Like a stone – that’s the best way to describe yesterday’s fall in the price of Treasury Wine Estates (TWE) shares after the company produced the widely expected downgrade – the second in around nine months and perhaps the biggest shock of all for what caused it – an attempt to reverse the discounting of the company’s best wines that had gone on for years.
It was at least a $40 million drop in earnings and means 2013-14 will be a wasted year for the company.
Last year’s big slide for TWE came on the back of the US wine sales debacle and over $165 million in losses from write downs, asset impairments and the impact of cost cutting.
It cost the then CEO David Drearie his job and others lower down the chain of command and in the bottom of the work force.
This latest write down should see more heads lopped at the top of the company and in the boardroom.
The 20% plunge in the share price, to $3.64, was as big an indictment of the business strategy of a mainstream company as we have seen for a while, and the shares fell like a stone – straight down.
TWE 1Y – TWE’s silly attempt to repair margins costs it dearly, with an assist from China
TWE makes Penfolds, Wolf Blass, Rosemount, Lindemans and Beringer wines (in the US) and is the world’s second biggest wine maker.
That hasn’t helped the company avoid a couple of nasty pitfalls it should have seen coming (as well as recognising the US disaster sooner than it did).
As a result of a collection of problems, TWE says it now expected operating earnings of $190 million to $210 million, compared to its previous range of $230 million to $250 million.
It blamed weak demand in China and stiff competition in its home market which saw attempts to improve profit margins by lifting prices, resulting in a sharp fall in sales. Gee anyone could have told them that once you start discounting premium products, as TWE has done for years – and the idiots at Fosters before it – you can’t go back to charging consumers top whack for the likes of premier red wines such as Grange Hermitage or Bin 387.
That management tried to bring in the price rises in the busy Christmas period tells us more about the lack of marketing smarts.
Somebody obviously thought that the rises would be ignored by consumers (and presumably Coles and Woolies and other liquor retailers) in the Christmas sales rush.
It was a dud idea because consumers remain very price conscious, even at the top end of the market, and online or mobile phone apps allow for instant price comparisons and the likes of Gray’s Online and other web-connected liquor retailers allow for easy purchases if the prices are right.
The weak demand for China was as a result of the crack down on corruption and big spending. So wine and spirit sales, especially of premium products, have fallen sharply.
Premium wine and spirits were used as gifts in business deals and other relationships, or at expensive restaurants frequented by government and business people.
Now that sort of entertainment isn’t as popular (or good for a career in China).
It also had to destroy $34 million of bottled wine sitting in the warehouses of third-party distributors to ensure an oversupply of wine in the US market didn’t worsen.
Hangovers all round for TWE and its suffering shareholders. It is going to be a long recovery session.
