Treasury Wine Estates insists it is not in talks with Pernod Ricard to sell its struggling US business after a 15% share price spike today followed news reports suggesting this was the case.
Key US wine brands owned by Treasury – the world’s only listed, pure play global wine company – include Beringer, Cellar No.8, Greg Norman Estates, Chateau St. Jean, Colores del Sol and Tierra Secreta.
French giant Pernod Ricard (€8.575bn or $11.88bn sales in 2012/13) went on record only a week ago saying that it remains keen to develop its US wine portfolio, although Treasury’s new CEO Michael Clarke insisted last month that its US business is too important to sell.
However, even before it was spun-off from Foster’s Group following the latter’s sale, Treasury has been struggling in the US, and over the past few years some analysts have urged management to sell an underperforming business – vineyards and wine labels – that could fetch billions.
Highly price sensitive US consumers – Treasury’s headache
Morning Star analyst Daniel Mueller described the firm’s Australian volumes as “crushed” (due to the supermarket duopoly) and all regions as challenging” in an April 8 note on its H1 2014 results – net sales down 0.6% to AUD $811.9m; net profit after tax down 42.9% to AUD $25.7m.
“While its premium brands are well known and have significant brand equity, these unfortunately represent less than 15% of volume,” Mueller said. 60% of Treasury’s grape volumes go into commercial, low-end wines.
New CEO Clarke (no stranger to firefighting given his recent stint as Premier Foods boss in the UK) was appointed on March 31 and will focus on optimising premium brands, but faces the problem of US, Australian and EU consumers focused principally on price who display little brand loyalty.
“Treasury’s ongoing inability to execute effectively in the US market has constrained returns. In our view this reflects significant competition in that market where consumers are highly price sensitive,” Mueller wrote.
But…upmarket wine brands soar in Asia
With the bulk of its volumes in bulk commercial wines with minimal brand awareness – despite rapidly expanding premium and ultra-premium sales in Asia with its well-known brands – Mueller warns that Treasury has “limited pricing power in most major Western markets, particularly in the low-end commercial wine segment, because of the bargaining power of its giant supermarket and liquor store chain customers”.
“The challenge will be improving the performance of these highly commoditised wines in a competitive and volatile industry,” Mueller said, noting that the company is trying to reduce its exposure to the customers mentioned above – where Asian growth (sales +10% in H1 with margins above 30%) is helping and there are “early signs of success in the weak European market”.
‘Ambitions in the United States’ – Pernod Ricard
Treasury Wine Estates said in a statement to the Australian Stock Exchange (ASX) today: “The company notes recent movements in its share price, along with the article appearing in The Australian newspaper today referring to Pernod Ricard’s interests in acquiring the company’s US assets.
“Pursuant to the Company’s disclosure policy, it does not comment on market speculation, but confirms that it has not been approached by, and is not in discussions with, Pernod Ricard,” it added.
Pernod Ricard was not available for comment this morning - rather bizarrely it's switchboard played a recorded message in French alerting callers that it is the forthcoming Monday public holiday in the country - but is frank about its desire to extend its US wine presence.
April 24: French firm buys California's Kenwood Vineyards
On April 24 the company agreed a deal to buy Kenwood Vineyards in Califronia's Sonoma Valley - owned by F. Korbel and Bros. - for its premium Sonoma wine portfolio, which is primarily distributed in the US and Canada.
"This acquisition reflects both Pernod Ricard's confidence in the development of its wine portfolio and its ambitions in the United States, the largest market of the group," the company said at the time.
CEO Pierre Pringuet added: “This transaction illustrates Pernod Ricard’s ability to seize tactical growth opportunities that can benefit our entire portfolio in key markets such as the United States,” he said.