In late 2020, Treasury Wine’s exports to China were hit with punitive tariffs as the Chinese government imposed tariffs across a range of exports to punish Australia for speaking out on human rights in China.
The tariffs stopped the company’s biggest growth engine dead in its tracks.
China used to take 600,000 cases a year of Treasury Wine’s high-margin premium wine but the earnings from the giant Asian economy in the latest results are now “minimal to insignificant”, the company said.
Since the tariff imposition, Treasury Wine chief executive Tim Ford has reinvented the company, accelerating plans to step up its international operations – particularly in the US and Europe, putting more effort into marketing to Asian countries other than China, and focusing more on the premium end of the market.
And we saw last week that the strategy is paying off.
Overall profit margins were up by 3.2 percentage points to 23.9 per cent, now very close to Treasury Wine’s ambition of 25 per cent margins. This is all thanks to sales of the premium wines, so the focus by analysts and investors on disappointing low-end sales misses the point of the result.
Interestingly, interest rate rises around the world and the resulting economic slowdown haven’t affected sales of wine above A$30 a bottle, which continue to grow in Australia, the US and Asia. Consumers are drinking less often but paying more for wine when they do. What’s more, there’s no sign that consumers of premium wine are trading down to cheaper bottles, as a lot of consumers are doing when it comes to their grocery choices.
It’s the $10 to $12-a-bottle market where sales are weak, which is what caused Treasury Wines’ sales to come in a bit below where analysts were expecting. While this spooked some investors, it’s unlikely to overly concern Treasury Wines’ management, given the company’s shift to the luxury end of the wine market.
In fact, the company now generates some 85 per cent of its global revenue from its luxury and premium wines, compared to only 50 per cent five years ago.
It has stepped up sales efforts in Malaysia, Thailand, Vietnam and Singapore and began selling in September a Chinese-made version of Penfolds in China, known as One By Penfolds. Made with grapes from the north of China, it sells for around $50 per bottle.
Red, red whine
In the wake of China’s tariff imposition on Australian wine, Australia’s wine exports to China have plunged to just $12.4 million annually from $1.3 billion before the 2020 tariffs.
The Chinese are still drinking wine, just not Australia’s.
China is already the world’s sixth-largest wine market and the biggest importer of red wine, and has the potential to be the largest wine market. As consumers in China grow more affluent, they are turning away from beer and rice wine and drinking more wine.
This represents a lot of potential upside for Treasury Wine.
The election of Anthony Albanese as Prime Minister has seen the government take a firm but constructive approach in its dealings with China – a marked contrast with the bumbling and belligerent approach taken by Scott Morrison and his ministers.
This is starting to pay off with Australia with an improvement in relations that might – or might not – result in the tariffs removed.
Ford, along with a host of other business leaders, is visiting China next month and Australia’s Trade Minister Don Farrell will soon travel to the country, after a recent video chat with his Chinese counterpart Wang Wentao.
Even if tariffs are lifted immediately, it will still take Treasury Wine a few years to get back to the more than half a million cases it was selling in China pre-tariffs.
Demand is already outstripping supply for its flagship Penfolds brands, so to take advantage of the market opening, Treasury Wine would have to source additional grapes and increase production, which would take about three years.
Even so, the company looks well-positioned to chase more sales and higher margin sales in the coming years.
