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The troubled Australian wine producer Evans & Tate has been a victim of the Australian wine glut but, writes Richard Woodard, the company has in some ways been the architect of its own misfortunes, over-extending itself financially, losing focus and getting carried away by its own PR.

Beleaguered Australian wine group Evans & Tate has scarcely been out of the headlines for the past year - and usually for all the wrong reasons.

Asset write-downs, major losses, wineries for sale and promises of wholesale restructuring, both in management and business strategy terms - it's been hard for E&T to shake off the unwanted tag of being "this year's Southcorp" almost since the ink was dry on the Foster's takeover.

Around mid-May last year, then CEO Frank Tate was talking bullishly about projected revenue growth of 15%, but within weeks major backer ANZ Bank was voicing concern about levels of debt at the Western Australian producer. More than 30% was wiped off the company's share value in 48 hours and, within days, trading in its shares was halted.

That heralded the first of many write-downs for E&T, as debts hit A$100m-plus and the management team tried to pick up the pieces. Deferral of interest payments, coupled with the borrowing of more "working capital", simply delayed the unpalatable and stored up problems for the future as big as the producer's unwanted wine inventories.

Frank Tate had departed before the end of July, to be replaced - eventually - by American Martin Johnson, previously with Peju, Mondavi and Jackson Wine Estates. But the months since have seen a plethora of depressing stories and shocking results emanating from E&T. So where did it all go wrong?

Apologists for E&T in general and Frank Tate in particular - for most, the prime architect of the company's woes - point to the state of the market. Look at Australia's wine glut, they say, and what about the pressure on margins in key markets like the UK? How could the company have done anything about such depressing market circumstances?

There's some truth in that. E&T has been caned by a ruthless market that has already punished Southcorp and will no doubt account for other high-profile Australian casualties before it's done. The consequences of chronic over-planting throughout Australia are still being felt - and, but for Yellow Tail's phenomenal success, it could have been so much worse.

But it's not just the market. To many, E&T has been guilty of forgetting where it came from, losing its focus and believing the hype, which had it as "another BRL Hardy in the making", to quote one influential trade magazine circa 2004.

This premium producer suddenly found itself a player on the big stage, with the takeover of Cranswick Premium Wines in early-2003. But 20:20 hindsight would suggest that this was where the rot set in; Barramundi, the major brand which came with Cranswick, was already in decline in its core UK market even then.

So it's ironic now to hear an E&T spokesman talk of the need "to move the company back into the premium wine segment" and of the importance of "chasing margin, rather than chasing business just for the sake of it". Better late than never, some might say.

E&T's over-reaching ambitions - amassing debts and wine inventories alike with no apparent end in sight - has brought the company to its current pass; selling off all non-essential assets to reduce levels of debt on its balance sheet, and refocusing on premium wines to drive up margins, essentially trying to keep the company alive.

The sell-offs are far from straightforward, however. Selling Mildura winery to Neqtar (owner of UK wine agency HwCg) for A$22m certainly helps, but it's akin to selling your house at the bottom of the property market in the knowledge that you might have got double that in the boom times.

At least in HwCg it has a partner that has proved it can build relationships with multiple retailers that involve some value - the company's successful Blason de Bourgogne range being just one example.

Barramundi is crucial to the Mildura part of the business in sales terms, and the brand is set for another relaunch courtesy of HwCg at this year's London International Wines & Spirits Fair (LIWSF). But if E&T's future lies in the premium wine sector - and HwCg too wants to focus on the company's "premium Margaret River wines" - some question whether it needs an ailing mass-market lifestyle brand.

Meanwhile, plans to sell and lease back Griffith winery in New South Wales have stalled, having generated little or no interest. And the situation at Oakridge in Victoria, also put up for sale recently, is complicated by the fact that E&T owns the leasehold, but not the freehold, on the property. Now it must hope that it can "do a Mildura" with another partner, hopefully within the next month.

It is, quite simply, a mess - and no wonder that the company is declining to put a timeframe on the turnaround in fortunes. CEO Martin Johnson now has a new CFO and senior team to do the necessary, but E&T is dependent on the market, as much as its own strenuous attempts to reduce debt.

One positive step - although the growers concerned will not agree - is the company's inventory reduction programme. Wherever possible, grape-growing contracts are not being renewed, in a bid to reduce levels of unallocated inventory down to somewhere close to this year's sales forecasts. But the market will again have its say on that one.

Johnson and his team are making tough but necessary decisions, including redundancies, to try to rescue E&T from being perhaps the most glaring embodiment of the Australian wine industry's over-optimism of the past years. Of course, rather like John Ballard at Southcorp, he may be rescuing a company for someone else to step in and reap the long-term rewards, snapping up E&T as soon as it looks appetising once again.

In the meantime, the company's move back to its premium Western Australia roots has suffered a setback with a cold, wet summer during 2005/6. This particular vintage could be one to forget for both for Evans & Tate's wines and for its business performance. But there's always another year…

Sectors: Wine

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