Treasury sours on cheap wine

Treasury Wine Estate’s new chief executive, Michael Clarke, didn’t pull his punches in his first public appearance today.

“There’s a lot to be fixed,” he said.

“There are structural issues affecting our business that have been left for far too long. There’s been a lot of talk in this company and not necessarily a lot of delivery.”

Those sorts of comments, about three weeks into the role, could be categorised as harsh but fair.

Treasury has serially disappointed and Clarke would be conscious that unless he can generate stronger and more consistent performances, there will be a very large question mark over the future of Treasury in its current form.

In what was a measured and high-level discussion with analysts, Clarke made it clear he had already come to some conclusions about the nature of the structural issues within Treasury -- and has some broad plans to address them.

It was also evident that he isn’t confident that the group is going to be able to meet its already revised-down but "challenging" guidance for this year of earnings before interest, tax and SGARA (the industry’s treatment of inventories) of between $190 million and $210 million. Not surprisingly, with the final quarter of the year already underway, he isn’t accepting any responsibility for meeting that guidance.

It is his longer-term performance, however, that really matters to Treasury and its shareholders. It is already clear that he believes the group’s cost base is too high, that it has too many brands, that it has too big a presence in the commercial wine categories and that its marketing spend is too thinly spread across the portfolio. He also believes Treasury has too much capacity within its infrastructure.

He does, however, believe that Treasury’s pursuit of its ‘premiumisation’ strategy and the build-up of nearly $500m of premium non-current inventory that he has inherited is the right strategy for the group and the appropriate way to utilise the group’s strong balance sheet.

Clarke plans to reduce overhead spending across the group and focus the savings on consumer and brand marketing, with particular emphasis on the group’s premium brands. It was implicit in his comments that he believes Treasury hasn’t invested sufficiently in supporting its key brands.

It appears likely there will be a culling of low-value brands that have no competitive differentiator other than price, as well as some rationalisation of the group’s infrastructure to get the business ‘right sized’.

The most common criticism of Treasury, dating back quite a few years, has been about the management of its US business. There are analysts and fund managers who believe the group isn’t capable of managing a US business and that it should exit that market.

Clarke, while saying he had no emotional attachment to any of Treasury’s brands or businesses, also said that he believed the US business could be improved. While he believed the US performance could get better, he said that “everything is on the table”.

While Treasury’s performance has been spluttering, it has taken some tough decisions. These include the destruction of aged inventory and the restructuring of the group’s distribution system in the US (a major factor in former CEO David Dearie losing his job). It has also cut back on shipments of Australian wine to the US.

The other thing going for Clarke is that for the first time in a decade and a half, the fundamentals of the industry look stronger. There is a better balance between supply and demand and the demand for premium wine is strengthening, which adds value to Treasury’s big store of non-current inventory.

While Clarke has hit the ground running and there are changes already underway within the business, it is obvious that some of the structural issues he has identified will take time to implement and have an impact. Such issues include the repositioning of Treasury’s brand portfolio and the rationalisation of its infrastructure.

With the market’s faith in Treasury’s business model shaken -- and its patience almost exhausted --  Clarke needs to get some early runs on the board and to gain the market’s trust. His first encounter with analysts today at least allowed him to demonstrate his candour and his confidence that, while there might be a lot to fix within Treasury, he believes the business can be fixed.