Treasury Wine Estates warns of softening demand, sell-off

Wine brands like 19 Crimes backed by US rapper Snoop Dogg are struggling in current conditions, forcing winemaker Treasury Wine Estates to look at selling some assets.

Treasury Wine Estates, the owner of the Penfolds, Wolf Blass and Wynns brands, concedes a revival of former blockbuster wine 19 Crimes won’t happen in the near term.

The company has blamed a wider malaise creeps into the market that is resulting in cheaper wines being left on shelves as drinkers rein in their spending.

The company’s admission, along with news its sales for 2023 would retreat by as much as 3 per cent, resulted in Treasury Wine Estates’ shares plunging 8 per cent to strip more than $700m from the value of the global winemaker.

Treasury Wine on Thursday said a downturn in consumption of its portfolio of cheaper and commercial wines – most notably in Australia and Britain – was expected to continue for the foreseeable future, forcing it to hack into costs, consider new supply arrangements and divest some of its wine brands.

The dour outlook from wine group mirrors recent comments from fashion retailer Universal Store.

Universal on Wednesday warned of consumers counting their dollars more closely as cost-of-living pressures mounted – triggering a one-third collapse in its own share price – and has raised market fears that discretionary retail is finally feeling the heat from interest rate rises and other household bills.

The poorer outlook for Treasury Wine was also driven by its once juggernaut wine brand, 19 Crimes, which had grown in recent years thanks to marketing tie-ups with celebrities such as US rapper Snoop Dogg but that was showing signs of maturing, some deterioration and now performing below expectations.

Treasury Wine chief executive Tim Ford had earlier this year at the company’s interim results revealed that the powerhouse 19 Crimes brand had slipped a bit, but that the company was focused on improving its sales and returning it to its historic robust growth trajectory.

In March Snoop Dogg dropped into the headquarters of Treasury Wine in Melbourne to meet staff and executives as part of his brand collaboration.

Mr Ford still feels 19 Crimes can be a huge growth engine for the winemaker, whose labels include Penfolds and Wolf Blass. Treasury Wine promised to rework some of its strategies to reinvigorate 19 Crimes label this year. But so far this hasn’t had much of an impact.

Mr Ford on Thursday said the winemaker would implement initiatives to delivering greater operational and strategic flexibility to help return the wine brands to growth.

These included slimming down and making its structures more efficient, a review of its commercial wine supply chains – particularly in Australia – and exploring the sale or rationalisation of some of its wine assets.

Despite softer trading conditions for lower-priced wines, the demand for its premium and luxury portfolio continued to be strong, led by powerhouse brand Penfolds, and it was building strong momentum across key markets such as the US.

Treasury Wine has updated its earnings outlook based on these factors and changing market conditions, announcing on Thursday that it now expected group sales for 2023 to fall 2 to 3 per cent compared with 2022 declines in its Treasury Americas division and Treasury Premium Brands (its cheaper commercial wines) and would be partly offset by growth for Penfolds.

Treasury Wine Estates chief executive Tim Ford says premium lines are holding up well. Picture: Aaron Francis

Treasury Wine now expects earnings of between $580m and $590m, representing growth of around 11 per cent to 13 per cent with group earnings margins of around 23.5 per cent, up from 21.1 per cent in 2022.

“We continually and proactively assess our business performance, our structure and our cost base to make sure we’re in the best position to continue to deliver on our premiumisation and growth strategy,” Mr Ford said.

“With changing consumer preferences and a tightening economic environment in most major markets, we’re taking the opportunity to make changes in our business now, so we have increased flexibility in the future to continue to grow our premium and luxury portfolios.”

Shares in Treasury Wine fell 8 per cent on the earnings update, and later closed down $1, or 7.84 per cent, at $11.76 which was a 10-month low.

Treasury Wine on Thursday said its Treasury Premium Brands division was executing a clear strategy to reshape its portfolio, focused on growing priority premium and luxury brands including Wynns, Pepperjack, Squealing Pig and 19 Crimes across key global markets.

Since commencing this strategy in 2021, the contribution of this arm’s brand portfolios has increased to greater than 60 per cent of division net sales revenue, an improvement of 13 percentage points.

However, the market trends and consumption outlook for commercial wine continued to be challenging, the company said on Thursday, most notably in Australia and the Britain.

“In recent years, this has led to further declines in Treasury Premium Brands’ lower-margin commercial portfolio volumes, a market dynamic that is expected to continue in the future,” the company said.

“In addition, the ongoing inflationary environment, particularly for packaging materials, is expected to place upward pressure on Treasury Wine Estates’ cost of goods in fiscal 2024.”

Originally published as Treasury Wine Estates warns of softening demand, sell-off