Treasury Wine Estates aims to ditch cheap wines

Tim Ford, the chief executive of Treasury Wine Estate, is planning to go premium for the next stage of reshaping and revitalising Australia’s biggest wine group.

In an interview with Australian Financial Review, Ford said the company has an internal deadline of the end of this year to sell-off, or de-merge into a separate company, the group’s less expensive brands.

This would leave TWE operating at the premium and super-premium end of the price spectrum.

A spokesperson for the producer told db: “As announced to the market at our interim results in February, we are assessing the future operating model for our global portfolio of premium brands, with a determination to be made during this calendar year.”

With the accelerating global trend for consumers to shift upmarket at the expense of low-profit commodity wines, separating that part of the business would concentrate Treasury’s efforts on its premium wines range and especially the lucrative Penfolds label.

Drinkers around the world are increasingly steering clear of wines in the AU$10 to AU$15 a bottle price segment and opting for higher-priced brands.

“That’s where the consumer is going, that’s where the market is going,” Ford said in the interview.

Premium

He wants to target the market for bottles costing AU$30 or more.

He said that could end up providing “anywhere between 90% to 100%,” of the remaining Treasury Wine Estates business.

About 75% of the company’s profits come from the Penfolds business and a luxury wine portfolio in the United States, which he expanded last year with the $AU1.6 billion acquisition of Daou Vineyards.

Ford says he is considering hiving off its portfolio of non-luxury brands.

Treasury has already set up separate structures for premium and non-premium wine in North America and internal work has begun on how to mirror this in Australia.

The move confirms the signal Treasury gave at its half-year results in mid-February that it was assessing different models for its mid-priced and lower-priced operations.

Brands

The brands that could potentially be de-merged into a separate entity or sold include Wynns, Pepperjack, Lindemans, Seppelt, Rawson’s Retreat, Squealing Pig and Wolf Blass.

Mid or lower-priced such as Sterling Vineyards, 19 Crimes, Matua, St Hubert’s and Castello di Gabbiano could also disappear from the TWE portfolio.

Analysts E&P Capital estimate that gross margins for luxury wines are more than 50%, compared with 25% for cheaper bottles.

The news of a potential split of Treasury’s business comes only days after news, reported by db, that Ford intends to increase the prices of the Penfolds range and other ultra-premium wines by about 7% from July 1.

That reflects the pressure on supply of its luxury wines, especially as the China market is now reopening. This is in distinct contrast to demand for the commodity wines of which Australian producers have a glut.

Rivals

Rivals Accolade and Australian Vintage are in the early stages of talks about future rationalisation of the industry, possibly through a merger, to restructure their businesses. Those talks may or may not bear fruit.

Accolade was effectively taken over recently when its mountain of debt was bought in a debt for equity swap by a Bain consortium after private equity house Carlyle accepted an almost US$1 billion hit and walked away from the group it bought only in 2018.

Finding an acceptable buyer for commodity Australian wines may be a tall order in the present market. That is why Ford is considering a split that could see shareholders offered separate equity in a commodity wine company.

We are on the verge of this year’s harvest and Wine Australia has estimated that there are almost 2 billion bottles of surplus stock already in the tanks.

Whatever happens many growers will be forced out of business by lower demand for grapes from the big producers as they reshape the industry.

Full circle

For Treasury forming a separate company for lower-priced brands or selling them entirely would see the company come almost full circle from 20 years ago.

Until 2005 Penfolds was part of Southcorp, then Australia’s biggest wine group producing some 30 per cent of the country’s wines by value.

That was taken over by the Fosters beer giant for almost AU$ 4 billion. That was a disaster and both Fosters and its wines arm foundered.

In 2011 Fosters was sold to South African Breweries with the wines division becoming a separatee company under the Treasury banner. The company then set off on a road to expansion which it is now putting into reverse.