China upside, risks for Treasury Wine Estates

China is the only place in the world where TWE is launching its new releases with face-to-face events at the moment.

In Shanghai next week Treasury Wine Estates will hold a “VVIP” dinner for the launch of Penfolds’ Full Moon limited edition series and open a Penfolds House consumer pop-up store that will operate for three weeks.

China is the only place in the world where TWE is launching its new releases with face-to-face events at the moment.

The nation is now emerging from its lockdown and slowdown, with its economy growing by 3.2 per cent, at a time when most other economies in the world are in or near recession.

Thursday’s release of the full-year financial results of Australia’s best-known winemaker, which suffered a 25 per cent fall in net profit to $316m, provided its own insight into the changing Chinese economy — one of its biggest single earnings drivers in the world.

Australia is the biggest source of imported wine in China, with TWE the biggest single foreign seller in the country.

For the month of June, TWE’s wine sales in China rose by 40 per cent compared with June 2019 — with sales growth over the quarter of 13 per cent compared with the June quarter of 2019.

This comes as the Chinese economy recovers from a tough first few months of the year with sales down 50 per cent in the worst months of February and March.

For the glass-half-full set, China is a forerunner of what can be expected globally — having been first into the COVID-driven downturn and now emerging from the darkness.

After presenting his first results, TWE chief executive Tim Ford told The Australian the company was seeing “positive signs of growth” in China, especially in the northern part of the country, which had been lagging behind the upturn in the wealthier southern and eastern regions.

“Clearly, demand is increasing and the occasions for that are increasing,” he says.

“It’s not quite back to normal (compared to what things were last year), but our team members have been returning to their annual business planning processes and visiting customers.

“Banquets and other events are starting up again.”

Ford says its sales growth in China have been across the board, from the more commercial Rawson’s Retreat to its popular Penfolds brands.

TWE does not break out revenue or profits from its China business.

It is included in its total Asian business figures, whose continued strong performance — at least on a relative basis — helped to cushion the bigger falls from the rest of the world.

TWE’s challenged Americas division saw the biggest drop in earnings — down 37 per cent to $147m — while earnings from Australia and New Zealand were down by 15.6 per cent to $133.3mn and Europe and the Middle East down 18.3 per cent to $52m.

Again, Asia has provided TWE’s largest single source of earnings by far on a turnover just a bit larger than that in Australia and 40 per cent lower than in its largest region, the US, where it has revenues of just over $1bn.

Clearly a lot more needs to be done by TWE to turn around its Americas operations, while the challenge in China is to continue to expand its sales, rolling out new products such as the latest white wine infused with Chinese baiju, following on the launch in 2018 of its baiju-infused Shiraz.

Ford reports another COVID-driven trend in China — sales of wine by e-commerce channels picked up strongly, a trend that can be expected to be more widely seen around the world.

TWE said e-commerce sales of wine in China grew by 28 per cent over the financial year, with TWE’s online sales up by 84 per cent over the same period.

Ford says that one of the trends evident in COVID is a move back to brands people trust.