The woeful admission by Treasury Wine Estates that inventory levels had been grossly mismanaged and overstated is going to lead to a major rethink by the market about what this company has been doing for the past couple of years

US wine stocks stain market darling

July 16, 2013

Elizabeth Knight


The woeful admission by Treasury Wine Estates that inventory levels had been grossly mismanaged and overstated is going to lead to a major rethink by the market about what this company has been doing for the past couple of years.

Under chief executive David Dearie, Treasury Wine has been telling a positive story about remaking the company, focusing on the high-end brands and installing proper management disciplines – a goal made possible thanks to winning independence from Foster’s in 2011.Treasury Wine’s stellar share price performance has been a little at odds with its financial performance. In full-year 2012 its earnings rose but only because it cut costs. And in the first half of 2013 earnings fell. Investors had clearly factored in that it was on the cusp of growth.

This optimism bubble burst on Monday when it became abundantly clear its US business remains plagued by distribution issues and that behind the big picture gloss lurked a business which had failed to execute a large part of its strategy. This will cost the company a staggering $160 million.

he only piece of good news was that 2013 earnings (before inventory related writedowns) would be in line with expectations. But this reeked of disingenuousness, according to one analyst who was joined by several others querying Treasury Wine’s accounting treatment in dealing with excess stock.

(Incidentally the sudden departure of Treasury Wine chief financial officer Mark Fleming barely rated a mention last month. But with the value of hindsight the announcement and his departure a day later must raise some eyebrows.)

The issues surrounding the troubles thrown up in Monday’s announcement suggest the US operations remain a weeping sore. Inventory mistakes of this magnitude don’t emerge overnight. Clearly wine stocks have been sitting in US retail or distributors’ warehouses for a while and clearing them organically was based on wishful thinking.

It is extraordinary that $35 million of wine will be tipped down the drain and another $40 million in discounts and rebates will be undertaken to get rid of excess inventory. Another $85 million of non-cash expense will be worn due to cancelling grape contracts because of oversupply.

The mistake is partly about miscalculations about the success of new products. This is not forgivable but a bit understandable.

The more fundamental sin is that the distribution system in the US was so lacking in transparency that a slightly more forensic analysis revealed Treasury Wine appeared to have no idea (or was not admitting) what was sitting in its channels. This is traditionally referred to as channel-stuffing.

The US distributors’ discovery of just-in-time inventory and logistics management meant Treasury Wine was further exposed.

Management of any retail operation has two fundamental rules – make or buy the product that the customer wants and match supply to demand (or manage inventory).

Any fashion retailer understands that its product has a shelf life of one season after which its value diminishes. It is a bit trickier with wine because shelf life varies depending on the type and quality but the theory still holds.

While inventory has been growing behind the scenes in the US, the firm’s sales pitch has been focused on increasing the sale of higher-margin premium wine and expanding its footprint around the globe.

This strategy has met with some measure of success in the UK and in opening new markets in Asia. But there is no point sitting on a crow’s perch if the daily operations are in disarray. Over the past two years Dearie had clearly convinced many investors and analysts to support his broader strategy or at least to get on board for what many had seen as a potential takeover target.

Treasury Wine appeared to be a ripe target in 2011 and even 2012 but this talk has died down over the past year, suggesting that share price gains reflected confidence in Dearie’s strategy. He says he has now cleaned up the spilt shiraz in the US but in doing so requires the volume of commercial wine (the non-premium end) being sold to fall.

This begs the question that many investors but only one analyst asked on Monday – why don’t you sell the US business? Merrill Lynch’s David Errington also noted that the US business has been a problem for 13 years, and management was accountable for what appeared to be an inability to execute the strategy.

Dearie discounted any suggestion Treasury Wine would pull out of the US, which he described as a large and high-growth market.

The reduced shipments to the US will bleed into earnings in 2014 and potentially 2015.

What was once a sharemarket darling lost its gloss in Monday’s trading – the share price fell more than 12 per cent by the close of trade as investors’ thirst for more detail was avoided by management, which invoked the defence that it was in black-out restriction territory.

