Treasury Wine Estates is the world’s largest listed winemaker with total revenue of A$2.88 billion in 2019. The Australian company, with a market value of US$7.32 billion, operates in Australia and New Zealand, the Americas, Asia, Europe, Middle East and Africa. Headquartered in Melbourne, Treasure Wine’s business is in the production and marketing of wine.

 

While the Americas accounted for around 40% of Treasury’s annual revenue in 2019, aggressive “discount war” in the U.S. market that saw oversupply of cheap wine had led the Australian wine giant to issue in January 2020 a warning to its earnings outlook for 2020. By contrast, the massive profitable Chinese market accounted for about a third of the company’s income.

 

It was already bad that Treasury Wine’s ratings were downgraded by a number of brokerages – including JP Morgan, Credit Suisse and UBS – amid concerns of weaker demand for wine in China due to risks from the outbreak of Coronavirus in early 2020. But Australia did not appreciate China – the Treasury’s biggest markets in the premium category.

It became worse when the Australian government chose to support Trump, who accused China’s incompetence in controlling the Covid-19 from spreading, despite tons of evidence that the U.S. president sat on his hands for months. Referring to the Covid-19 as the “China Virus” or a “Chinese Plague”, Trump’s political rhetoric included claims that the virus was “sent by China”.

 

It was a huge mistake when Prime Minister Scott Morrison’s campaigned in April, 2020 – urging top allies France, Germany and New Zealand to pressure China to give the foreign countries the “weapons inspector-like” powers to investigate the outbreaks. Beijing, of course, was not impressed that Canberra used the Coronavirus pandemic to engage political manipulation.

 

China had mocked Australia of parroting U.S. President Donald Trump in its call for an inquiry to determine the origins of Covid-19, despite Morrison’s own admission that he had no evidence to suggest the disease originated in a laboratory in the Chinese city of Wuhan. Trump was the only leader who said he was convinced the virus may have originated in the Chinese virology lab.

In April last year, Chinese Ambassador to Australia Cheng Jingye warned the Morrison government that its dangerous manoeuvre would spark a consumer boycott against Australian goods. Beijing made good on its promise, slapping an 80.5% tariff on all Australian barley grain in May after banning imports from four major Australian beef suppliers, allegedly over labelling issues.

 

Today, several months after Beijing retaliated and started its trade war against Canberra, the Australian wine giant reported a 43% drop in first-half net profit to A$120.9 million (US$94 million), forcing it to cut its dividend by 25% to 15 Australian cents per share. To make matters worse, the second-half earnings are expected to come in “below” first-half earnings.

 

Interestingly, its net sales revenue tumbled only 8% to A$1.4 billion. Essentially, Beijing’s tariffs of up to 175.6% on Treasury Wine Estates’ products has destroyed the company’s net income – indicating that it badly needs the Chinese, its premium customer. The net profits from mainland China has plunged 37.1%, reflecting the impact of the tariffs.

Treasury Wine Estates is now planning to overhaul its business. The restructuring includes selling off some of its U.S. brands and assets in a desperate effort to increase sales. The Australian winemaker hopes to raise at least A$300 million (US$232 million) from the divestment of non-priority brands and the sale of operating assets in anticipation of China-Australia hostility to continue.

 

In addition, the company will exit certain leases to cut costs across vineyards, winemaking, and packaging operations. The company would also split its business into 3 new divisions – Penfolds, Treasury Premium Brands and Treasury Americas. Effectively, an earlier A$6.5 billion spin-off plan – demerger of its high-end wine brand Penfolds – has been cancelled.

 

In August 2020, China began a second investigation into imports of Australian wine, just after announcing a separate “anti-dumping” inquiry into its wine industry 2 weeks earlier. Beijing had wanted to impose an anti-dumping tariff of 202.70%, which would triple the price of Australian wine, as part of its punishment against Morrison administration.

By November, Australian wine exporters watched in horror as stockpiles of wine stuck in warehouses thanks to boycott from its biggest customer. Australian industry said they had been warned by importers that shipments of Australian wine will not clear customs, even though China hasn’t officially confirmed whether the bans are a government directive.

 

China does not need wine from the land Down Under, but the same cannot be said about Australian wine growers. The ban was designed to cripple Australian wine exports to China which are worth A$1.2 billion a year – 167% more than the value of exports to its next biggest market, the U.S. Despite the ongoing trade dispute, Treasury is not giving up the lucrative Chinese market.

 

Treasury Wine Estates chief executive Tim Ford said – “We’re not walking away from China. But in terms of building the strength of our business, we will continue to build the markets outside whilst navigating different alternatives for us to maintain the brand presence in China”. Mr Ford claimed that the company has found a new market in the region such as Malaysia, Hong Kong and Thailand.

However, you don’t need a rocket scientist to tell that no market is large enough to replace China, let alone paying a huge premium for Treasury’s wine. Otherwise, it would not have to resort to selling brands and assets in the U.S. just to raise A$300 million. The demand for its premium wine will remain “extremely limited” as long as China’s tariffs remain in place.

 

Treasury has admitted that it would brace for minimal earnings contribution from China in the second half of the year. It’s absolutely ironic that Prime Minister Scott Morrison’s idea of supporting President Donald Trump has not only ended up with the Australian wine giant having to raise money and exit the U.S. market, but still plans to retain a presence in China even after the Chinese’s boycott.

 

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February 17th, 2021 by financetwitter

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