Treasury Wine Estates (TWE.AX), Australia’s largest winemaker, issued a warning on Thursday about the impact of inflation on its commercial-grade wine and packaging costs. This announcement led to an almost 8% decline in the company’s shares.
The challenging market conditions and consumption outlook for commercial wine, particularly in Australia and the United Kingdom, prompted Treasury Wine to initiate a review of its domestic supply chain.
According to market analyst Josh Gilbert from eToro, wine is considered more of a luxury item than an essential, and consumers tend to cut back on such items during periods of rising living costs.
While winemakers worldwide have reported strong profits from premium brand sales, market analyst Carl Capolingua of thinkMarkets suggests that budget-conscious consumers are more likely to reduce their wine consumption during a cost of living crisis, while customers of premium brands are likely to continue purchasing.
Treasury Wine is also exploring the possibility of divesting selected assets, either individually or in combination.
As a result of these developments, the company’s shares experienced a significant decline of 7.8%, marking their worst session since February 16, 2021. Treasury Wine became the top loser on the benchmark stock index (.AXJO).
For fiscal year 2023, Treasury Wine estimates a decline of 2%-3% in group net sales revenue, primarily due to weaker performance in its Treasury Americas and Treasury Premium Brands divisions.
In recent years, the company has been adjusting its business strategy by shifting focus away from low-margin “commercial” wine toward higher-end, more profitable products. However, the consumption of entry-level premium wine in the United States remains challenging, and there are indications of further deterioration, particularly in the performance of its “19 Crimes” portfolio, endorsed by American rapper Snoop Dogg.
Despite these challenges, Treasury Wine expects an increase in earnings before interest, tax, SGARA (Self-Generating and Regenerative Assets) and material items for fiscal year 2023. The projected range is between A$580 million and A$590 million ($393.41 million-$400.20 million), compared to A$523.7 million in the previous year.