Dearie said part of the new inventory strategy was about protecting wine brands. But this news will pose a threat to the company that will require repair.

Bottoms up is one thing – this is going to extremes

July 16, 2013

Eli Greenblat

Somewhere in the US, up to $35 million worth of wine will be laid to rest along with fast-food wrappers, food scraps and soiled nappies.

Such is the ignominious end for as much as 1 million bottles of wine created by Treasury Wine Estates, the Australian winemaker that owns brands such as Penfolds, Wolf Blass and Rosemount, and which has been stuck in warehouses across the US for months – and maybe years – unable to find buyers.

The decision to pour the wine down the drain, bury it in a landfill or squash it beneath a 10-tonne steamroller, has been made by Treasury Wine Estates to help clear a bottleneck of unwanted wine currently sitting in the US – its biggest market by sales – and allow fresh wine to be put through the system.

But before wine fans fret, the company is only destroying its cheaper, commercial wine, typically priced as low as $US5 ($5.50) in the US and which has a limited shelf life before it turns.


The company won’t say which brands it will help its distributors to get rid of or the manner in which the wine will be returned to the earth from whence it came.

However, it is believed the bulk will be from the flagship Californian vineyard Beringer, which makes wines such as the ”Sledgehammer” brand – pitched at men who liked bold reds.

Other brands likely to be dumped include ”Little Penguin” wine as well as ”Meridian”.

It is not believed much of the company’s Australian-made wine still gathering dust in US warehouses will also be destroyed, although wine analysts believe some out-of-date Lindeman’s might be culled.

Updated July 15, 2013, 5:15 p.m. ET

For Vintner, $145 Million of Wine Down the Drain

Australia’s Treasury Wine Estates Takes Write-Down on Disappointing U.S. Sales


One of the world’s biggest vintners has a roaring hangover from poor U.S. sales, leading it to destroy thousands of gallons of wine past its prime.

Treasury Wine Estates Ltd. TWE.AU -7.53% —whose brands range from the mass-market, U.S.-made Beringer up to $1,000-a-bottle Penfolds Grange from Australia—said it would book a charge of 160 million Australian dollars (US$145 million) against its U.S. business for the fiscal year that ended June 30.

The vintner relies heavily on sales of less-expensive labels in the U.S., the world’s biggest wine market. Treasury Wine said Monday it had overestimated U.S. demand in the past year, forcing it to discount or destroy older wines that had passed their drink-by date. The company warned it expects to ship less wine to the U.S. this fiscal year, reducing operating earnings by as much as A$30 million.

Inexpensive, low-alcohol wines such as White Zinfandel, a key Beringer varietal, don’t have nearly as long a shelf life as a high-end Chardonnay or many red wines, said Jon Fredrikson, head of Gomberg, Fredrikson & Associates, an industry consultancy in California, noting that many people who used to reach for a white Zin now opt for Moscato, a similarly sweet wine. Even so, he said, it is “very rare” for large quantities of wine to be destroyed.

Bulk wine that hasn’t sold is redirected to distilleries, which can use it to make brandy or other spirits, although it is too expensive to do that once wine has already been bottled.

By recalling unsold wine bottles from distributors and retailers and then destroying them, wine companies can recoup taxes that were paid on the wine, softening losses, Mr. Fredrikson said.

“You take a steamroller and roll over the bottles and the government approves it and you get the tax back,” said Mr. Fredrikson.

Problems have followed the Sydney-based Treasury Wine Estates since it was spun off from global beverage maker Foster’s Group Ltd. two years ago. Back then, a glut of Australian grapes and weak sales in the U.S. and other overseas markets weighed on profit. The latest impairment charge followed a A$1 billion write-down of the business before the spinoff in 2011.

The company owns scores of labels produced globally, including Castello di Gabbiano, Chateau St. Jean, Greg Norman Estates, Pepperjack, Stags’ Leap Winery, and Wynns Coonawarra Estate.

Treasury Wine’s struggles set it apart from the broader wine industry in the U.S., which is posting record sales after 19 straight years of volume growth and an increased thirst for imported labels.

