In its half-year results report, Penfolds owner Treasury Wine Estates (TWE) revealed profits had dropped by 7.5 per cent to $109.1million for the first half of 2022, with net sales revenue down to $1.27billion, a decline of 10.1 per cent.

Chief executive Tim Ford maintained the belief that this was a strong result, given the closure of the on-premise, Chinese tariffs, and a divestment and restructuring program pursued by the company.

“We are very pleased with our first half results, where we delivered comparable EBITS growth of 28 per cent when taking into account the effective closure of the Mainland China market,” Ford said.

To mitigate the impact that China’s tariffs (which can be up to 218 per cent) are taking on the company’s Australian operations, TWE have looked to find different countries of origin for certain brands.

For instance, The Rawson’s Retreat brand now has Chilean and South African provenance bottles, produced with the Chinese market in mind.

Similarly, TWE has also expanded Penfolds holdings in Bordeaux, and rerouted some Californian-produced Penfolds wines to the Chinese market, allowing access to the all-important Chinese premium market.

In the last half year, TWE completed the purchase of the Californian winery, Frank Family Vineyards, for US$315 million.

During the results announcement, TWE also indicated that the company was looking into the possibility of a China-sourced portfolio as a potential work-around.

The crunch of the Chinese market was considerable, with EBITS (earnings before interest, tax and material items) from Australian wines sold in mainland China falling from $78.2million in the first half of 2021, to only $2million in the recent half-year report.

This decline was offset, however, by particularly strong performance in Asia excluding mainland China, with net sales revenue up by 119 per cent.

Elsewhere, TWE stated that its new divisional model (with the company comprising now of Treasury Premium Brands, Treasury America and Penfolds) had enabled growth in key markets.

Ford explained the advantages of such a divisional structure: “Each division is now on a clear and positive trajectory towards their respective long-term growth objectives, with the benefits of separate focus and accountability already very evident throughout TWE.”

In Australia, a large 2021 vintage, plus falling costs of grape and bulk wine, and the loss of the Chinese market (which was Australia’s largest export partner) prompted fears of a ‘Wine Lake’ amongst some investors.

Nevertheless, TWE believes that the premiumisation of its portfolio, in addition to shifting consumer interest in more premium products, will hedge it from any loss in sales value or excess supply. TWE does not expect retailers to ‘trade down’ customers, or to significantly drop prices.

Illustrating this premiumisation trend is the fact that 83 per cent of TWE’s net sales revenue was provided by the Premium and Luxury Portfolios.

As a result of the fall in bulk wine and grape costs, TWE anticipates some improvement in margins, but will also take a smaller 2022 vintage as part of its inventory position management, and therefore expect any benefit from favourable market pricing to be moderated.

TWE representatives said in its interim report: “[The] planned approach strikes the right balance between vintage costs, margin structure and retail pricing, particularly across the Luxury portfolio.”

“Following the past two years of significant change within TWE and the markets in which we operate, we have shifted our focus from a mindset of ‘recovery and restructuring’ to one of ‘growth and innovation’,” Ford said.

“We have great confidence that by leveraging the unique strengths of our business – our people, our brands and our asset base – we are well placed to capitalise on the significant opportunities across the global markets in which we operate.”

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