‘You can’t get the US wine business right. Sell it!’ Analyst tells Treasury Wine Estates CEO

Beringer is one of Treasury Wine Estates top US brands (Picture Credit: Ceasol/Flickr)

Treasury Wine Estates said yesterday it will spend $147m destroying wine destined for the growing US market after admitting ‘over ambitious’ sales forecasting for fiscal year 2014.

The former Foster’s Group wine business – Beringer, Lindemans, Stone Cellars are popular US brands – is spending the AUD $160m to re-base US inventory levels to carry less stock, as it targets opportunities in better quality products, where it currently has high exposure in lower-cost wines.

This is despite the wider US wine market growing 2.2% last year, with 345.1m nine-liter cases sold, according to Chicago-based Technomic. But of the US top 5 wine suppliers by volume, only No.5 player Treasury (-1.9%) and No.2 player The Wine Group (-4.4%) saw sales slump.

Treasury logged AUD $1.64bn in sales in 2012, and was spun-off into a standalone following the sale of Foster’s Group to SAB Miller two years ago.

Old and out-of-date stock

But it has struggled since, and admits it is now stuck with an excess inventory of “old and out-of-date stock” that both it and its US distributors would prefer to destroy.

52% of US wine sales occur in the sub $7.99/bottle range, with 25% in the sub-$4.99 bracket, but the more significant growth over the past year is 13% in the $9-$11.99 range, according to Nielsen.

During a tense investor call yesterday led by Treasury CEO David Dearie to discuss the ASX Announcement on inventory US levels, financial analysts were unimpressed, since pre-tax earnings of AUD $216m will be hard hit by the US write-down.

David Errington from Merrill Lynch was especially blunt: “I’ve only got one question,” he said. "You’ve had 13 years, not your personally David, but Foster’s etc. have had this business for 13 years. And in my recollection, I can’t remember ever getting the US right.”

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He added: “I’ve know you’ve taken the axe to it. But my question is, you’ve cleaned the business out now. Why not just sell it? You’ve got great opportunities in Australia, great growth in Asia.

“You just really can’t get this business right. Why be there? Why not just sell it? Because there’s plenty of buyers, you’ve got great asset values over there – I think vineyards are about $300,000- $500,000/hectare, and you’ve got 220,000 hectares. Why not just sell it?”

Dearie replied: “The US is the world’s largest consumer of wine, and it’s growing, growing at more luxury price points, the more massed age and luxury end. That’s where the consumer is moving to.

“The growth from the US is forecast to go from about 300m cases to about 450m in the next 10 years. It’s a fantastic opportunity at the right price points.”

Treasury Wine Estates will report its FY 2013 results on August 22 2013.