Treasury downplays new inventory concerns

27 September, 2013 by TheShout

By James Atkinson

Treasury Wine Estates (TWE) has rejected reports the company faces a new problem of excess inventory in the China market, as luxury goods companies worldwide feel the impact of Chinese Government austerity measures. 

Advertisement

Suppliers of premium liquor, jewellery and luxury cars have reported a major sales slowdown in China as a result of a government crackdown on gift-giving and banqueting by officials. 

Sources close to TWE have told TheShout that following on from its US inventory writedown, the company's Chinese distributor ASC Fine Wines is now loaded up with excess stock in that market as a result of the stringent new government policies. 

Advertisement

A TWE spokeswoman downplayed the issue, telling TheShout Asia represented about 1.4 million cases out of its total worldwide volumes of 32 million cases last year, and China is just one of four countries in that minority segment. 

"If there was a material / significant problem or we anticipated there becoming one… we would have informed the market," she said. 

However, TWE's annual report released on Wednesday says Asia – of which China and Hong Kong are believed to represent at least two thirds of volumes – represents 26 per cent of company earnings, given the richer sales mix in that market.

And it is China that was earmarked as the destination for the masses of premium wine that the company is aggressively putting down for maturation under a strategy implemented by former CEO David Dearie, who was sacked on Monday


A different kind of inventory problem

CIMB analysts Daniel Broeren and Alex Beer told TheShout that the China inventory issue is very different to that in the US market, which related to commercial wine with a short shelf life. 

They said TWE is not obligated to report the China inventory issue to the ASX, because the carrying value of that asset is unlikely to have reduced materially and the company could still ultimately get full value for the wine in question. 

"The bulk of TWE wine sold in the region is premium wine that ages in the bottle, so can be held back for later release," Broeren and Beer said. 

"However, you will potentially see future shipments to ASC impacted and it raises further questions about TWE's ability to manage channels through to the consumer." 

"With Penfolds' crush capacity expected to grow 80 per cent in the next five years, where else are they going to sell the wine that's coming through? If the demand's not there, you've got problems." 

Treasury is certainly not alone in the China situation, with other Australian companies contacted by TheShout also reporting declining sales in that market. 

Pernod Ricard recently reported a slowdown in China, particularly in sales of its most exclusive spirits, which the French company attributed to a "curb on conspicuous consumption".  

Australia's First Families of Wine chairman Mitchell Taylor this week told TheShout he believes the tough market conditions in China will subside over the next 12 months.

Click here to read the Mitchell Taylor interview.

 

 

 

 

 

 

.