Treasury Wine Estates banks on luxury Penfolds brand to accelerate growth

Treasury Wine Estates is banking on its luxury Penfolds brand to accelerate the company’s growth while China remains closed off.

Tim Ford, chief executive of the country’s largest winemaker, said Treasury saw significant opportunity in its premium brands in priority markets including the US, Hong Kong and Thailand. Picture: Aaron Francis

Treasury Wine Estates is banking on its luxury Penfolds brand to accelerate the company’s growth while China remains closed off.

Tim Ford, chief executive of the country’s largest winemaker, said Treasury saw significant opportunity in its premium brands in priority markets including the US, Hong Kong and Thailand.

The high-end Penfolds brand was already doing the “heavy lifting”, Mr Ford added, and more difficult economic times as inflation and interest rates rose would not dent its growth.

“The centre of gravity in Penfolds’ growth has been in the Bins range, $100 a bottle and above, which is the Bin 407 the Bin 389 and the heart of the Penfolds portfolio,” Mr Ford said after Treasury reported a 5.3 per cent rise in net profit to $263.2m for the year to June 30, even as revenue fell 3.6 per cent to $2.5bn.

The company has lifted prices across a range of its products as it deals with higher costs. It is banking on expansion in its key markets to continue to offset the loss of sales in its single largest previous export destination, China, which in 2020 added punitive tariffs to Australian wine imports.

Treasury has managed to claw back more than the $25m in costs hitting its winemaking business over 2022 and another $25m expected to in 2023, while an efficiencies program has cut $62m in cost this year to help cover that inflationary pressure. The winemaker is also hiking prices on some brands to grow its revenue base.

“Whilst we are not immune to the recessionary impacts and consumer spending shifts we are not seeing any shift whatsoever at this point in time,” Mr Ford said.

“History suggests that the luxury or premium wine consumers, the impact of discretionary cuts would be less at that end.

“We have high confidence they will continue to do that, as evidenced by what we are seeing today,” he added.

Through 2022 much of the Penfolds that was traditionally shipped to China found its way to other parts of Asia. Picture: Emma Brasier. Picture: Emma Brasier

Asia was particularly strong for Penfolds in the second half, with sales growth in the region outside mainland China up 95 per cent in the second half.

“(The price rises) won’t be driven by cost recovery, (but) by where we have brands that we feel have the strength to take price,” Mr Ford said.

“Very specific brands, and the major ones will be Frank Family Vineyards and Stag’s Leap in the US, all of our sauvignon blanc wines like Matua and Squealing Pig … and we are also taking price on some select (brands) within the Penfolds range as well.”

Mr Ford said the winemaker’s long-term objective remained to deliver sustainable growth and an earnings margins target of more than 25 per cent.

Meanwhile, through 2022 much of the Penfolds that was traditionally shipped to China found its way to other parts of Asia, helping to stem the loss of customers and super-profits generated by Chinese drinkers.

Treasury Wine’s drop in net sales of 3.6 per cent reflected reduced global commercial portfolio volumes and the decline in shipments to China in the wake of the 169 per cent tariffs placed on its Australian-made wine, partly offset by strong growth in the ­premium and luxury portfolios. For its flagship Penfolds division, there was an 8 per cent decline in earnings to $319.3m and a 9.1 per cent slide in sales to $717.3m, reflecting the sharp decline in shipments to China but partly offset by strength in other markets as they bought up supply-constrained Penfolds wine.

Mr Ford said he was confident that the Penfolds wine arm could maintain its earnings margins within its historic 40-45 per cent range, although it would be to the midpoint of that as Penfolds booked higher costs relating to the 2020 vintage and investment to support future growth.

In North America there was a 2.5 per cent lift in sales to $963.4m and a 20.5 per cent leap in earnings to $185.6m, led by brands such as Beringer, Stags’ Leap, Matua and 19 Crimes. The division also saw the acquisition of Frank Family Vineyards.

For the company’s Treasury Premium Brands sales fell 5.3 per cent to $796m as earnings rose 27 per cent to $79.6m. There was a strong performance by brands including 19 Crimes, Pepperjack, Squealing Pig and Wynns.

Ord Minnett said in a note to its clients the full-year results were in line with market expectations and highlighted by strong underlying result in the Americas, the successful reallocation of Penfolds to markets outside China and growing strength among its more premium brands. “The premiumisation and reallocation strategies appear on track, while higher costs are expected to be offset by targeted price rises.”