More of the same harsh medicine for struggling wine giant, Treasury Wine Estates (TWE) from the new CEO Michael Clarke.
His prescription of cost cuts, job losses and revamping the company’s long list of wine labels could have come from the playbook of previous managements of the embattled wine group.
But the market liked and the shares jumped 7% (or 26c) to $3.86 in reaction to the news.
This news has been well anticipated by the market – the shares are up more than 10% from March 31 when they touched a recent low of $3.49.
What appealed to investors in the generally weaker market, was the bottom line from yesterday’s briefing of investors by Mr Clarke – that under his management, TWE is heading for more losses as he restructures and tries to improve performance and profitability.
And there won’t be any sentiment from Mr Clarke who warned that all but one of the company’s 83 wine brands could be axed or revamped. Only Penfolds’ labels would not face such drastic action.
The reason for the tough action is of course the weak management of the company over last three years, the problems and losses in the US and the protracted downturn in its key markets of the US, Europe and China.
Mr Clarke said in a statement to the ASX that since officially commencing in the role on March 31 he had spent extensive time inspecting TWE’s underperforming vineyards and assets in America, and believed immediate action including reducing costs was needed to improve the business.
‘While there are a number of actions to be taken to improve Treasury Wine’s performance, my immediate focus is on running the business," he said in the statement.
"It is however, already clear to me that Treasury Wine must take action to reduce overhead expenditure, reinvesting these savings back into consumer and brand marketing.”
Mr Clarke will shortly start visiting customers in Asia and Europe and we can expect more tough talk.
Mr Clarke, who worked for companies such as Kraft and Reebok, also said he was committed to the strategy laid down by his predecessors to shift Treasury Wine’s production focus up the price curve to more expensive wines, also known as a ”premiumisation” in the industry.
TWE tried that last last year in the big Christmas New Year selling season by not offering discounts to retailers, especially Coles and Woolies with their huge liquor chains.
That move saw sales fall and profits under pressure.
For the December 2013 half year, Treasury Wine reported flat sales of $864.2 million as profits halved to just $25.7 million.
But TWE is like any other supplier to the supermarket giants – they want discounts and better trading terms to lower prices and fatten profit margins and suppliers have to supply what the retailers demand.
In the briefing Mr Clarke revealed he had no attachment to any of TWE’s brands, bar Penfolds.
"There is a lot that needs to be fixed," he said in a briefing for investors on Tuesday, according to media reports.
Mr Clarke said he would investigate all options to improve shareholder value, including axing some of TWE’s 83 brands.
TWE’s wine portfolio includes Penfolds, Lindemans, Wolf Blass, Rosemount Estate and Beringer.
The company would spend more on marketing luxury and premium brands such as Penfolds; drop bottom-end wines where the only differentiating factor was low price; cut costs; reduce discounting; and review infrastructure and production capacity.
He said TWE could improve its US business, with new management in place and a step-up in the marketing of luxury and prestige wines.
He was confident that the Chinese market would recover from austerity measures that had affected demand for luxury wine.
That’s a big maybe, as so far there have been no signs the anti-corruption drive in China is being relaxed.
