By James Atkinson
Treasury Wine Estates’ decision to sack CEO David Dearie in the leadup to the crucial December trading period has been rounded on by analysts in their continuing inquest into the company’s catastrophic earnings downgrade yesterday.
The company’s shock admission of a major first half volume decline in the Australian market compounds its well documented woes in the US and China.
Just how much the Australian performance contributed to the earnings downgrade is still up for debate.
What is clear is that Australian volumes did decline as a result of a decision to increase prices on commercial brands the company deemed to be in a price spiral and at risk of losing brand equity, including Yellowglen, Wolf Blass Red, Eaglehawk, Rosemount and others, which were therefore omitted from the major off-premise chains’ Christmas promotions.
The new Coles Liquor strategy and resulting SKU reduction is also believed to have had a multi-million dollar impact on TWE volumes.
Unaware of the changing dynamics, some independent retailers continued to distance themselves from TWE, under the belief that that TWE was just as “heavily in bed with the chains” as ever. Those independents’ anecdotal reports were that they too did lesser volumes of TWE wines in the leadup to Christmas.
“If they’ve lost ground with the chains and they’re not the flavour of the month with independents, that’s a bit of a challenging thing to come back from,” commented one analyst.
Poor execution in Australia
CIMB analyst Daniel Broeren told TheShout the Australian issues were clearly a result of poor execution in the first half.
“They’ve misjudged the market expectation around pricing and missed out on all volume,” he said.
On the plus side, Broeren said the earnings shortfall could in theory be resolved in the corresponding period next year.
“Hopefully they’ve got a new CEO by then or the new head of Australia is in a position where he’s actually able to make a difference. They could be able to recover the EBIT that they lost,” he said.
However, Broeren expressed serious reservations that TWE will hit its full year guidance, which factors in 15 per cent growth in the second half.
“Given what happened in the first half you’d have to think that’s highly improbable. It’s not conservative guidance at all, it’s optimistic,” he said.
“The next problem you’ve got is that some big vintages are coming through – V13 was big, V14 looks likely to be big, so there’s going to be downwards pressure on pricing,” added Broeren.
Complete loss of confidence
In his note to investors, Merrill Lynch analyst David Errington suggested he had all but given up on the board.
“To exit a highly regarded CEO in September 2013 was disappointing, with a replacement yet to be announced causing unrest within TWE,” he said.
“Add to this the change in management structure just before a key trading period and this only added further unrest,” Errington said.
He said he had heard that there is confusion within TWE and that its sales teams have been dis-organised because of the management changes.
“And given the change in pricing strategy – to increase prices and reduce promotions going into Christmas – it is a cause to question why these decisions were made.”
“We see this being a critical mistake, an own goal by the company. Our confidence toward the company reaching its full potential has been materially diminished.”
More bad news coming?
Citi’s Gino Rossi was more moderate in his assessment of the Australian market, where he said the weak performance was isolated to the Christmas period.
“The decision to pull back on promotions and raise pricing on commercial wines didn’t work, highlighting the challenge for wine manufacturers,” he said in his note.
“We think the strategy is commendable, but we doubt the company can maintain this price discipline for much longer, and forecast a recovery in FY15 Australia and New Zealand EBITs.”
However, Rossi said yesterday’s trading update provided little clarity about how the US de-stocking is progressing, and said the first half results “could reveal more bad news”.
“We think investors should remain cautious ahead of this,” he said.
“Longer term, we note that Treasury provides investors an opportunity to buy the Australian wine industry at the bottom of the cycle, and we think the outlook for the US market is favourable.”
If treasury concentrated on the independents getting their pricing right it would cost them less in discounts with chains and the major chains would have to stock their products(iconic brands) or lose foot traffic. its not rocket science