; Herbison, 2014) and demand for their wares tends to keep upstream buyers in check.  The scale of operation of Endeavour Group and Coles Group Limited (Coles Group) relative to rivals gives them significant market power (Reeves, 2021).  Most workers in big box formats such as Dan Murphy’s are part-time which helps to keep labour costs low (Reeves, 2021).

There are many non-alcoholic beverages that are substitutes for non-alcoholic beverages (e.g., zero alcohol wine including Edenvale Shiraz alcohol removed, zero alcohol beer including Great Northern Brewing Company), with many innovative producers, but Endeavour Group and others sell these products as well (Dan Murphy’s, 2022).  Consumers can also choose soft drink options, juices, dairy, and sports drink alternatives.  As a consequence, threat of substitutes is low.

There are moderate barriers to entry in this industry setting influenced by the market strength of Endeavour Group and Coles Group, ensuring it is difficult for new entrants to get significant traction and scale for a viable business model (Reeves, 2021).  These include brand recognition, distribution network, and workforce.  The duopoly in the industry compete ferociously, signalling to potential entrants.  State government regulation also provides constraint on new industry entrants—for example in South Australia the state government prohibited the sale of alcohol in supermarkets, limiting Aldi’s expansion of this product line (Reeves, 2021).

Market size in this industry is AUD $16 billion employing 29,417 (Ibis, 2022). Major players include Endeavour Group, Coles Group, Metcash Limited and Aldi Pty Ltd (Aldi) who account for more than 75 per cent of market share in the period 2021-2022 (Reeves, 2021).  Coles Group operate 900 stores under the brands Liquorland, First Choice Liquor, First Choice Liquor Market, and Vintage Cellars (Coles Group, 2022).  Foreign rivals such as Aldi have limited market share (Reeves, 2021).

Critical success factors in this industry are location, product range, price, technology at point of sale, stock control, loyalty programs, alliance partnerships, and customer service.

Looking more broadly online retail itself is an interesting, contested strategy space where learning for main players continues after the experience of the lockdowns during the CoViD19 pandemic, and the related increase in e-commerce sales activity.  A number of online retailers including Kogan, Redbubble, Temple & Webster, Booktopia, and BikeExchange are reporting a pullback or correction in online sales activity with a return of a portion of brickand-mortar sales activity (Boreham, 2022).  Temple & Webster is the largest Australian ASX listed achieving valuation above AUD $600 million and is now setting out to take on Bunnings in the online AUD $16 billion home improvement market (Boreham, 2022).  There are pure online liquor retailers including Naked Wines Australia and BoozeBud, who have gained some traction in the marketplace during the pandemic (Reeves, 2021).

Endeavour Group Strategic Situation

Endeavour Group’s strategy centres on three pillars: “Knowing our customer; Innovating to meet customer needs; and Being one team, living our purpose and values” (Endeavour Group, 2021, p. 18).  The “Innovating to meet customer needs” pillar is particularly interesting, as it allows Endeavour Group to seize on the following growth opportunities:

• growing digital engagement
• enhancing existing venue and store footprint
• expansion to better serve communities • expanding range and reach, and,
• enhancing asset efficiency.

The Endeavour Group celebrates its purpose, ‘creating a more sociable future together’ (Endeavour Group, 2021, p. 1).  Its establishment coincided with, and allowed it to seize on six key consumer trends (Woolworths Group, 2021, p. 31):

1. rapid growth in digital channels for sales and engagement
2. discovery, leading to customer’s increased demand for premium products
3. rising expectations on ease of doing business
4. changing role of physical stores to engage customers, rather than for transactions
5. increasing demand for total wellbeing, and,
6. increasing awareness of sustainability outcomes with respect to climate action.

