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Treasury Wine Estates Performance Trends 2016-2020 - results data

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In mid-August, Treasury Wine Estates reported a 9.3% decline in sales from the 12 months to the end of June. A tough second half of the fiscal year, in which the coronavirus pummelled performance, pulled markedly on a first-half when sales came in flat. Here, just-drinks considers the wine group's performance over the last five years.

Treasury Wine Estates has garnered great success from its increased focus on value rather than volume

Treasury Wine Estates has garnered great success from its increased focus on value rather than volume

When Treasury Wine Estates (TWE) issued its full-year results for fiscal-2020, the media statement carried the subheading: "Positioning for next phase of journey." That's true in more than one sense as the company enters a new era.

It's a statement that could be applied to just about every beverage company as the world grapples with the ongoing impact of the COVID-19 pandemic. But, for TWE, it has added resonance as the company welcomes a new CEO, with former COO Tim Ford replacing Michael Clarke in the hot seat.

Such a change is always significant for a company the size of TWE, with its complex assortment of wine brands from different countries, servicing the contrasting demands of markets as diverse as China, the US and the UK. But, the departure of Clarke - or, rather, semi-departure, as he will stay on until late-2021 in a consultative capacity - is potentially all the more disruptive for the fact that he is widely-credited with engineering a remarkable turnaround in TWE's fortunes since he arrived in March 2014.

That turnaround has been underpinned by a series of factors: a marked emphasis on value rather than volume; the successful targeting of the Chinese market; the refusal to be constrained by category convention, spawning a number of out-of-the-box concepts, particularly with flagship brand Penfolds, and a successful partnership approach with distributors and retailers that surely owes much to Clarke's strong FMCG background.

If TWE's success has been partly built on less scrabbling around after low-margin volumes and market share, and more pushing of its higher price-points, then that philosophy is coming under pressure as Ford takes the reins.

First of all, there is the impact of COVID-19 - both the immediate downturn brought by the enforced shutdown of the on-premise and Global Travel Retail channels, and the economic consequences, the full extent of which remain unclear at the time of writing as new waves of infections hit countries around the world.

Then, there are the underlying conditions of the US market, where a wine glut has encouraged aggressive discounting and a drive towards private label. This scenario predates the pandemic, but is likely to be exacerbated by it, running at odds to TWE's preferred migration up the price ladder. Nonetheless, and despite the evident need to tweak the strategy in-line with market conditions, there is little sign of any significant diversion from the Clarke strategy that has proven so effective over the past six years.

Whether the global market will allow the same measure of success to Tim Ford in the months and years ahead, however, will be what keeps the spotlight on TWE.

Treasury Wine Estates' Sales 2016-2020 - reported

Source: Company results

  • Regional Performance Trends

The big story for TWE over the past five years has been the rise and rise of Asia. In fiscal-2016, the region accounted for just over 13% of company revenues; by 2019, it had doubled that share figure to 26%. The early impact of COVID-19 on trading in Asia during fiscal-2020 saw that number drop back to 23%, but the longer-term direction of travel remains clear: All three other regions have had their revenue share eroded since 2016.

The Americas remains Treasury's most significant region, with just over 40% of group sales (down from more than 44% in fiscal-2016), followed by Asia; then comes Australia & New Zealand at just over 22% (26.5% in 2016), and Europe, the Middle East & Africa at 14% (16%).

Treasury Wine Estates' Sales by Region 2016-2020

Source: Company results

The Americas

The early part of the five-year period was characterised by TWE's value-focused adjustment to its operations in the US - focusing much more strongly on its luxury and 'masstige' lines, while consciously exiting the highly-competitive - and margin-thin - sub-US$10 segment, the preserve of aggressive discounting and private label.

That strategy, with brands such as Stags' Leap, Penfolds and Beringer Luxury leading the way, proved highly successful, with organic sales growth topping 9% in 2019. Since then, however, life has become increasingly difficult in the US for the company.

Some of the issues have been market-related, but not all. When Angus McPherson, the company's original choice to become president of its operations in the Americas, could not relocate to the US for personal reasons, TWE had to bring in Ben Dollard from Constellation Brands, in December 2019.

The disruption that resulted, with Michael Clarke and Tim Ford filling in by spending more time in the US in the interim, led to what the company described as "a loss of execution momentum" in the first half of fiscal-2020, which persisted into the next six months. The timing could hardly have been worse, as oversupply in the market led to deep competitor discounting and the expansion of private label products. TWE's sales in the Americas subsequently fell by more than 4% in the first half of 2020, and by 11.6% in the year as a whole.

