Standing alone: David Dearie, Treasury Wine Estates
With Treasury Wine Estates now decoupled from Foster’s, CEO David Dearie is determined to turn the firm’s fortunes around with a centrally controlled global focus.
But in the case of the brewing leviathan, the testing of this theory was particularly prolonged and extravagant, lasting 15 years and costing the company rather more than a packet of paracetamol – it had lavished almost £4 billion on vinous assets, and, when the wine division appeared on the Australian stock market three months ago as Treasury Wine Estates, investors valued it at a little under £1.5bn.
So what went wrong? David Dearie, who was appointed CEO of the new, standalone company, which contains some of the wine world’s most iconic labels, suggests it could be connected to the brewer’s failure to appreciate the cyclical nature of the wine business – or its particularly weather-sensitive production – as well as Foster’s regionally distinct management style, which split the world into quarters, preventing the full and efficient development of global wine brands.
Today, however, decoupled from the brewer, Treasury can pursue a strategy to fit the quirks of the international wine trade and one that Dearie, with over 20 years’ experience of alcoholic drinks, seems well placed to impose and direct. Further, speaking to the drinks business just two month’s after his elevation from MD of Foster’s Wine Group Australasia to CEO of Treasury Wine Estates, he records an air of renewed enthusiasm at the company, despite rumours of possible takeovers from initially Constellation Brands and then China’s Bright Food Group.
“People are very excited about being a dedicated standalone wine business because there are some who joined a wine business and through no fault of their own ended up being part of a beer business.” As for the threat of incorporation into another multinational operation, he adds: “There is a lot of speculation now Foster’s is in two parts, but we are focusing on turning ourselves into the most successful wine business we can, and if we are successful, then the ownership will stay as it is and the shareholders will be happy with our returns.”
The Foster’s Group, to use its official and full name, is, Dearie admits, “predominantly a beer business in one market with one competitor”. Treasury Wine Estates is, however, “a more competitive business, more of a global business, and an agri-business at heart”. The latter aspect he says needs particularly careful management. “Mother nature has proven to us she can do funny things at inappropriate times,” he remarks, only half joking.
Continuing, he says: “The wine business is very cyclical and you get around 15 year cycles, with six to seven years of undersupply, then a period of balance, and then six to seven years of oversupply.” Excusing the underperformance of Foster’s wine division, he continues: “The problem is that companies track it [the wine business] and see that during the good times there is growth and the margins are good and then they buy, but, by the time they buy, along comes oversupply, and they have to change their techniques.”
Then, admitting failure on the part of Foster’s, he says: “And I’m not sure Foster’s really understands the business we are in.” In contrast, turning to Treasury, he adds: “But we understand it is a cyclical business, and you can make good returns through the downside and really good returns through the upside if you know what you are doing.”
When it comes to the current state of the international wine trade, he says: “We are in oversupply, with lots of private label, low pricing and low consumer brand awareness.” This, he thinks, is slowly changing, although for Australia, he believes the country “is still probably 12-24 months away from demand and supply balance”. Indeed, Dearie outlines a worrying situation in the nation. “The estimated crush is 1.6 million tonnes, so slightly higher than last year’s 1.5m – because the rains brought higher yields. Now a lot of that wine will be turned into concentrate, but we are also seeing wine produced that is not good quality.”
He explains: “We’ve been rejecting grapes because of mould but others are saying, ‘we’ll take these off your hands’ and these grapes should not be turned into wine.” Dearie’s concern is the export, mainly to the UK and Asia, of “extremely cheap” and “poor quality” wines, which will damage Australia’s image in these markets.
Treasure chest of brands
On the other hand, he also thinks it could favour well-known labels. “This is when the power of brands comes in, because people know that the quality is there.”
And he’s convinced of the potential in Treasury’s existing portfolio, suggesting that five-year targets – which he will set out in late August when the new company releases its annual results – will be met with the current stable of wines, which include names such as Beringer, Penfolds, Lindeman’s, Wolf Blass, Rosemount, and Wynns. Speaking of the possibility of acquisitions, he admits: “We will consider brands that are of benefit to our portfolio, but with our brands I think we can hit our goals.”
To achieve growth – and regain lost stock market value – Dearie has two clear intentions. One is to expand the production of the more premium end of the portfolio. The other is to dramatically improve distribution, and break out of the old Foster’s model of operating as four discrete regional units, Foster’s Emea (Europe, Middle East and Africa), Asia, Australasia and the Americas. Dearie explains: “Foster’s ran as four separate individual units, but now we are running as a collective, now it is about the brands and then the key markets, understanding the brand and market combinations.”
