Accolade budget wine worth a bet

Budget wine worth a bet?

An article worth reading in full can be found at BloombergGadfly. Written by David Fickling and published on 16 January, it is headed, “Budget wine will face a test of maturity with Accolade IPO.” Fickling writes:

“Regardless of the debate about whether wine belongs in the gutter or the stars, there’s long been a near-consensus on the markets that the companies making the stuff are poor investments.”

Fickling pins the issues to deep fragmentation among producers and massive market power among retailers. Add the vagaries of seasonal weather each year, often forcing a redirection of the business model, and the result is few publicly traded winemakers worldwide.

The article carries several interesting pictographs:

The above 17 pure-play winemakers with trailing 12-month sales of over US$100 million ($134 million) have a combined market capitalisation of just $14.5 billion (data compiled by Bloomberg). The article points out this is less than Jack Daniels-maker Brown-Forman Corp.

The article moves on to Accolade Wines and the possibility of raising $100 million-plus on an initial public offering (IPO), possibly mid this year.

Fickling: “Such a move could provide a rare opportunity for equity investors to test their theories about wine’s business model.”

Fickling quotes Stephen Millar, former CEO of BRL Hardy (pre the name change to Accolade), who says luxury on its own can’t pay the bills for a winemaker.

From Accolade to Treasury Wine Estates (TWE), the largest listed pure-play winemaker in the world. Much is made of CEO Michael Clarke pushing the premium aspect of winemaking, along with the tripling of share value since 2014. TWE may push the premium end but it still has a large hold on the cheaper sector of the market.

Fickling: “Net sales revenue in its European unit came to just $3.55 a bottle in its latest fiscal year, barely more than the $3.19 it was making six years ago.”

In an article in the Australian Financial Review (5 January) Clarke said: “I will keep walking away from the lower end.” A positive statement but it’s proving a very slow walk.

Fickling says the upshot is that Accolade produces more cases of wine then TWE – 38 million versus 34 million – but makes less money overall. Operating income from Accolade’s main UK and Australian operating businesses in the 2015 fiscal year came to about $66 million, less than half the $141 million TWE reported, which, according to Fickling

“seems to vindicate Treasury Wine’s premium strategy, but it would be a mistake to count Accolade out. More importantly, Treasury Wine’s drive upmarket is still relatively young.” 

Spanish wine down

An article in Drinks Business on 10 January says sales of Spanish wine in the UK were down 8.3 per cent in the year to 10 September 2016. It lists the top eight selling Spanish brands as:

Brand Owner Value mil Plus/Minus Vol 9lt c/s Plus/Minus
1 Campo Viejo Pernod Ricard £87.727 +16.3% 1,071k +13.7%
2 Torres Bodegas Torres £28.61 +21.5% 429K +24.8%
3 Carta Roja Bodegas San Isidro £11.151 -11.7% 170K -9.5%
4 Faustino Grupo Faustino £10.726 +42% 143K +50%
5 Castillo de Albai Felix Solis Avantis £9.234 +17.5% 143k +23.4%
6 Marques de Montino Changyu Pioneer

Wine Group

£7.999 -7.8% 123.9k -7.1%
7 Baron de Ley Baron de Ley £7.1233 +23% 71.7k +29.3%
8 Contenda Felix Solis Avanti £7.017 -9.5% 156.6k -3.1%

It’s understandable that Pernod Ricard is supplying strong support for Campo Viejo. It’s now a million-case-plus brand in the UK. This week the brand was retailing in the £8-£11 ($13-$18) a bottle sector at Tesco. By comparison, the Jacob’s Creek basic range was £6 a bottle, with the reserve £10 a bottle. TKR assumes the cost of production in Spain is less than Australia, so the margin for Pernod Ricard greater.

Overall Spanish sales may be down, but there is a lot of own brand and very cheap bulk in that. As the table above demonstrates, some of the branded wines are doing very well and it’s these that pose a threat to Australian wine.

The biggest growth in the UK in the 12 months to 5 November 2016 was for Argentinian wine, mainly malbec. Off-trade sales were 32 per cent up on the previous year in volume worth £155 million. That’s still a long way behind Australia but growth is growth.

New Zealand wines continued to grow in the UK off-trade during 2016, up 16 per cent on the previous year’s sales. Value was £401 million.

Chilean wines also grew, up 3 per cent by volume and value.

According to the UK Wine and Spirit Trade Association, in the off-trade Australia, Italy, the US, France, South Africa, Spain and Germany all posted declines in volume and value sales.

Although Argentina did well in the off-trade, its volume and value sales in the on-trade declined by 8 per cent and 2 per cent respectively.

In the on-trade New Zealand sold 56 million litres of wine, up 5 per cent on last year, with a value of £145 million, up 16 per cent.

South African wine was up 5 per cent in volume to 109 million litres, with an increase of 8 per cent in value to £218 million.

Italy was also up in the on-trade, with volume and value sales rising 2 per cent and 4 per cent respectively.

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