Broo is the latest Aussie manufacturer to face distribution challenges in China. (Pic: A fishbowl beer-drinking contest in Hangzhou, Zhejiang Province. (Getty))
Food & Agriculture
Beer company Broo Ltd (ASX:BEE) has severed ties with its China distribution partner, Beijing Jihua Information Consultant Ltd.
The company referred this morning to a three-year distribution agreement it signed with Beijing Jihua back in November 2017.
The initial agreement gave Beijing Jihua the rights to exclusively market and sell Broo beer products into China for a term of seven years.
At the time (November 27, 2017), Broo also advised the market that Bejing Jihua had incurred “significant upfront marketing and advertising funds” to boost sales in the first three years of distribution.
As a result, the company agreed revenue payments for that term could be “accrued and paid upon completion of the 3rd year, with payments continuing on a 6–monthly basis thereafter”.
By December last year, that three-year term was up, and Broo hadn’t been paid.
On December 18, Broo sent a letter to its China-based distributors asking them to pay up within 14 days.
Beijing Jihua failed to meet the deadline. Broo said today that in accordance with the initial contract, it has the right to terminate the agreement if the royalty payment is not made in the specified timeframe.
Shares in the $16m minnow fell more than 10 per cent at the opening bell, before the stock clawed back some ground into midday trade.
BEE shares were trading at around 30c at the time of the November 2017 announcement, but a steady decline over the last three years has seen them fall to below 2c.
The original deal was made on a binding ‘take or pay’ basis, meaning Beijing Jihua were expected to make periodic payments regardless of whether or not they acquired the beer.
Broo said that over the course of the full seven-year term, its aggregate distribution revenue was expected to reach $120m.
The company said today that its termination of the deal has been implemented with “immediate effect”.
In addition, Broo said it will be “reviewing its legal position against Beijing Jihua arising from the termination of the Distribution Agreement”.
Broo makes a premium lager and a draft beer, both of which are manufactured at beer giant CUB’s Yatala brewery in Queensland.
The company dispute with its Chinese distribution partner comes amid escalating trade tensions between China and Australia, with Chinese buyers cancelling deals for a number of Australian export commodities as relations between the two countries reach a low ebb.