Australian wines rode a wave of popularity in the U.S. during the 1990s and first half of the last decade but have ceded momentum to other wine-exporting countries, such as Argentina, Chile and South Africa. The Aussie dollar’s strength in recent years also hurt the competitiveness of wine from Down Under.

In addition, much of Treasury’s U.S. sales are in low-priced wines at a time when American tastes are turning more expensive. U.S. store sales of wine bottles priced between $3 and $5.99 edged up just 1.5% and bottles priced $6 to $8.99 dropped 3.3% in the 52 weeks ended May 25 in volume terms, according to Nielsen. By contrast, volumes of bottles priced $9 to $11.99 and $12 to $14.99 rose 13% and 9%, respectively, and those above $15 increased more than 6%.

U.S. wine consumption rose 2.2% last year, reaching 345.1 million 9-liter cases, and rose 3.6% to $32.3 billion in retail sales, according to Technomic, an industry tracker. But for Treasury Wine, the No. 5 player in the U.S., American sales slipped 1.9% by volume, while those of market leader E & J Gallo Winery rose 3.5%, Technomic estimated.

Treasury Wine’s sales in the U.S. slipped below 13 million cases last year from 16.5 million in 2009, according to an estimate from Import Databank. It said that each of Treasury Wine’s top five brands in the U.S.—Beringer, Lindemans, Stone Cellars, The Little Penguin and Meridian—had lost ground over the past three years, although Beringer and Lindemans posted modest growth last year.

“Management need to rebuild credibility across the board,” said Brad King, a portfolio manager at fund manager Armytage Private, which owns Treasury Wine shares. “Apart from the Penfolds brand, everything needs improvement.” He said he was surprised by the size of the latest impairment charge.

Treasury Wine’s shares fell 12% Monday in Sydney.

Treasury Wine Chief Executive David Dearie defended the vintner’s strategy of chasing sales in the U.S., where he predicted total wine sales could rise to 450 million cases a year within a decade.

“It’s a fantastic growth opportunity, at the right price points,” he told investors on a conference call.

Treasury Wine has been seeking to increase sales in China, announcing plans in March to open wine bars or restaurant-and-entertainment outlets in a bid to get the country’s consumers to drink luxury wines, rather than simply give bottles as gifts. Treasury Wine currently sells in China only through distributors.

China’s appetite for wine has surged, spurring competition among winemakers who had flooded the market and now are looking to differentiate themselves. Wine consumption in China will increase to 2.1 liters a person over the next three years from about 1.4 liters in 2011, according to London-based International Wine & Spirit Research.

Analysts said a recent fall in the Australian dollar, which is down about 13% against its U.S. counterpart since the start of the year, could help Treasury Wine offset the lower U.S. sales and could even lure bidders for the vintner itself.

The Australian dollar’s relative strength against the U.S. currency—the Australian dollar was above parity from late last June until mid-May of this year—had made Australia’s products less competitive against wines from rival regions, such as California’s Napa Valley and South America.

“If the currency comes back a bit further, perhaps it could become a takeover target for the Europeans or the Chinese,” Armytage Private’s Mr. King said.

Treasury Wine said it expected that operating earnings, which strip out items such as the write-down, would be about A$216 million for the fiscal year that just ended, in line with analysts’ forecasts. The company reported net profit of A$89.9 million and operating earnings of A$210.2 million for fiscal 2012.

Treasury Wine competes against rivals such as Constellation Brands Inc.STZ -0.11% in the U.S. North America, which also includes Canada, is the Australian vintner’s biggest market.

Global wine inventories have been tightening recently, after years of oversupply, so Treasury Wine’s woes were largely company-specific, said Andrew McLennan, a Sydney-based retail analyst at Commonwealth Bank of Australia CBA.AU +0.60% .

Despite a record harvest in the U.S. last year, boosted by excellent growing weather, the U.S. grape supply has begun to tighten in recent years as some California farmers switched to nuts and vegetables after vineyard expansions in the 1990s flooded the market with wine.

Global wine consumption has outpaced production for more than half a decade, dropping global inventories by about 40% since 2006, according to Rabobank. Global production fell about 6% last year, led by declining output in Europe, while consumption was roughly flat.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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