China is the Treasure

David provided a great overview of Treasury Wine Estates (TWE) on Monday on the blog. Instead of discussing the topics, I thought I would delve deeper into one Treasury’s successes – China.

For a little context, in 2011 TWE split from Foster's and entered a down wine cycle. After that period, TWE was given back to Foster's shareholders with its assets in very strong condition. Part of tts strategy was “based on increasing availability of top-end wines where there are shortages” according to a UBS analyst who covers the stock. This strong inventory of luxury and high end wines will help TW continue to grow in regions and more specifically in China.

Since FY2013, TWE’s Asian division has grown from A$135M in sales to A$200M and EBIT has increased from A$55M to A$73M. Despite the macroeconomic backdrop and anti-corruption measures, the Chinese market is expected to continue to increase its consumption of popular premium wine over the long run. After a trip to China, one Credit Suisse analyst observed that in China “wholesale wine pricing for these wines has dropped so rapidly and to such a low level that there is no more incremental margin to sell such wines in China relative to Australia.”

Despite these trends ad margin pressures in the backdrop, TWE has been able to execute successfully in the market to continue to grow and gain share. The key part of their strategy have been to enter into numerous new distribution arrangements and grow sales. An example of this is TWE’s agreement with Changyu - one of the largest local Chinese wine manufacturers and distributors. In addition to Changyu, TWE has signed up 10 new core distributors and 10 online players. It will be interesting to see retail sell-thru trends over time. The pop in sales may be driven by need to provide inventory to new partners, so it will be important for TWE to provide sustainable sales and growth over the long term.