The wine glut has boosted the $8-to-$15 price bracket - the very segment that TWE had worked so hard to exit - and has left the company ruefully admitting that it would be open to selling brands and assets in the US.

At the same time, TWE is committed to restructuring its US operations with a new team and a fresh strategy. The company now expects this overhaul of operations and distribution to incur annualised savings of AUD35m (US$25m) from fiscal-2021, and savings of AUD50m by fiscal-2023.

Asia

When Michael Clarke took over at the helm of TWE in 2014, the company's presence in Asia was relatively insignificant. Over the next five years, he oversaw the five-fold expansion of revenues in the region, culminating in a 35.6% surge in fiscal-2019. That success was the result of a number of factors, including the elimination of tariffs on Australian wine imports into China as a result of a free trade agreement, the successful surfing of the market's premiumisation trend, and the company taking control of its own distribution in China.

The latter helped cement a close relationship with trade partners in the country, with TWE announcing plans to double its sales force in China from the fourth quarter of fiscal-2019. Then came COVID-19. That meant depletions in China were "significantly impacted" in the third quarter of fiscal-2020 and, for the year as a whole, Asia sales fell back by nearly 15%. However, the fourth quarter brought strong signs of recovery, with China revenues up 13% - and volumes in June alone up 40%.

TWE will hope that the latter signals a return to the medium-term upward trend in the market, particularly as it looks to diversify its offer with a stronger emphasis on French wine. Here, its direct approach - cutting out the increased costs of dealing with négociants in France and distributors in China - should reap dividends.

Australia & New Zealand

Trends in the group's home market of Australia have been broadly in-tune with the TWE strategy in the past few years: a relatively-stagnant market in terms of volumes, but with an increasing focus on value and a trend of premiumisation. That plays into the hands of TWE brands such as 19 Crimes, Squealing Pig and Seppelt, and led to a 3.1% sales lift in fiscal-2019. The company has also prioritised the Australian on-premise, including activities around wine on tap.

Revenue losses in pandemic-affected fiscal-2020 were limited - sales across the region only fell by 1.7% - but there were mildly worrying signs of consumers trading down as the economic consequences of the pandemic made themselves felt, affecting TWE's high-end products. The main change in New Zealand came in the first half of fiscal-2018, and the switch to a distributor model with Independent Liquor NZ. The move had a short-term impact on revenues in fiscal-2019, but depletions were up by double digits.

TWE is standing by its value-focused strategy despite the impact of the pandemic, and is targeting a category revenue share across the region of 25%, up from 21% in fiscal 2019.

Europe, the Middle East & Africa

TWE's performance in Europe has seen the company rewarded for its prolonged emphasis on value over volumes, even in a market as price-sensitive as the UK. Long resistant to the value-led approach, the UK displayed a "strong trend to premiumisation" in fiscal-2019, when 'masstige' volumes rose 9% while commercial wines dipped 7%.

In the longer term, the region saw a major sales boost in fiscal-2016 following the acquisition of Diageo's wine brands, including the highly-significant volume player Blossom Hill.

Fiscal-2019 brought a 4.4% sales lift as 'masstige' products grew strongly in the Nordics and continental Europe, but the pandemic led to a reversal of this, and a 3.7% decline, in fiscal-2020.

In line with the market, TWE noted a rise in at-home consumption, particularly in the UK, the Netherlands and Nordic markets, where volume and value growth was maintained - but observed that the closure of the on-premise had a severe impact, offsetting retail gains.

Treasury Wine Estates' Volumes 2016-2020

Source: Company results

  • Brand Performance Trends

The last five years have seen a reconfiguration of TWE's mix of brands and price-points, aided by the $552m acquisition of Diageo's wine brands in January 2016, alongside a string of more tactical purchases and a number of divestments. Clarke reckoned it took about a year to "reset" the Diageo acquisitions, in terms of "fixing and nurturing" brands that were never an especially high priority for their previous owner. Indeed, seven of the 12 wine brands sold off by TWE in a transaction in mid-2016 had been part of the Diageo deal.

Most of the adjustments to the TWE portfolio have been focused on delivering value over volume, but it's worth remembering that the Diageo buy also brought in the volume heft of Blossom Hill, which the company has since diversified with the launch and expansion of Blossom Hill Gin Fizz.

Despite this, there's been a clear strategy to prioritise the company's luxury and 'masstige' offerings in recent years, which have come to account for a growing share of TWE's sales, reaching 69% in fiscal-2019. While this value focus was hampered by the impact of COVID-19, with TWE's net revenue per case falling fractionally by 0.5% in fiscal-2020, this was wholly due to the negative dynamics of the US market. Elsewhere, net revenue per case grew, and the luxury & 'masstige' portfolio increased their revenue share to 71% in 2020.

