China's austerity drive takes toll on Treasury Wine sales

Treasury Wine Estates, the world's largest pure-play winemaker, has warned that consumer demand for wine in China has softened as a result of March's leadership change and a recent austerity drive pushed through by the central communist government.

Treasury Wine Estates, the world's largest pure-play winemaker, has warned that consumer demand for wine in China has softened as a result of March's leadership change and a recent austerity drive pushed through by the central communist government.

The slowdown in the company's biggest growth market comes as Treasury Wine Estates also searches for a new chief executive following the ejection of its former boss David Dearie last month.

Chairman Paul Rayner told shareholders at the annual meeting on Wednesday that the board was conducting a worldwide search for a boss, which could take nine months.

Treasury Wine Estates, which owns a stable of well-known wines such as Penfolds, Wolf Blass and Yellowglen, has also become an unexpected victim of the recent US government shutdown with its plans to destroy $35 million of unwanted wine in America delayed by the budget battle that closed the US government for business.

Mr Rayner admitted a $154.3 million provision against the company's 2013 accounts, which included the destruction of past-its-best wine, could have been avoided if the winemaker had better reporting and inventory systems.

"The information was not available to us, but now is," he said in response to a shareholder question. "You could argue that it should have been, and I'd agree with you if you argued that."

Interim CEO Warwick Every-Burns confirmed to shareholders that the company was on track to post pre-tax earnings of between $230 million and $250 million in fiscal 2014.

Although investors had already borne the painful brunt of a shock profit downgrade in July from Treasury Wine Estates due to an oversupply of unwanted wine in the US - an admission that triggered a $160 million write-down that led to Mr Dearie's departure - the bearish commentary on conditions in China were new.

Mr Every-Burns said the souring demand for luxury products in China had been witnessed by other beverage and fashion companies.

"In keeping with recent announcements by other alcoholic beverage and luxury goods businesses, we are observing signs that consumer pull-through in China is softening as a result of the recent leadership change and well-documented government austerity measures," he said.

A slowdown in consumption of wine in China could loom as a serious threat to Treasury Wine Estates' growth projections with Asia, and China in particular, the winemaker's strongest market.

In 2012-13, pre-tax earnings growth in the Asian region was 35.6 per cent to $54.5 million, representing a quarter of the company's total earnings for the year.

Its sales by volume to China and Hong Kong combined grew by 39 per cent last financial year.

"Fiscal 2014 will be a challenging year for Treasury Wine Estates," Mr Every-Burns said, "with our [pre-tax and accounting treatment for inventories] strongly influenced by the depletions performance we deliver in the United States and a range of other factors, including the benefit of vintage [2012] wine and the volatility of the Australian dollar."

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