Penfolds to allocate more wine to Australia after Chinese market shut down by tariffs

Penfolds admits it neglected its home market while chasing big profits in China. But will Australian wine lovers welcome its planned homecoming?

China’s tariffs on Australian wine will see shiploads of Penfolds once destined for the banquet tables of Beijing and Shanghai reallocated to other markets, including Australia.

Australian lovers of the luxury wine brand Penfolds will be able to buy more of the iconic wine for the first time in decades after the winemaker neglected its home market as it chased super profits in China.

But now China’s loss will be Australia’s gain after a decision to slap 200 per cent-plus tariffs on Australian wine last year will see shiploads of Penfolds once destined for the banquet tables of Beijing and Shanghai reallocated to other markets, including Australia.

Treasury Wine Estates chief executive Tim Ford has conceded on Thursday that the winemaker had not offered sufficient supplies of its flagship premium brand Penfolds to its Australian customers, and that with now the Chinese market closed because of high tariffs it would redirect Penfolds to its home market.

Mr Ford told analysts at the Treasury Wine investor day that “we are back” in Australia in terms of devoting enough supplies of the Penfolds range and that in recent months he has had tough discussions with retailers here to pledge they would not be taken for granted.

Previously China had swallowed as much Penfolds it could get its hands on, scooping up supplies and given its high margins saw Treasury Wine allocate less Penfolds to other regions, such as Australia.

This had seen for many years Australian drinkers and retailers complain they were having their allocations cut and access to Penfolds diminished as Treasury Wine chased fatter profits in China. There is huge global demand for Penfolds but only limited supply, with total volumes produced each vintage kept a closely guarded secret within Penfolds which further serves to fuel demand in the face of apparent scarcity.

But with crippling 200 per cent-plus tariffs imposed by China that would free up Penfolds supplies for elsewhere.

“We are back”, Mr Ford told analysts in reference to allocating more Penfolds to Australian drinkers and investing in the brand here.

The Treasury Wine CEO also admitted there was cynicism among its large Australian retailer customers about the change of heart.

“Let’s not hide from the fact there is some cynicism in the Australian market with our independent customer base, certainly our large retail customers have been very supportive and see it as an opportunity to continue to build their businesses with Penfolds.

“In the independent trade there has been, in my words, ‘oh you need us again now’ sort of response, we’re not hiding from that, and I have had probably 20 conversations with key influential independent retailers around the country.

“Once you put your hand up and say you haven’t focused on the Australian market, it was the choices we made, not neglect, just the choices we made to grow the portfolio. You acknowledge it and you tend to move on pretty quickly when they realise there is actually a really big opportunity for their businesses to build Penfolds again in those channels.”

Mr Ford said it was hard to find many Penfolds ranges at independent retailers, venues and restaurant wine lists – other than Grange at top venues – and this represented a great opportunity for growth in its home market.

He said Treasury Wine would invest in that, backed by a new operating model for Penfolds to offer more of the premium and luxury brand.

The announcement is good news for Australian wine lovers. Picture: Lindsay Moller

“We have the confidence we will actually have the wine to allocate to this market, and the last thing you want to do is go invest significant amounts in distribution or brand awareness or any consumer spend and then two years later all of sudden pull back from that.

“We have the confidence to be consistent and the reality is if things change in China in the future, we will stick the course in these other markets. The investments we are making now are with the view that we build them over the next 5, 10, 15, 20 years and this is the mindset we have.”

Penfolds would also allocate more wines to the rest of Asia and drive more awareness of the brand in the US, with North America tagged as a the biggest opportunity for the brand in coming years.

“It is a very big shift in mindset for our organisation, particularly here in this market. It is a source of pride that we will do that in our home market.”

Penfolds was also seeking to sell more of its Californian-made Penfolds range in China, but it would resist the “short term sugar hit” of devoting a bulk of the supply of Penfolds Napa to China, but rather spread it across a number of geographies including the US.

As part of the investor day, Treasury Wine also provided for the first time key financial metrics around its Penfolds brand. It showed the Penfolds group of wines had sales of $544.3m in 2018, rising to $816m in 2019 and $765.2m. Penfolds had earnings of $363.3m in 2019 and $357.3m in 2020. Its earnings margins were 47 per cent in 2020, up from 45 per cent in 2019.

The investor day also fleshed out expansion plans for the iconic Penfolds range including a release of French grown Penfolds wines in 2023, following on from a recent release of Penfolds wines grown and made in California.