The flagship for this value drive is Penfolds, which has continued to diversify and drive into the ultra-premium space traditionally occupied by Champagne, high-end spirits and luxury lifestyle brands. Eye-catching initiatives have included a Champagne (in association with Thiénot), a 28-year-old brandy, a baijiu-infused Shiraz and a series of high-end multi-vintage blends of Penfolds Grange: g3, g4 and the yet-to-be-released g5.

This repositioning of Penfolds has been long in the making - the relatively low-priced Rawson's Retreat range was separated from the Penfolds core as long ago as 2013 - but it has reached new heights as the company explores the potential of Asian markets, and especially China. In April 2020 came the surprise news that TWE was exploring the possibility of demerging Penfolds, a move that would allow the brand to plough its own luxurious furrow while simultaneously giving increased focus to the company's other high-end products - while also "reducing and rightsizing" the more commercial wines it owns.

Some have questioned the wisdom of hiving off a brand that accounts for about 10% of group volumes, but more than half of its profits. More definite news is expected by the end of the current fiscal year, as part of a broader review of TWE operations.

Under Clarke, TWE has not been shy of crossing category and country boundaries in a similar fashion to the Penfolds and Blossom Hill initiatives outlined earlier. California's Beaulieu has sourced wine from France, while Squealing Pig - which started life as a New Zealand wine - now has lines from Australia, France, Argentina and Italy, as well as a gin.

Such activities are part of the increasing diversification of TWE's business. Large-scale initiatives have also come in France with the Maison de Grand Esprit roster, boosted by the company's acquisition of the Cambon de la Pelouse French wine business in August 2019; and in Italy with Cavaliere d'Oro, a multi-region range launched in August 2018. These give TWE a more diverse and comprehensive offer in a number of markets, particularly in Asia, where the company harbours ambitions of becoming the region's top importer of French wine.

Success has also come in the form of non-traditional, Millennial-friendly wine brands such as 19 Crimes, with its focus on the brand story and image over dry details of production and grape variety. The sixth 19 Crimes variant, 19 Crimes Sauv Block, launched in June this year, following the April 2019 debut of Snoop Cali Red in association with Snoop Dogg.

This approach is now being used elsewhere by TWE, notably in the introduction of the Samuel Wynn range to the UK in July 2020, with its use of "personality" sub-branding for its wines, called The Man from Nowhere and Dice with Destiny.

  • The Future

In late 2020, Treasury Wine Estates faces a number of issues and challenges:

Penfolds - twist or stick? - Many eyebrows were raised at the news that TWE was considering spinning Penfolds off into a separate business. If nothing else, the potential move illustrates the growing power of a brand that resonates particularly strongly in Asia. Whether still part of TWE or not, the next steps for Penfolds in terms of expanding its luxury status still further will make for interesting viewing. Is it really becoming the Porsche of the wine industry?

Rightsizing Stateside - COVID-19 apart, the US clearly constitutes the group's biggest immediate challenge. Can TWE maintain its laser focus on value in the context of oversupply and the economic consequences of the pandemic? Assuming it does, the savings envisaged in the overhaul of the company's US operations will also play a vital role in driving profitability.

Value versus the pandemic - TWE's determination to emphasise value over volume is a familiar mantra, and one that has proven highly-successful since 2014. But, a global pandemic that shows no signs of going away, with all the economic consequences that it brings, will put the strategy under huge pressure in the coming months and years. Expect some adaptation of the value focus to maintain volumes and market share.

China back online - COVID-19 interrupted a golden period for TWE in China, with its value strategy, allied to a strong company presence in the market, yielding spectacular results. The end of fiscal-2020 appeared to signal renewed growth for the company in China; a more diverse wine offer from the likes of France and Italy will help maintain that momentum.

Outside the box - Prioritising value has been only one strand of the company's strategy in recent years. TWE's nimble thinking and refusal to be bound by category convention has seen Penfolds move into Champagne and multiple countries of origin, while Blossom Hill and Squealing Pig have explored in gin. It's a philosophy that will surely survive Michael Clarke's departure.

Global player - It's easy to think of TWE as an Australian, or perhaps Australian/Californian, wine business, but that's increasingly only part of the story. In particular, applying the New World branding and marketing template to traditional production sources such as France and Italy is becoming vital to TWE's increasingly diverse wine offer. This remains an area ripe for further expansion.

"We want to be the number one importer of French wine into Asia" - Click here for just-drinks two-part interview with Michael Clarke from 2019


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