Some of these were driven by customer behavioural change, following government-enforced lockdowns (Saul, Scott, Crabb, Majumdar, Coghlan & Hellard, 2020), whereas the rising customer expectations trend is because of rising service levels generally (Lesonsky, 2019).  Despite these trends, Endeavour Group enjoys 40% market share of the Australian liquor market and 9% of the Australian hotels market (Woolworths Group, 2021), through its 1962 outlets across Australia and New Zealand.  Endeavour Group puts its best foot forward in its digital strategy, supported by its endeavourX division.  In March 2022, it was reported to invest AUD $35 million in new digital capability, much of it in recruitment of digital, data, user experience, and business analyst positions (Weber, 2022).  Indeed, it boasts an ‘integrated’ digital offering to support its flagship brands, Dan Murphy’s and BWS.

Endeavour Group is proud of its entrepreneurial heritage, a culture of innovation, and positive workplace environment (Endeavour Group, 2022). Endeavour Group is conscious of its role across the community and as a business network partner and seeks to act responsibly, contribute to sustainable outcomes, and make a positive contribution to its industry (Endeavour Group, 2021).

Some of the digital initiatives the Endeavour Group boasts include the ‘personalisation engine’ by which it provides superior customer services via digital channels (Weber, 2022).  Hogan (2020) described the number plate recognition system, that allows Endeavour Group to streamline click-and-collect operations—particularly important for facilitating efficiency during the government-enforced lockdown period where social distancing kept customers out of stores (Davis, 2021).  A further example of Endeavour Group’s digital prowess includes the roll out of electronic shelf labels and near field communication (NFC) technology, which allows customers to access product information (e.g., information on the winery, vintage, or grape variety), and facilitates greater analytics for product placement (Weber, 2022).  Endeavour Group average 11 million monthly web site and app visits, with 86 per cent monthly growth in active users of Dan Murphy’s and BWS apps (Endeavour Group, 2021).  Finally, to support the transition, Endeavour Group shares IT infrastructure assets with its former parent (Endeavour Group, 2021, p. 15).

As part of the portfolio, Dan Murphy’s stores are typically 1,000m2 with around 4,500 products and offers customers 30-minute click-and-collect services.  It’s smaller sibling, BWS stores, are typically 175m2 with 1,500 products and include formats including drive-through and integration to Woolworths stores.  The hotel business operates approximately 330 hotels around Australia in several formats including bars, accommodation, cafés, wagering, and public bars (‘pubs’).  A vast network of suppliers is brought together by Endeavour Group’s relationship with Primary Connect, Woolworths’ supply chain provider (Woolworths Group, 2021, pp. 32-36).

Endeavour Group summary financial data from their annual report is below in Table 1:

Table 1: Endeavour Group Summary Financial Data (Endeavour Group Limited, 2021)

Endeavour Group has 28,000 team members including 16,100 in retail, 11,300 in hotels and 800 in support office roles (Endeavour Group, 2021).  Its size allowed it to redeploy hotel staff members that would otherwise have been furloughed to its retail operations, as well as furnish click-and-collect demand (Woolworths Group, 2021).  Team members must be trained in responsible service of alcohol, and responsible gambling, and be specifically trained to refuse sale of alcohol to minors (Endeavour Group, 2021).  This can be particularly difficult in the online channel, but Endeavour Group has been recognised as a leader in this emerging challenging area (Endeavour Group, 2021).

Endeavour Group’s understanding of consumer behaviour is built on its loyalty program, which boasts 5.1 million My Dan’s members, and is linked in with Woolworths’ 12.8 million Everyday Rewards program.  Through its endeavourX personalisation capability, it uses customer insights to improve and expand web-based and digital sales channels (Endeavour Group, 2021).

Strategy Challenges for Endeavour Group Looking to the Future

Endeavour Group has a strong property portfolio, is an interesting pubs play, a strong liquor retail business and an interesting digital strategy play. Endeavour Group has capable and experienced leaders at board level and the upper echelons of management.  Is the strategy correct? What does financial ratio analysis reveal about the financial risk profile and financial efficiency of Endeavour Group?  Is the physical footprint of liquor retailers and pubs optimal?  How should this footprint evolve in future?  How can the influence of endeavourX, and digital and loyalty platforms be maximised?  How can Endeavour Group engage positively with communities across Australia with favourable social impact, including indigenous opportunity?

References

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