Treasury Wine Estates Limited (ASX: TWE or Treasury Wines) is a global winemaking and distribution business selling wines in 70 countries under luxury and premium quality brands, including the iconic premium brand, Penfolds.
Treasury Wines produces its own grapes in Australia, France, Italy, China and the US from 11,400 hectares of vineyards. TWE was formerly the wine division of Fosters Group before its demerger from Fosters in May 2011.
Investment in Chinese vineyard
Penfolds’ commitment to China has been strengthened by the recent acquisition of a Chinese vineyard and production assets for A$27.5 million. Located in a highly regarded wine production region in north-western China, the vineyard is 43 hectares in size and includes a modern winery with capacity for future expansion and a cellar door.
The winery produces several grape varietals, including Cabernet Sauvignon and Marselan. These grapes have already been used by TWE’s flagship brand, Penfolds, for its China-origin wines. The transaction terms provide for 75 percent ownership of the vineyard, with an option for TWE to acquire the remaining 25 percent ownership after five years. The acquisition will complete in the second half of FY25.
The acquisition strategically aligns with TWE’s growth of its Luxury-wine portfolio and complements its existing third-party sourcing arrangements to increase the Penfolds’ China country of origin portfolio. The evidence suggests that providing a China sourced product resonates strongly with Chinese consumers. Accordingly, TWE intends to evolve the site in the future to create a local brand for Penfolds aimed at building on its strength as one of the leading Luxury wine brands in China.
By owning its vineyards Treasury Wines has control over production costs and the quality of its wine vintages. This is a critical aspect of owning and running a Luxury brand portfolio. Cost of grapes and oak barrels account for 65 percent of wine production costs.
TWE’s decision to build a Chinese winery makes sense after China imposed up to 218 percent tariffs on Australian imported wines during the pandemic.
China is potentially a globally significant market for Penfolds which is intent on building a long-term, multifaceted strategic co-operation with CADA, China’s primary alcohol industry body, by working together to build China’s fast-growing wine industry capability.
Luxury brand portfolio driving profits
Treasury Wines’ Luxury Penfolds brand accounts for 75 percent of Group net profit and approximately 50 percent of Net Sales Revenue. Penfolds delivered a 42 percent EBIT margin in FY24, compared to the Commercial brands EBIT margin of just 10 percent.
The Commercial brands portfolio comprises Wolf Blass, Lindeman’s, Yellowglen and Blossom Hill. These brands represent approximately one-third of the Group’s volume (7.1m cases), 11 percent of Net Sales Revenue and less than 5 percent of gross profit.
Divestment of these brands should boost margins and enhance the overall quality of TWE’s portfolio as it executes its premiumisation strategy by focusing on its valuable Luxury portfolios. This strategy includes the creation of a Global Premium division before 1 July 2025 by combining the Treasury Premium Brands and the Treasury Americas Premium division.
Looking ahead
TWE expects a 20 percent lift in FY25 EBIT to the range of $780 – $810 million, driven by strong sales momentum the Luxury brand portfolio. Given TWE’s conservative balance sheet, this outcome implies a similar lift in the FY25 dividend.
TWE’s multi-country of origin brand based on premium product and focused on high-end consumers provides strong barriers to entry and takes decades to establish. By avoiding products where low cost is the primary source of competitive advantage and focusing on premium quality wine that is the best in the industry, TWE creates superior value for its customers and should continue to earn higher long-term returns for its shareholders.
