China is drowning in cheap Penfolds wine

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  • Penfolds is popular in China, but the preference is for more expensive labels in the range, rather than entry level wines such as Rawson’s Retreat.
  • The company’s share price plummeted more than 11% after the AFR spoke to Chinese distributors who claimed up to 800,000 cases of cheap Treasury Wines Estates products are sitting unsold in warehouses.
  • The company issued a statement to the ASX saying it was having importing delays following changes to Chinese customs law.

Treasury Wine Estates (TWE) has admitted it’s having difficulties in China following reports there’s a 3-year glut of its cheaper Penfolds wines, but has told the ASX that it’s “comfortable with the sustainability of its operating model in China”.

After a golden run under CEO Michael Clarke in recent years, the company’s shares were hammered in early trade, down more than 11% to $16 before recovering to be down about 6% for the day, after the AFR reported that distributors were sitting on up to three years’ worth of cheap wines from the Treasury portfolio, and in some instances were giving it away in bundles with more premium Penfolds wines.

As a result of discounting in an attempt to clear some of the stock, Rawson’s Retreat, the entry-level Penfolds wine selling for $6 in Australia, is now selling for around the same price in China, despite additional tax and shipping costs, suggesting it’s being sold for under the breakeven point.

Wolf Blass and some low-end Beringer products are also believed to be part of the glut, the AFR reported, because Treasury insisted on distributors taking the cheaper wines, including Wolf Blass and the California producer Beringer, when ordering more expensive Penfolds labels, which have a strong following in China.

The AFR spoke to several distributors in China, quoting one as saying: “TWE have succeeded in filling a whole lot of warehouses in China, but I’m not sure much wine has actually been sold.”

A major tier-one wholesaler estimated there could be between 600,000 and 800,000 cases of surplus cheap Treasury wines sitting in warehouses in China. Another told The Fin that it had 50,000 (six-bottle) cases of Rawson’s Retreat and another 30,000 cases of other low-end Wolf Blass and Beringer.

In a statement to the ASX Treasury said “discipline and sustainability remain the cornerstone of TWE’s growth in North Asia”, adding that it actively monitors shipments and stock levels with its retailers and distributors.

China accounts for half of Treasury’s proposed $200 million in earnings in Asia in 2018.

“TWE cautions reliance on feedback from selected customers in China,” the company said.

Treasury added that its “disciplined and rigorous approach to working with customer partners to sell a portfolio” of its wines “may underpin motivations for underperforming customers… to comment publicly”.

Clarke said: “The benefits of our global operating model means that we can allocate luxury wines across regions, channels and fiscal years. Therefore, we have flexibility as to when and where this wine is sold in the short to medium term.”

But the wine exporter conceded that it was also having problems getting wines into China, with delays in its shipments occurring with Chinese customs in the wake of new verification requirements introduced last month, saying they “seemingly appear to only apply to Australian Country of Origin wines, and to Australian exporters operating ‘warehouse models'”.

“TWE continues to respectfully co-operate with authorities and relevant agencies in China to meet all regulatory requirements,” the company said, adding that it was working with senior Australian government officials to address the verification requirements.

While Treasury’s shares have now fallen significantly since their recent high of $19.63 on May 9, Morgan Stanley analysts Thomas Kierath and Monique Rooney remained positive about the exporter’s prospects in a note this week with an overweight rating on the stock and price target of $20.

A booming China luxury market and global wine undersupply positions TWE well, they argue, tough conditions in the US.

TWE’s recent US distribution changes should position the business well over the medium term, but we think US results will remain challenged per company guidance,” they wrote

“We remain believers in the long term growth outlook as TWE operates in an attractive category and is executing strongly. We think as the market prices the earnings acceleration in FY19 and FY20 from stronger vintages so TWE holds its one-year forward trading multiple.

“We lift our FY19-20 earnings forecasts 2-3% on faster Asia earnings growth and FX movements.”

You can read the original AFR story here.

TWE’s share price today

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