The Investment Column: Cider makers feel squeezed

The cider industry is in turmoil. Growing competition from the new crop of creamy, smooth beers and alcopops have caused sales to slump. A rise in duty on strong ciders has forced manufacturers to raise prices, causing customers to switch to other tipples in droves.

All three quoted cider makers, Matthew Clark, Merrydown and HP Bulmer, have seen their shares collapse since the start of the year.

Bulmer added to the gloom yesterday by announcing a 17.5 per cent fall in pre-tax profits to pounds 14.3m in the six months to October. Its shares fell another 15p to 392.5p. A pounds 2.5m increase in the advertising budget for brands such as Strongbow failed to curb the slump in the market. Bulmer predicted the market would rise by 4 per cent in the year to September. In fact it has fallen 7 per cent. Despite Bulmer's assertions that the market has bottomed, the fall in sales that Matthew Clark has experienced in the vital run-up to Christmas suggests that the industry's troubles are far from over.

Bulmer and Matthew Clark are gambling that a further rise in advertising spend will eventually pay off. In the long run, it is hard to argue with the strategy. After all, a dearth of this kind of spending contributed the industry's problems in the first place.

But the investment may not bear fruit for years and most investors won't want to hang around to find out.

One obvious answer to the cider makers' woes is to join forces. Merrydown is already in the bid spotlight and Matthew Clark and Bulmer should consider a merger, which would allow them to pool their advertising efforts. Given that a tie-up would give the two more than 90 per cent of the UK cider market, this obviously raises monopoly issues. But these are not insurmountable as they could argue cider is in effect competing with the broader beer and lager market.

Analysts have cut Bulmer's full-year profit forecasts by pounds 1m to pounds 27m, putting the shares on 12 times forward earnings. Until there are signs of a recovery in the cider market, its shares, which have fallen from 625p in March, still look high enough.