Andreas Clark & Michael Clarke, TKR differs

Talk is cheap:

Last week we published an interview with Andreas Clark, CEO of Wine Australia. One Q&A went like this:

TKR: I find it disconcerting that China (also the US volume increase and value) has taken the lead in bottled wine at $2.50 a litre and below. Apart from the quality aspect does this not indicate the Australian vintage is still too large?

AC: Not at all, China is a growing market with a quickly evolving wine culture. We’re selling in to an expanded market and it’s not surprising to see this growth across all price points.

We remain unconvinced and return to the subject later. Also last week (April 20) The Australian published an article by Eli Greenblat on a speech given by Treasury Wine Estates (TWE) chief executive Michael Clarke at the Global Food Forum in Melbourne.

Two points Greenblat touched on were:

“[Clarke] warned Australia must move away from the poor reputation ‘Brand Australia’ has overseas for cheap wine, to an industry that stands for more premium wine that generates sustainable profits.”

“Mr Clarke also called on the Federal Government to snuff out the wine equalisation tax (WET) rebate system in its current form, which he said was ‘being rorted’ and only served to further cheapen ‘Brand Australia’.”

One can understand Clarke’s statement about exporting more premium wine and doing away with the cheap image, but really it’s not as simple as that, and as the CEO of Australia’s biggest wine company by value Clarke should know better.

Before getting to TKR’s view, there is this from wine marketer Brian Miller:

“I have been hearing this story about focusing on premium wine for years, and have said it myself. It’s a whinge without a solution.

“How do you stop wine companies from selling or exporting wine, to customers who are buying it, at prices (or under labels) you disapprove of? At gunpoint? Dawn raids? Re-education camps?
 
“And why would anyone want to?
 
“Every major wine-producing nation makes, sells, consumes and exports both expensive and inexpensive wines, and a great deal more of the latter.
 
“A customer can pay $10 or $10,000 for a bottle of French wine, or American or Australian. One does not dramatically affect the other.

“Precisely (no broad generalisations, please) how does cheap wine ‘damage’ expensive wine? Is Grange restrained by Rawson’s Retreat? It more likely depends on it, financially.

“Even if the cliché was correct, what follows? So what, and then what?

If ‘Precious Paddock Estate’ can’t sell its $60 Shiraz-Sangiovese-Saperavi in San Diego, it’s pointless blaming Yellow Tail.”

TKR and Miller are in agreement. That is, we accept the need for wine across all price brackets and that money is made in many different ways. But we have a concern about the lowest priced bottled sector. It would be good to think of only top-end wines being made in Australia and sold in export markets.

Which brings us to Clarke’s answer. As yet we are not convinced the $2.49 per litre and below bottled wine exports is profitable, other than in a WET rort, such as Clarke mentions in his speech.

In the year to the end of March, 33.93 million litres of wine was exported in bottle at the case (12 bottles) price of $22.41 or below. China, the US, UK and Malaysia accounted for just under 29 million litres of the total.

The total is 3.77 million cases. Taking the uppermost case price of $22.41 and deducting $15 for bottle, cap, label, carton and transport to dockside, the wine is $7.41, or 82 cents a litre. If we are to believe the rule of thumb that the break-even point is $1 a litre, these cases could be losing money. If not losing money, they are not making a great deal. The profit could be in WET rebates, but if so, it’s a grey area and not a place Australian wine needs to be. Also, what is the quality of these wines? Are they doing any damage to the overall reputation of Australian wine in the global market? Is Andreas Clark right in defending this sector of the market?

The next price bracket up is $2.50 to $4.99 a litre and this is the largest bottled export sector, accounting for 740.3 million litres (out of a total 1.66 billion litres exported). Most bottled Australian wine that is exported goes out at an FOB price of $22.50 to $44.91 a case.

In the 2014-15 financial year TWE sold 30.1 million nine-litre cases of wine, with the average price for cases going to the US, Asia and the domestic market above $44.91 a case. However, in Europe, the Middle East and Africa (EMEA) the average price was $41.30, with the EBITS margin being 5.4 per cent compared to EBITS margins of:

  • US: 11.7 per cent
  • Australia/NZ: 14.4 per cent
  • Asia: 36.5 per cent

The question for Clarke: is all the wine going to EMEA profitable for TWE, or should he follow his own advice to the rest of the industry and concentrate on his more profitable and hence sustainable wines? Is he so sure all his brands are over and above the standard he sets for cheap wine?

We could take the line that to follow Clarke’s logic and speechmaking, TWE should cut its production 20 per cent. In fact, the whole industry should be 20 per cent smaller. In other words, the harvest of 1.6-1.7 million tonnes really should be down to 1.4-1.5 million tonnes.

Clarke has been involved with fast-moving consumer goods for more years than he has been involved in fine wine. He knows full well consumers have a budget for wine, and in most cases that budget is modest. As for the WET situation, hopefully that will soon be sorted.

Treasure in the chest:

On April 15 Treasury Wine Estates (TWE) entered into an agreement to sell Balgownie Estates Pty Ltd resort and winery business to Interactive Entertainment China Cultural Technology Investments Ltd.

In February the property and the business (excluding stock) was valued at $21.4 million. The carrying value of the stock at end of March was $3.44 million. The business was valued at $5.8 million.

Earnings before interest, taxes, depreciation and amortisation of the business for the year ended June 30, 2015, was put at about $1.71 million. Net profit before and after taxation was $460,000.

The sale consists of 29 hectares located at 1309 Melba Highway, Yarra Glen, with stock and business total value of about $27.5 million.

Interactive Entertainment has several parts:

  • Mobile internet cultural business and provision of IT services
  • Provision of medical diagnostic and health check services
  • Provision of hospitality and related services in Australia
  • Money lending business
  • Assets investments business

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