Comment - Wehring's Way - Treasury Wine Estates' US$145m Question
If Treasury Wine Estates' US$145m writedown doesn't solve its problems in the US, then what will?
Yesterday's announcement that Treasury Wine Estates is set to take a US$145m hit as it clears out excess stock in the US prompted an inevitable kicking from most angles for the company.
Wine-writer Jancis Robinson expressed surprise and disappointment in equal measure at the news (“So much for the old adage that wine improves with age”), while David Errington, an analyst with Merrill Lynch in Australia, also felt let down by the move (“You've had this (US) business for 13 years and, to my recollection, you've never got it right”).
The destruction of “excess, aged and deteriorated inventory” in the US was never going to be a popular move, while the company's admission that it had been “over-ambitious” in its forecasting of new product launches in the country opened Treasury up even wider to the aforementioned kicking.
But, hats off to Treasury for its candour. It must have been a nervy weekend for the exec team ahead of yesterday's announcement, but at least the firm pulled the plaster off with haste. Hopefully, it can now crack on with exploiting the opportunity that the US wine market still offers, without the baggage it is now in the process of dumping.
Also, this writedown by an Australian wine company - particularly one with a presence in the higher volume/lower value segment - has been on the cards for quite some time. As the country's wine industry has become more established in drinkers' preferences, Brand Australia has become caught between making enough of the stuff and making it taste better.
As Treasury's CEO, David Dearie, flagged up yesterday, brand-conscious US wine consumers are looking more towards better quality than they are toward better value. “Luxury, 'masstige' (mass prestige) wines do not carry the same exposure (in the US), as they are crafted to age,” Dearie said. “Commercial wines are designed to be consumed younger.”
With too much of this “commercial” wine (the company was naturally very reluctant to name specific brands) slooshing around in the US, and the likelihood of even more to come further up the pipeline, something had to be done.
The short-term sting for Treasury is that the US$145m writedown will effectively wipe out most of its operating profits in its current fiscal year - EBIT in the previous fiscal was US$194.8m.
Medium-term, the worry will be the company's share price, which has also been pummelled this week.
But, the longer term prognosis looks good: Figures released by trade body Wine Australia last month show that Australian wine exports are growing faster at the higher price points, with volumes dipping and values rising in the 12 months to the end of June.
The hope, then, is that Treasury has timed its move in the US correctly. Because, if it hasn't, who knows what the company's next set of “hard but necessary decisions” will encompass?
The final just-drinks management briefing of the year takes a look back at the last 12 months in the global drinks industry. The penultimate chapter in this five-part briefing reviews 2013 for wine....
Treasury Wine Estates has faced serious challenges since its spin-off from Foster’s Group in 2011. The US, which was a key component of its turnaround plan, has thus far failed to pay dividends. In 20...
With the end of the year looming, just-drinks is running a series of 'Top Tens of the Year' in the run-up to Christmas. Here are the ten most read news stories on just-drinks in 2013....
Global Wine industry profile provides top-line qualitative and quantitative summary information including: market share, market size (value and volume 2008-12, and forecast to 2017). The profile also ...
With the end of the year looming, just-drinks is running a series of 'Top Tens of the Year' in the run-up to Christmas. Here are just-drinks' ten favourite quotes in 2013....
With the end of the year looming, just-drinks is running a series of 'Top Tens of the Year' in the run-up to Christmas. Here are the ten most read analyses on just-drinks in 2013....
- Focus - Edrington's FY Performance by Brand
- Where Beer is Brewed Can Leave a Bad Taste
- Pernod relies on Indian whiskey to crack Africa
- Analysis - Storm clouds lift over Diageo Towers
- NPD: The Clear Soft Drink Trend is Back
- Diageo CFO Mahlan to head up N America
- Former Bacardi exec takes De Kuyper CEO role
- Diageo lining up Gleneagles sale - report
- Comment - Diageo CFO to North America? Do the Math
- Pernod Ricard allays Havana Club shortage fears
- Global liqueurs insights - market forecasts, product innovation and consumer trends research
- The IWSR Company Profile 2014 – Remy Cointreau
- Edrington Group in Spirits (World)
- Diageo plc (DGE) - Financial and Strategic SWOT Analysis Review
- Global Tequila insights - market forecasts, product innovation and consumer trends research