Treasury Wine toasts America for the long haul

Treasury Wine Estates' renewed US strategy is seeing it double down on the troubled market. But a softening China could present a different kind of problem entirely.

Just how does one of the world’s largest winemakers get rid of excess inventory of old bottles? In the case of Treasury Wine Estates, which is facing a massive oversupply of aged and outdated stock in the Americas that prompted a $154.3 million writedown, they employ third-party ‘destruction agents’ to pour the wine down the drain.

That was one of the more unexpected insights from Wednesday’s surprisingly subdued AGM in Adelaide, the first without David Dearie as chief executive after his abrupt dumping last month in the wake of the shocking US writedown.

Another was that the actual destruction of the wine was one of the multitudes of daily operations of American business that was affected by the 16-day US government shutdown. The destruction of some 600,000 cases worth $35 million required a filing with the Alcohol and Tobacco Tax and Trade Bureau, a unit of the Treasury Department – so the application was delayed.

Most galling for shareholders was that the wine was not even stocked by the company; it resided with distributors who received incentives based on shipments rather than sales. TWE decided it was in the company’s best interests to buy back and destroy the distributors’ inventory that was past its use-by date. The company has since changed its incentive system and is keeping closer tabs on stock levels at distributors.

Distractions aside, the clearest message from TWE’s chairman Paul Rayner to shareholders was that the winemaker is not about to turn its back on the American market, with its temptations of growth – despite the company’s costly disappointments there ever since it took over Beringer in 2001, and the urging of some investors to exit.

“There has been some commentary along those lines but it is certainly is inconsistent with the strategy of the company,” Rayner said in response to a shareholder’s question. “We are all about winning in America and you are only going to win if you stay there. We see a strong future for us in America … It is a very large market and it is growing in both volume and value terms.”

TWE wants to ramp up higher-margin luxury and middle-market brands, recently shipping 10,000 cases of its Pepperjack label ahead of a launch on November 1. Nearly half its total sales volume comes from the US.

A pretty solid defence of strategy there, despite the difficulties of execution for which Dearie paid the price. A search for his replacement is expected to take up to nine months, even though there were indications of the board’s intentions with the eerie absence of any photos of Dearie in the company’s annual report – which was published just three days after the announcement that Dearie was leaving.

Critics argue that the new chief executive may have a different perspective on either the sustainability of the business in the US, or the amount of reinvestment required to shift the emphasis from commercial to prestige and ‘masstige’ wines.

Fund manager Perpetual apparently puts its faith in TWE’s vision for the Chinese market, as one of the few locally listed firms that offer exposure to Chinese consumption trends. While Perpetual sold down its holding in TWE when its stock topped $6 earlier in the year, it recently saw enough value to re-establish a position at around $4.70 for several of its portfolios.

Unfortunately, the recent slowdown in the Chinese economy has made itself felt on TWE’s biggest growth market. While interim chief executive Warwick Every-Burns did not alter profit guidance for the current financial year, he did warn that Chinese consumer demand was softening, in line with reports from other alcohol and luxury goods companies. With sales growth in Asia up by 39 per cent for TWE last year, the interim chief has his work cut out for him on two critical fronts.