Michael Clarke has been Treasury Wine Estates CEO since early-2014

Michael Clarke has been Treasury Wine Estates' CEO since early-2014

In mid-August, Treasury Wine Estates released its full-year results for fiscal-2018. The group saw its sales in the 12 months to the end of June rise in organic terms on the year-prior by almost 2%. Here, just-drinks considers TWE's performance over the past five years.

Anyone looking for evidence of the escalating importance of Asia to Australian wine producers can find plenty in the past five-year financial performance of the Penfolds, Lindeman's and Wolf Blass owner, Treasury Wine Estates. An increased focus on better customer partnerships, more efficient routes-to-market and greater marketing investment in the region has taken in the lucrative markets of Taiwan, Singapore, Japan and Malaysia - but China has been the big prize. Asia began the five-year period under review accounting for just 8% of TWE's total sales and ended with a 22% slice. Revenue from the region has increased four-fold between fiscal-2014 and 2018 (TWE's financial year runs from July to June).

Over the same period, sales growth in its mature Australia & New Zealand (ANZ) region amounted to just 6%, with the region's sales contribution falling from a third to just under a quarter.

Asia is just one plank in what chief executive Michael Clarke declared in 2015 to be TWE's ambition to become the "world's most celebrated wine company". The group took a significant step on that journey at the start of the following year when it completed the acquisition of the bulk of Diageo's wine business, including the mass-market Blossom Hill brand and more upmarket US labels such as Sterling Vineyards and Beaulieu.

Globally, TWE's brand-building strategy has seen a shift away from cheaper, lower-margin wines in what it calls the commercial segment, to premium 'masstige' - relatively inexpensive mid-tier lines marketed with prestige positioning - and genuine luxury brands. At the same time, the group has been attempting to take complexity out of the supply chain, most notably the decision, either through simplified, lower-cost distribution deals with third-party agents or by taking its operations in-house. Treasury's supply chain optimisation programme is on target to deliver savings of AUD100m (US$72m) by fiscal-2020.

Treasury Wine Estates' Full-Year Sales 2014-2018

20142015201620172018
Sales (Reported)1705.61848.32232.62401.72429

Source: Company results

Treasury Wine Estates' Full-Year Volumes 2014-2018

20142015201620172018
Volumes3030.133.636.434.6

Source: Company results

In what was described by the company as a challenging year, sales in fiscal-2014 rose 1% to just over AUD1.7bn, despite a fall in volumes of 6.4% on the previous year, which TWE said was the result of challenging domestic trading conditions and reduced US wine shipments. Revenue per case was ahead by 7.9%, with positive returns seen on marketing investment in Asia and reduced costs contributing to increased margins.

Volumes of luxury wines rose 40% driven by the release of premium wines from the 2012 vintages in Australia and California.

At the year-end, Clarke put a marker on 2015 as a "reset year" for Treasury and, as it turned out, sales for the group rose 8.4% to AUD1.85bn despite more or less static volumes. Eleven of the group's 15 priority brands delivered sales growth during the year, compared with just six a year earlier, and their combined growth rate rose from 3% to 13%. Driving the results was a 50%-plus increase in marketing spend and a reduction in overheads of more than AUD40m. Clarke heralded his team for delivering in one year what he said might normally take two or three.

The 2016 financial year included the first six-month contribution from the Diageo wine brands, the acquisition of which was completed at the beginning of calendar-2016. Group sales for the full-year swept past the AUD2bn mark, up 20.2% to AUD2.2bn, with volumes ahead by 11.5%.

Sales rose further in 2017 to a touch over AUD2.4bn with volumes up by slightly more, at +8.5%. Highlights included increased availability of the US wines portfolio in both their domestic market and in Asia, where the group was supported by better distribution and increased consumer-focused marketing investment.

In fiscal-2018, group volumes dropped 5.1% but sales increased by 1.1% to AUD2.43bn. The figures were skewed, however, by the reorganisation of TWE's US distribution arrangements (see Americas below), including the proactive destocking of a former distribution partner's inventory in several states. Overall sales-per-case was up 7.1% driven by portfolio premiumisation, "top-line momentum" in Asia and ANZ, and the realisation of better prices for luxury brands.

Treasury Wine Estates' Full-Year Sales by Region 2014-2018

Source: Company results

  • Americas

The five-year period began with the region in the midst of a planned stock depletion programme to take old and obsolete wines out of the US market. Volume shipments were down 6.9% in fiscal-2014 though sales increased by 4% to AUD731.9m. There was a 15% increase in sales of masstige brands - including Chateau St Jean and Matua - and a 3% increase in luxury wines, led by Beringer Knights Valley, Stags' Leap and Penfolds. Total volumes in Canada, meanwhile, were up 2%.

