TWE says building strong relationships with independent retailers will be key to its success as it returns to high single-digit earnings growth.
Following the devastating impact of punitive tariffs on Australia wine in China, Treasury Wine Estates expects its FY21 pre-tax earnings to be in the range of $495million to $515million, slightly ahead of current market consensus expectations.
The company was selling about $500 million worth of wine in China prior to the introduction of tariffs of 175%. However, chief executive Tim Ford told analysts at TWE’s investor day that he was confident that revitalising Penfolds sales in Australia, together with the company’s plans to shift sales from China to other countries in Asia such as Thailand, Malaysia, Vietnam and Singapore, would help reinvigorate sales in the region.
Ford confessed the company had neglected independent retailers in Australia during the China wine boom in regard to allocations of Penfolds wines such as Grange and was now focussed on rebuilding bridges.
“Let’s not hide from the fact there is some cynicism in the Australian market with our independent customer base, certainly our large retail customers have been very supportive and see it as an opportunity to continue to build their businesses with Penfolds.
“In the independent trade there has been, in my words, ‘oh you need us again now’ sort of response, we’re not hiding from that, and I have had probably 20 conversations with key influential independent retailers around the country.
“Once you put your hand up and say you haven’t focused on the Australian market, it was the choices we made, not neglect, just the choices we made to grow the portfolio. You acknowledge it and you tend to move on pretty quickly when they realise there is actually a really big opportunity for their businesses to build Penfolds again in those channels.”
He also admitted Penfolds would need to work on its image as a luxury brand in the US due to an inconsistent approach in the past.
“We’ve had stops and starts,” he said.
Penfolds generates about 63% of the company’s total profits on a historical basis. TWE also revealed the huge margins Penfolds commands. Penfolds had sales of $544.3million in 2018, rising to $816million in 2019 and $765.2million. Penfolds had earnings of $363.3million in 2019 and $357.3million in 2020. Its earnings margins were 47% in 2020, up from 45% in 2019.
Restructure to grow profits “stronger for longer”
Ford told analysts that a restructure of the company’s wine operations and a recent boom in consumer spending on premium brands will grow profits “stronger for longer”.
“We are seeing pretty consistent return to significant consumption growth, particularly in premium price points here in Australia,” Ford said. “We are seeing in the US market a return to some pretty strong growth in those channels that had been impacted by the pandemic as the vaccination rolled out in the US as well. The trends are relatively consistent across the board and play to our portfolio, the premium and luxury mix that is in those channels as they open.
“We are certainly seeing positive signs in those markets where the vaccine is rolling out.”
The company will split into three divisions from July 1: Penfolds, Treasury Premium Brands and a North American business unit.
“We see growth across multiple portfolios, multiple markets, and a premium brands portfolio focus will drive our growth consistently at that high single digit levels over the next five years,” Ford told The Australian.
“We think the focus and accountability that will be driven through those three business units, where they are measuring themselves against themselves and how they are going to grow their own businesses not only at the profit level and margin level but also the return on capital employed.”
The company remains buoyant about the potential of the American market, where it has the number one wine innovation of 2020 – Snoop Cali Red – and the fastest growth New Zealand sauvignon blanc, Matua, which is up 30%. It has also has stepped up its collaboration with US heavyweight distribution partner Republic National Distributing Company. A new distribution contract will expand its market reach by nine new states.
Constellation Brands has pulled all its volume from RNDC, which means TWE is now the distributor’s largest wine portfolio in key markets.
The innovations driving growth
TWE is continuing to focus on innovation to drive growth globally. For example, in the US it has launched a Penfolds California collection in March, a Snoop Cali Rose was launched in April and a Matua lighter range is being introduced in June.
In the UK, 19 Crimes is now the favourite supermarket red wine with consumers and a bag-in-box option has been introduced; while in Australia, Wolf Blass has a zero alcohol range launching.