Treasury Wine Estates may be looking forward to the opportunities ahead as it re-enters the China market following the dropping of tariffs at the end of March.
But the company, which has long been confident about the potential of the Chinese wine market, now faces new challenges in a very different China from the one that closed its doors to Australian wine four years ago.
Speaking at the company’s annual results earnings call on Thursday, TWE chief executive Tim Ford expressed confidence in the market, confirming that China was a major part of its future strategy.
He said TWE was back in the China market with shipments of Australian-made Penfolds as soon as it got the word that tariffs would be lifted on March 29.
While he told analysts on Thursday that the re-entry to China was on track – with the company gearing up to increase shipments – it is still facing two major headwinds.
First is the long-term weakness in the Chinese economy which will reduce demand for its products, particularly Penfolds. The second challenge is the potential undercutting of its pricing strategy from products being made available on online marketing portals, where sellers are all too eager to undercut official retail prices.
When he took over as chief executive in July 2020, Mr Ford saw China as a key part of the company’s future.
His hopes were soon dashed, with China’s Ministry of Commerce (MOFCOM) announcing in August 2020 that it was starting an anti-dumping investigation into Australian wine imports, a trade once worth as much as $1.2bn a year.
In November 2020 it announced tariffs on Australian wine of up to 212 per cent, effectively destroying the market for Australian bottled wine in China.
But Ford has never wavered from his faith in the China market, selling Penfolds made in France and the US into China to keep the brand alive and backing the development of a Chinese-grown wine industry, including a locally made Penfolds. After the election of the Albanese government in May 2022, TWE watched the situation carefully, keeping in close touch with the federal government as it negotiated with China over tariffs.
It announced earlier this year that it was holding back some of its Australian-made Penfolds wine, ready to send it to China as soon as the tariffs were dropped – which finally happened on March 29.
Confident that a key market was reopening, Treasury Wine also announced plans to increase the wholesale price of Penfolds.
Today Mr Ford is hoping that the end of the tariffs will give the company a fresh start in selling wine from Australia, with China a key part of his next five-year plan.
However, China in 2024 has a much more depressed, sombre economy than that which prevailed in the heady days before Covid.
In the analysts’ call on Thursday, Mark Southwell-Keely of Select Equities expressed concern about the pricing pressure Penfolds was facing in China from the e-commerce “parallel market”.
He said Penfolds Bin 407 was now available on e-commerce platforms in China for 20 per cent below the wholesale price being asked by Penfolds, and significantly lower than its recommended retail price in the country.
China is one of the most e-commerce-savvy markets in the world, with consumers prepared to shop around for the cheapest deal.
Mr Southwell-Keely also believes considerable volumes of Australian wine went into China via Hong Kong during the tariff period through a “grey market”.
And just as TWE was gearing up to sell Australian-made wine to China once the tariffs were dropped this year, so were other middle-market players who had bought or been holding stocks of Penfolds.
He argues that while TWE may have thought it could have increased prices in China, it is now facing competition from parallel markets including a “grey market” which are undercutting its pricing.
TWE executives acknowledged that the “parallel” e-commerce market has always been a factor when selling into China. They said the market was in a transition period which would eventually allow for better pricing.
Mr Southwell-Keely estimates that there is one to two years of inventory which will have to work its way through the parallel market.
He estimates that the amount available is equal to the amount that TWE is now seeking to put back into the market through the front door.
TWE executives said the volumes of product on offer in the parallel market was nowhere near his estimates, describing them as “isolated instances”.
Mr Southwell-Keely said the demand for wine in China has been hit by the slump in the property market.
“The market for wine in China is not so much for drinking but for gifting,” he told The Australian.
“But the property market is weak and the demand for wine for gifting is not strong. This won’t change until there is an improvement in the property market and an improvement in economic sentiment.”
“We don’t expect this to happen for some time. We are sceptical about the short-term outlook for the earnings from TWE’s re-entry into the China market.”
Ford said the company was managing its allocations in the China market, which involved working with some 16 or 17 distributors.
“We are very clear who we are engaging with directly and we expect them to hit their retail price points,” he said.
In the end the proof will be in the pudding. The tariffs may be gone but when it comes to China, there are still plenty of challenges ahead.
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