Earnings in 2015 were in line with the previous year. US sales in luxury wines were up 16% while masstige brands rose 20%, with cheaper priority commercial brands up by a mere 1%. Innovations such as Beringer Wayfarer and Stags' Leap The Investor contributed to luxury wine growth. Non-priority commercial brand depletions declined by 315,000 cases and the sale during the year of the Asti winery signalled an intention to address over-capacity in this segment. Total sales from the Americas were up 8.6% and overall shipments exceeded depletions after the completion of the stock reduction programme begun in 2013.

The region saw strong growth in its base business in addition to an extra contribution from the newly-acquired Diageo brands in 2016. Volumes rose 14.2% from the base business with sales ahead by 27.7% at AUD991m. There was solid growth from the Beringer luxury tiers, Chateau St Jean, Lindeman's, Stags' Leap, Matua and 19 Crimes. Luxury and masstige brand portfolio depletions were up 15% and 13% respectively.

The region achieved a rise in revenue per case in 2017, with sales up 7.2% to pass the AUD1bn mark for the first time. Volumes in the region, meanwhile, rose 3.1%. Depletions were ahead of shipments by around 100,000 cases primarily because of destocking on Lindeman's ahead of a packaging relaunch.

The year brought a new distribution partnership in Canada with Mark Anthony Wine & Spirits, which Treasury complimented with improving profitability in the country.

Early 2018 saw the company announce changes to its distribution operating model in the US, taking it in-house where state legislation allowed (principally in California and Washington), introducing a hybrid set-up in Florida that combined in-house distribution and a deal with Breakthru Beverage Group, and appointing new dedicated distributors in a clutch of other states. The changes are expected to be fully embedded by the second half of fiscal-2019 but a transitional impact was felt in 2018, with volumes down as existing distributors' inventories were destocked. Volumes for the region were down 13.3% and sales by 11.3% to AUD961.8m. Revenue per case, however, was ahead by 2.4% with depletions of luxury and masstige brands up 6%.

  • Australia & New Zealand (ANZ)

In fiscal-2014, Treasury reported that its pre-tax earnings in the region plunged by 31.5%, driven by reduced "in-market programming" in challenging trading conditions and a reduced allocation of Penfolds wines. Volumes were down 9.4% and sales dipped 6.4% to AUD562.2m. Sales in Australia specifically were affected by inventory reduction by the company's large customers and aggressive price competition. The group's luxury portfolio, however, performed strongly, with the umbrella 'Wines of Distinction' activation bringing increased volumes for Pepperjack (+19.8%) and Wynns (+12.8%).

In 2015, earnings growth was up 15%, driven by portfolio premiumisation, investment in priority brands and reduced overheads. Volumes dropped 2.2% but sales climbed 4.3% to AUD586.3m. Branded shipments in Australia were up 1.6%, ahead of the overall wine market. Penfolds, Pepperjack and Wynns all contributed double-digit revenue growth.

In 2016, Treasury reported strong growth for its priority brands in the region, with better brand execution and improved prices on limited production wines. Revenue for fiscal-2016 was flat, inching up 0.8% to AUD590.7m, against volumes that were up 2.6%, resulting in a reduction in revenue-per-case of 1.8%. The figures reflected an increase in sales in Treasury's lower-margin commercial wine tiers, particularly for Wolf Blass and Lindeman's. Supply constraints in its masstige portfolio, meanwhile, were offset by price rises achieved on Penfolds, Wynns and Annie's Lane wines.

The region pretty much treaded water during fiscal-2017 with volumes up 0.2% and revenue ahead by 0.1% at AUD591.3m. Volumes increased by a mere 32,000 cases in Australia but the results were helped by improved prices on key luxury and masstige brands including Penfolds, Pepperjack and Annie's Lane. ANZ was hit by the reallocation of advertising and promotion spend to other regions, though there was increased brand-building investment behind the masstige brands.

The year also brought a new distributor partnership in New Zealand with Independent Liquor New Zealand, in an attempt to increase Treasury's reach and scale in the country.

In 2018, the company said it was helped by masstige brand-led premiumisation and an ongoing focus on managing costs. ANZ volumes rose 1.7% and sales were up 1.3% to just short of AUD600m. Regional highlights included the relaunch of the Seppelt Luxury Collection – with national in-store activation and print media advertising in the second half of the year – and the launch of the A'tivo canned spritz in Australia.

  • Asia

Sales from Asia in fiscal-2014 rose by 1.6% to AUD137.6m, a performance that, with the benefit of knowing what was to come later, looks relatively modest. Volumes slid by 8%. Austerity measures in China and one-off operational issues in Japan hit EBITs in the region, which fell 12.3% in organic terms. Increased marketing investment brought the best results in South-East Asia - most notably in Singapore, Malaysia and Thailand - and Hong Kong, led by Wolf Blass, Penfolds and Lindeman's.

