Australian winemaker doubles its profits as Asia’s middle-class millennials raise their glasses

Melbourne-based Treasury Wine Estates has profited from a shift away from beer and spirits, with a surge in wine sales in China, South Korea and Japan

PUBLISHED : Thursday, 18 August, 2016, 3:53pm
UPDATED : Thursday, 18 August, 2016, 3:53pm

The world’s largest standalone winemaker, Australia’s Treasury Wine Estates, on Thursday said annual profit more than doubled thanks to growing consumption of mid-market wine by Asia’s young middle-class.

As the froth drains out of Asian economies like China, Treasury has found a lucrative market in selling US$10-plus bottles of wine to millennial drinkers instead of relying on prestige sales to older, wealthy customers.

“The millennial consumer tends to be a very good target for us,” Treasury Chief Executive Michael Clarke said. “What we are finding is that a lot of those consumers are moving away from other beverages like beer, spirits and baijiu in China and moving to wine.”

The Melbourne-based company, owner of brands such as Penfolds and Wolf Blass, posted annual net profit growth of 131.2 per cent to A$179.4 million (US$138 million), underpinned by a 76 per cent surge in sales by volume to China, South Korea and Japan.

A lot of those consumers are moving away from other beverages like beer, spirits and baijiu in China and moving to wine
Treasury chief executive Michael Clarke

Revenue from Asia as a whole, where volume sales rose 40 per cent, comprised 14 per cent of Treasury’s total revenue in 2015-16. Outside Asia, volume sales jumped in Europe by 26.4 per cent, but volume growth was more subdued in Australia, New Zealand and the Americas.

Shares in Treasury leapt 11.5 per cent on Thursday and are trading at a lofty price-to-earnings multiple of around 67, signalling both the popularity and risks associated with the stock.

“We’re dealing with a stock that already trades at a significant premium to the rest of the market. It’s good foothold into Asia probably has to do with that good valuation,” said Ben Le Brun, a Sydney-based analyst at OptionsXpress. “In such a fast-growing area of the market it does look as if that’s what’s underpinned the result.”

Winemaker Neil Howard, from Whicher Ridge in Western Australia’s Margaret River region, said he was preparing plans to produce a slightly cheaper wine to export to China’s young middle-class.

“Most of our product retails for between US$25 and US$40,” Howard said. “But it’s well known here that Asian consumers want something a bit cheaper. If that’s what the market is after, that’s what we’ll produce.”

Since a troubled foray into the US mass market made Treasury Wine a takeover target in 2014, it has been taking its portfolio away from low-end wines to widen its margins. This included the A$754 million purchase of Diageo’s US assets last year, and the company’s sale in July of some of Diageo’s downmarket brands.

Treasury recorded earnings before interest and tax of A$342 million for the financial year, compared with its guidance of A$330 million to A$340 million.