TWE denies it is abandoning Chinese market, despite crashing profits
Despite tumbling profits in its biggest market, Australian wine making giant Treasury Wine Estates has vowed to maintain a “meaningful presence” in China.
Announcing TWE’s half year results, CEO Tim Ford said even though the company had seen operating profit down by over a third (36.6%), largely as a result of the imposition by China of tariffs of up to 212% on Australian wine, it had no intention of abandoning its biggest market. Ford said he was keen to “preserve and protect the presence of the Penfolds brand within the China market” though conceded that the business expects to see “minimal contribution” from the region for the rest of the financial year.
At the same time, the company said it was diversifying and seeking out new markets for its wines, as well as increasing volumes to existing markets such as the UK. However, analysts are concerned that it could take time to reallocate sales, which could come at lower margins. But Ford claimed that the business had seen a strong uptake of its brands in markets such as Hong Kong, Thailand and Malaysia, to the extent that it was currently unable to keep up with demand.
“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,” he said.
TWE reported group net sales down by 8.2% to AU$1.41bn in the first half of its 2021 financial year, with a 43% drop in statutory net profit to $120.9m which chief financial officer Matt Young attributed to disruption of key sales channels for premium wine, along with disruption to TWE’s China business due to the MOFCOM investigations into alleged dumping. But this was offset by “strong performance” in retail and ecommerce outlets in Australia, New Zealand, the America and EMEA regions, he claimed.
Citi analyst Craig Woolford said he thought TWE’s results were “surprisingly strong” in the Asian market, given the challenges it faced, though the company said it expects its earnings for the second half of the fiscal year to be down on the first, mainly due to the lack of contribution from China.
The company also said it had cancelled a potential demerger of the Penfolds brand, with Ford saying that the mooted $6.5bn spin off was now “no longer in contention” according to a report in the Sydney Morning Herald. Instead, the company unveiled its plans to split its business into three internal divisions of Penfolds, Treasury Premium Brands and Treasury Americas, as well as a series of divestments of some of its US brands, which it hopes will return “at least” $300m to the business.
“The focus right now is purely on this new divisional operating model we’ve announced today,” said Ford. “That’s how we’re going to run the business for the foreseeable future, and we’ve stopped any work on demerger options.”