As a seasoned wine writer, I often find myself extolling the ethereal, exotic and esoteric aspects of wine. As a result, on occasion I overlook the true nature of wine. As an agricultural product it is inexorably dependent on the vagaries of nature. However, it also provides subsistence to growers and winemakers, and as such it is a business venture entered into by those seeking to maximize cash flows and profits.
I recently read with interest the account of the business aspect of the wine industry. A global wine producer, Treasury Wine Estates, announced that it had suffered a financial loss by gaming the marketing of its wine brands. In anticipation of increased demand, it took steps to build its wine inventory. But its gamble did not pay off.
Treasury Wine Estates is a mid-size producer, arising in 2011 as a spin-off of Foster’s, the Australian wine and beer producer. Its brands include many Australian and American labels, including Rosemount and Lindemans in Australia and Chateau St. Jean, Beringer and Chateau Sovereign in the United States. It reported 2013 pre-tax earnings of $197 million, on sales of $1.5 billion and 32 million cases of wine. It has made a concerted effort to build the United States market, setting an aggressive goal of a 40 percent market share. But it is this very market where Treasury suffered its misstep.
Let’s place its dilemma in perspective. In 2013, overall wine sales increased in virtually every global market, boding well for wine companies’ profits. But not for Treasury.
In 2013, the United States became the world’s highest consumer of wines, a boon for many wine companies. But not for Treasury.
In this market environment, it seems if you produce it, they will drink it. But not for Treasury.
In 2013, Treasury found itself with an excess of wine from earlier vintages; it overestimated the demand for its wines in the United States, causing a large inventory of older, out-of-date wines as the new vintages were coming to market. The affected brand names were not disclosed.
Treasury’s accountants and marketing executives were faced with the dilemma of dealing with this glut. What to do?
Discount the wines? This is difficult since retailers have already stocked shelves with new releases and are not interested in older wines in the $8 to $15 price range.
Reassess your sales forecast methods? Reduce vineyard acres planted? Each requires a multi-year strategy and a logistics nightmare.
Destroy the excess inventory and incur a financial write-down? Take your poison and move on? And if so, what are the repercussions on Treasury’s stock price and its reputation on Wall St.?
Treasury made the difficult business decision: liquidate its agricultural bounty. It recorded a $145 million expense, resulting in a 53 percent drop in annual profit. There were three components of this write-down: 1) most alarming, the equivalent of six million bottles of older wines, valued at $32 million, was literally poured down the drain, the ultimate form of liquidation of assets; 2) a write-down of $36 million for older bottles of wines retained for onward sale; and 3) a loss of $77 million on bulk wines and grape contracts.
The head winemaker (CEO) of Treasury was summarily dismissed for this financial debacle. A statement was issued by the chairman of Treasury: “Following the write-down of U.S. inventory, the board has undertaken a review and concluded that now is the right time to look for a new CEO. The board believes TWE needs a leader with a stronger operational focus to deliver the company’s growth ambitions.”
It seems that, unlike Wall St., bad commodities investment decisions in the wine industry have personal repercussions.
Nick Antonaccio is a 35-year Pleasantville resident. For over 15 years he has conducted wine tastings and lectures. He also offers personalized wine tastings and wine travel services. Nick’s credo: continuous experimenting results in instinctive behavior. You can reach him at firstname.lastname@example.org or on Twitter @sharingwine.