He exemplifies by pointing out the inward-looking nature of the old Foster’s Americas wine division. “We export very little from the US, so, for example, 99% of Stags’ Leap is sold in the US. We’ve got to get some of that in to global markets.” Similarly, he says: “Beringer has such as wonderful range of products and we’ve got to be able to take some of those wines and position them in the global marketplace. We see that as a big opportunity for us.”
Expanding distribution in emerging markets will be key to these plans. While 50% of Treasury Wine Estates’ business is currently from the Americas, predominantly the US and Canada, followed by Australia, then the UK and Europe, Dearie says that there will be “more emphasis on Asian markets – particularly Singapore, Hong Kong, China and Japan”. He records that of the 35m cases that Treasury sold last year, less than one million went into Asia, although it is “very high margin and profitable”. In the longer term he says: “We need to look at central Europe and central Africa,” while he also believes “there is still a lot of growth potential in our two domestic markets, the US and Australia”.
Fine wine focus
Then there’s Dearie’s aim to focus on more upmarket levels within the Treasury portfolio. He segments the wine industry into four tiers, which he terms “economy, commercial, masstige and luxury”. The lowest, “economy”, represents wines that are less than US$4 per bottle,as well as clean skins and bag-in-box; “commercial” incorporates labels from $4 to $10, such as Wolf Blass Red Label; and “masstige” refers to those labels over $10, such as Wolf Blass Yellow Label. Meanwhile, the luxury level takes care of the fine wine end of the scale, primarily the top wines from Penfold’s, including of course Grange.
The future for Treasury lies in the upper end of the commercial sector, and those tiers above that, according to Dearie. Interestingly, limiting growth at the luxury level, Dearie explains, is not demand, but supply. Speaking of last year’s releases, he says: “We could have sold almost every bottle of high-end Penfolds and Lindeman’s in Asia alone.” In short, he states: “We didn’t make enough,” and as a result, Dearie has been working on “reallocating our luxury wines” and, for the future, “looking at meeting the demand.” This he cautions won’t involve “massively ramping up production but making some more to get closer to satisfying the demand”.
Referring to Penfold’s specifically, he says of the “Luxury and Icon Range”, which includes Grange, “we are likely to invest in more contracts, more land, more oak and storage facilities, so we can make a slow but steady increase in the availability of those wines”. While he acknowledges that the limited supply of these fine wines is part of their appeal, he adds: “But I don’t want them to be so scarce that I disappoint people.”
He is also setting a minimum price for the 2012 allocation. “We realised our internal pricing was all over the place which meant the retailing price was all over the place,” he explains. Such a new approach will, he believes, “free up some wines to sell in markets with better returns… we have got to optimise profitability”.
As for the rest of the range, Dearie identifies the need for investment in certain lines. For example, he says that Wolf Blass will get a new look in September, and Rosemount will be repackaged too. “If we’re honest, we haven’t done a good job with Rosemount in the last few years,” he admits. “It’s hard to put a finger on why not but we are very determined to turn that brand around and it has such good consumer health ratings. There’s a team working on new packaging and positioning and I’m very confident we will turn it around.”
Then there are those labels which Dearie terms “regional champions” such as the aforementioned Stags’ Leap, as well as Australia’s Seppelt and Coldstream Hills. “These have tremendous success in their domestic markets but wouldn’t it be great to sell them internationally?” he asks rhetorically. “They weren’t pushed internationally because of the way Foster’s was structured, they fell into a gap where they were no-one’s responsibility, but we will make sure someone is responsible for pushing them.”
Then there’s Wynns. “The brand is on fire in its domestic market,” says Dearie, “and we will start to make some available to the international markets.” Continuing he reminds that the label, founded in 1886, “has 60% of the Coonawarra cigar – [a cigar shaped strip of Terra Rossa soil] – and it is incumbent on us as the leading wine producer to start selling the Coonawarra story. If we can turn that area into something as recognisable as Napa, then we will win out”.
There are also certain trends that Treasury is attempting to tap into, such as lower alcohol and organic wines. For example, it is continuing to develop sales of Lindeman’s Early Harvest [8% abv] while improving the company’s green credentials with the conversion of 1,000 hectares to organic viticulture in Victoria, Australia. “We see organic wine as an opportunity, we are excited about it.”
However, it’s the existing stock of labels, land and other assets that really offer the potential, Dearie believes, for Treasury’s success.
“We’ve got six of the top 10 oldest Australian wine brands sitting in our portfolio, we have this wonderful rich history that we’ve not done enough to tell people about it.” He also records: “We’ve invested in fantastic technology… which is coming through in the quality of our winemaking.”
And it’s these facets that have motivated Dearie, who is originally from Scotland, to move to Melbourne and manage Treasury. “Some of my friends said, ‘what the hell are you doing’, but I believe the wine business has tremendous potential – the demographics and consumption trends are working in our favour – and I do think we will be extremely successful.”
Dearie is certainly convincing, and let’s hope he’s right.