Improved routes-to-market in growth countries including China, Korea and Singapore helped EBITs increase by 54.5% in 2015. Volumes in China were up 36.3% and across South-East Asia by 13%, with total volumes for the region 23% ahead of the previous year. Asia's sales grew 45.6% to nudge past the AUD200m mark.

The performance in China was massively boosted by a 'Numbers Can Be Extraordinary' marketing campaign for Penfolds, backed by increased in-store activations, particularly around the Chinese New Year. Double-digit sales growth was reported by Wolf Blass, Penfolds, Rawson's Retreat, Pepperjack, Matua, Chateau St Jean, Stags' Leap and Gabbiano in the region.

A 76% increase in volumes in northern Asia was the main thrust behind a 40% rise in case sales for the region as a whole in 2016, which lifted sales by AUD40.6m to AUD293.2m. Penfolds, Wolf Blass, Rawson's Retreat, Wynns and Lindeman's all saw significant uplifts, with gains on price points supported by a doubling of marketing spend over the previous year.

Asia continued to surge in fiscal-2017, with sales leaping by 34.5% to AUD394.3m, although this growth was outstripped by a volumes increase of 48.7%. North Asia volumes rose 43% and combined sales for South-East Asia, the Middle East and Africa were up 58%. Sales of Treasury's Australian brands were up by 700,000 cases, while the group also sold an extra 420,000 cases of American wine in the region. Route-to-market efficiency was improved by the opening of new warehouse facilities in Japan, which, along with China, received increased investment in sales and marketing functions. The region also had higher advertising and promotional spend per case than in previous years. In June 2017, Treasury signed an exclusive agreement to import Mouton Cadet and Escudo Rojo from the Baron Philippe de Rothschild portfolio into China and followed this with the roll-out across north Asia of its own luxury French wine, Maison de Grand Esprit.

As a result of this latter move, Treasury's French wine sales in fiscal-2018 rose almost four-fold in the region. US brands (excluding Blossom Hill), led by luxury tiers of Beringer, Beaulieu and Sterling were up 44% and Australian wine sales rose 27%. Overall volumes increased by 23.2% and sales showed a 38.9% improvement on the previous year to hit AUD547.6m, with Asia poised to overtake ANZ as the group's second-largest region by revenue after the Americas.

Volumes rose by 41% in north Asia, where advertising and promotional support behind the Australian, US and French brand portfolios was doubled. A Shanghai warehouse facility became fully operational during the year which increased access to regional retailers in China.

  • Europe

Sales from Europe in fiscal-2014 rose 10.2% to AUD273.9m, on a 1.3% drop in volumes. Earnings were broadly in-line with the previous year, but reduced promotional activity in the UK meant that volumes from the country were lower than 2013, though Treasury claimed to be outperforming the market in value and volumes. Lindeman's global 'Sunshine' marketing activation helped the brand's UK sales increase by 8% in both value and volumes, while Wolf Blass was buoyed by its Ashes cricket sponsorship.

Meanwhile, a double-digit decline in the overall Australian wine category in the Nordic markets resulted in the region proving "challenging" for Treasury, which claimed 40% market share in the region.

European volumes (-2.2%) and sales (-2.5%) both struggled in 2015, held back by the competitive wine retail landscape in UK supermarkets and the absorption of tax increases in Nordic markets. Volumes in the UK were down as Treasury withdrew from supporting what it felt were unstainable promotions in some retailers, although this was partially offset by growth elsewhere in western Europe, notably Belgium and the Netherlands.

A continued exit from "unsustainable volume" in the UK took 284,000 cases out of TWE's volumes from the region during fiscal-2016, though sales of AUD357.7m were ahead year-on-year by 25%, shored up by the first contribution from the Diageo brands, most notably Blossom Hill, a top five brand in UK supermarkets.

Lower revenue-per-case of 1.1% in the year reflected the increased contribution from cheaper commercial wines, but the core tiers of Wolf Blass and Lindeman's provided growth on the same metric.

A volumes lift of 14.4% in 2017 was led by the masstige brands Wolf Blass, Rosemount and 19 Crimes but the major contribution to volumes from the former Diageo portfolio meant that sales actually slipped in Europe by 1% to AUD354.1m. Treasury said it delivered "brand health" for key wines in its core European markets, despite a lower advertising and promotional spend per case. The UK was reiterated as being a priority destination for Treasury, despite market conditions remaining challenging and the first tentacles of uncertainty spreading from the prospect of the country's exit from the European Union in March 2019.

In fiscal-2018, the positives in Europe were again produced by priority masstige brands. Volumes from the region were down by 7.5% in the year, however, and sales dropped 3.4% to AUD320.9m. Revenue-per-case increased by 4.4%, driven by gains on Wolf Blass, Lindeman's, Gentleman's Collection and 19 Crimes.

"We have really instilled a discipline within the organisation" - Click here for just-drinks' exclusive, two-part interview with Treasury CEO Michael Clarke from 2017

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