The Treasury sells wine brands in search of profit
The huge wine producer is moving out of the bargain basement to focus on the more lucrative end of the wine market.
Wine conglomerate Treasury Wine Estates (TWE) has sold four low-end US wine brands to The Wine Group (TWG) for $100 million as the company continues to focus on its premium brands and bottom line.
The quartet of brands, sold March 10, include Beringer Main & Vine, Beringer Founders’ Estate, Coastal Estate and Meridian. The harsh tariffs imposed by the Chinese market on Napa-based TWE’s brands — particularly the company’s Penfolds label — have prompted the wine company to rethink its brand lineup and marketing approach in the U.S. market.
The recent rebranding came as no surprise to most US wine industry analysts. “In the case of TWE, the industry has been waiting for some time for the sale of the sub-$12 segment in the United States to occur,” notes Mario Zepponi, wine merger and acquisition adviser at Zepponi & Company, based in Santa Rosa. .
The TWE-TWG deal, notes Stephen Rannekleiv, global beverage strategist at Rabobank in New York, was a good opportunity for TWE to capitalize on these specific brands, as they play in a less-than-premium segment. He adds that the price was also right. “I guess both companies are happy with the deal they got. There weren’t a lot of people who could go after those brands.”
Although it’s “difficult to assess the value, but I’m sure Treasury views it positively from a reported earnings perspective and The Wine Group views it positively from a cash flow perspective. “, adds Napa-based Jon Moramarco, the managing partner of bw166, a beverage industry analyst.
TWE President of the Americas, Ben Dollard, calls the move a “mutually beneficial sale”, adding, “We look forward to allowing our team to focus on driving our priority brands for the company, including Beringer, Beaulieu Vineyards, 19 Crimes and Penfolds”.
Focus on the case
TWE executives say the deal will allow them to better focus on their premium brands. “As part of our TWE Americas strategy, we continue to focus on our luxury and mass brands, while refining our wine business,” Dollard said. The adjective “masstige” – long used by TWE – strikes a happy medium between mass and class and commands a premium over conventional products while being priced well below super premium products, according to the Harvard business review.
Dollard adds that at the same time, TWE will “continue to build momentum on our masstige and luxury levels with the release of 19 Crimes Snoop Cali Red…and in the luxury level with the release of the Penfolds California Collection.”
The California-based TWG — which has more than 60 brands including Franzia, Cupcake, Chloe and Trapiche — is the second-largest wine group in the United States, according to WineBusiness.com. The group was an ideal buyer for these four brands as the company has long specialized and been adept at marketing low-end wine brands.
TWG declined to comment for this story, and TWE provided a press release confirming the sale and that TWG would acquire existing inventory of all four brands. TWE CEO Tim Ford said in the statement that the agreement “will be mutually beneficial over the long term for our respective organizations. For TWE, this transaction is an important step towards our delivery plans. [TWE’s vision of] the future state [of the] premium wine business in the US and we can now focus solely on continuing to grow our premium brand portfolio to drive future performance in the Americas. »
A sale that makes sense
TWE has long wanted to focus on its premium brands and the recent beating the company has taken in the Chinese market has clearly prompted it to change its sales setup in the US market. Zepponi says TWE has been hit with “a double whammy with slowing US sales and political fallout with China and Australia.”
Since the company’s standoff with China has accelerated interest in changing its US portfolio, Zepponi notes that TWE “wanted to make some quick decisions about the US portfolio.” Selling to TWG makes sense because the company “isn’t afraid of these low-priced brands and actually has a sweet spot for them,” he concludes. “It’s a win-win for both parties.”
“Treasury has made no secret of its desire to focus on wines they call ‘masstige’,” notes Moramarco. “Typically, these brands are in decline, so they are holding back the revenue and profit growth of a public company.” The benefits for TWE, in the case of this sale, “are similar to the benefits of the Constellation deal with Gallo,” he adds.
TWE has long struggled to balance its US business for quite some time, add both Rannekleiv and Zepponi. At times, according to Zepponi, they seemed to rebalance it, but once again the mix of brands tilted like a pinball. So getting rid of brands that aren’t right for them will help “free them up in the future to add brands that will help them succeed,” Rannekleiv said.
Moramarco agrees. “Treasury will find it easier to spend more time on the brands they want to focus on. However, they may make staffing adjustments with the loss of gross profit.”
The Gallo Affair
There are similarities to Constellation Brand’s $810 million sale of its low-end brands to Gallo that was announced in April and completed in January of this year. “There is a tendency for publicly traded companies to sell their low-end portfolio. These brands are not as attractive and will not show shareholder growth,” Rannekleiv shares. In comparison, “a private company may consider these acquisitions to be very profitable”.
On the other hand, a larger stable of brands should benefit TWG in the long run, according to a handful of analysts. This acquisition will also help TWG maintain its relevance with retailers, adds Rannekleiv. Also, TWG handles “cheaper brands” very well. He adds that the purchase is also “an exciting opportunity for the TWG to solidify its role in the value market.”
Given the recent wave of IPOs and SPAC – an acronym for a special purpose acquisition company that is publicly traded and has no assets other than cash – including Vintage Wine Estates which was due to close in May; and Duckhorn, a company that just declared its intention to go public, some wonder if this sale is a precursor to a bigger TWE merger.
Only time and ever-changing wine market conditions will tell.
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