Treasury Wine Estates let Dearie go this week

Treasury Wine Estates let Dearie go this week

David Dearie, the head of Treasury Wine Estates who left the company this week, may derive some satisfaction from the thought that it was not a lack of ambition that led to his downfall. 

Instead, with TWE blaming the write-down of excess US inventory for his sudden departure, it was an, albeit over-reaching, confidence that the Australian wine maker could further its footprint in one of wine's most competitive markets that put paid to Dearie's immediate career plans.

It is unlikely that the stock over-supply that led to a AUD160m (US$145.7m) hit to full-year profits, and the destruction of $30m-worth of wine, was solely Dearie's decision but, as the man at the helm, he took the flack. His crime? A lack of “operational focus”, TWE said on his departure.

The question is, though, was there a failing of management in TWE's US strategy, or is the region a lame duck for the company, no matter who is in charge?

The US accounts for one-third of TWE's profits and, as noted in the Sydney Morning Herald this week, “crucially soaks up a massive proportion of the company's Australian and New Zealand wine produced at its local factories”.

But, there is a lack of confidence in the US consumer market at the moment and a glut of wine in the country's supply chain; a state of affairs that is hardly Dearie's fault. Further, as Eli Greenblat points out in a post-mortem of Dearie's departure, the CEO, who only joined in 2009, was not around to have been directly responsible for the unwanted wine.

“It went back to decisions made years before that, when the vines were first planted and marketing teams sat around a table to create the kind of labels that didn’t really have much traction among drinkers,” Greenblat wrote. 

The fall in TWE's share price the day after Dearie left, showed that there was little investor appetite for his ousting, which suggests a lack of confidence in those that are left at TWE.

The Australian newspaper also questioned the wisdom of the board, pointing out that wine is not a fast-moving product.

“It's slow," the paper said, "hence, Dearie's strategy of stockpiling top vintages for later sale once they had a few years and could command higher prices - a strategy that could be unwound by a successor determined to meet the 10% to 20% earnings growth target the board has affirmed for this year.”

Others pointed to the board's apparent hastiness in getting Dearie out of the door. Blair Speedy in The Australian asked what new interim CEO, Warwick Every-Burns, a former executive in charge of bleach and food wrap, had in terms of experience over Dearie, with his 25 years in the alcohol industry.

Speedy's colleague John Durie went further: “The move smacks of incompetence on the board's part, a basic failing of one of its key roles - succession planning.”

Durie said that Dearie “was a great marketer and a team builder who had set a new base for future growth. The value in the bottle was yet to be realised.”

The board's perceived incompetence was suggested by some as a reason to believe that executives are playing it by ear until TWE is broken up, perhaps starting with a sell-off of Penfolds, which Durie calls the company “jewel-in-the-crown”. The fact that TWE has yet to find a full-time replacement for Penfold's managing director had Blair Speedy's conspiracy radar beeping.

“For the company to quietly decide that such a key earnings generator can do without a permanent boss suggests either that important decisions are not being made, or that the board expects TWE to be taken over very soon,” he wrote.

In the end, though, it came back to the US.

“You can do what you want with Penfolds, but unless they can get the story straight on the commercial wines, there’s just no way to make money,” said Dan Hurren, an analyst at UBS AG. “Wine isn’t just about brands, it’s about managing costs through the entire range of products.”

There was plenty of advice available for TWE concerning its American outpost.

Credit Suisse analyst Larry Gandler said: "The underlying problem in the US is not inventory, it's the health of the brands, because of underinvestment in marketing,"

Meanwhile, Eli Greenblat wrote: “The Americas wine business should finally be sold off. It must now be viewed as a failed strategic step that blew billions of dollars of company funds and is best put in the dust bin of history.”

But, when have boards ever listened to the analysts? The company will be determined to find its own way out of the current morass, although I'm sure both commentators and board agree that that should be done as quickly as possible. For the time being, however, that task will have to be undertaken without a permanent leader in place, and without the help of David Dearie.