The Treasury sells wine brands in search of profit

The huge wine producer is leaving the basement of bargains to focus on the more lucrative part of the wine market.

By Liza B. Zimmerman | Posted Saturday 13-March-2021

Wine conglomerate Treasury Wine Estates (TWE) has sold four low-end American wine brands to The Wine Group (TWG) for $ 100 million as the company continues to focus on its premium brands and results.

The quartet of brands, sold on March 10, includes Beringer Main & Vine, Beringer Founders’ Estate, Coastal Estate and Meridian. The harsh tariffs imposed by the Chinese market on Napa-based TWE 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 of the brand did not surprise most analysts in the US wine industry. “In the case of TWE, the industry has been waiting for some time for the sale of the under $ 12 segment in the United States to occur,” notes Mario Zepponi, wine merger and acquisition advisor at Zepponi & Company, based. in Santa Rosa. .

The TWE-TWG deal, notes Stephen Rannekleiv, global beverage sector strategist at Rabobank in New York City, was a good opportunity for TWE to take advantage of 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 wasn’t a long line of people who could take these marks.”

While it’s “hard to assess value, but I’m sure the Treasury sees it positively from a reported earnings perspective and The Wine Group sees it positively from a cash flow perspective,” adds Jon Moramarco, Napa-based managing partner of bw166, a beverage industry analyst.

TWE Americas President Ben Dollard called the move a “mutually beneficial sale,” adding, “We look forward to allowing our team to focus on driving our priority brands for the business, including Beringer. , Beaulieu Vineyards, 19 Crimes and Penfolds. “

A closer look at the deal

TWE executives say the deal will allow them to better focus on their high-end brands. “As part of our TWE Americas strategy, we continue to focus on our luxury and masstige brands, while refining our wine business,” said Dollard. The adjective “masstige” – long used by TWE – strikes a balance between mass and class and commands a premium over conventional products while being far inferior to 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 on 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 The group was an ideal buyer for these four brands because the company has long specialized and skillful in the marketing of 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 from all four brands. TWE CEO Tim Ford said in the statement that the agreement “will be mutually beneficial in the long run for our respective organizations. For TWE, this transaction is an important step towards our delivery plans [TWE’s vision of] future state [of the] in the premium wine business in the United States and we can now focus only 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 blows the company has suffered in the Chinese market have clearly prompted it to change its sales setup in the US market. Zepponi says TWE has been hit by “a double whammy with slowing sales in the United States 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 quick decisions about the US portfolio.” Selling to TWG makes sense because the company “isn’t afraid of these low-cost brands and actually has a good place for them,” he concludes. “It’s a win-win for both parties.”

“The Treasury has made no secret of its desire to concentrate on the wines they call ‘masstige'”, notes Moramarco. “Usually these brands are in decline, so they are holding back the growth of revenue and profits for 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 operations in the United States for some time, add both Rannekleiv and Zepponi. At times, according to Zepponi, they seemed to rebalance it, but again, the brand mix tilted like a pinball machine. So getting rid of brands that don’t suit them will help them “free them up in the future to add brands that will help them be successful,” says Rannekleiv.

Morocco agrees. “Treasury will find it easier to devote more time to the brands it wants to focus on. However, it could make personnel 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 which was announced in April and completed in January of this year. “There is a tendency for listed companies to sell their low-end portfolio. These brands are not as attractive and will not show growth for shareholders,” Rannekleiv shares. By comparison, “a private company can view these acquisitions as very profitable.”

On the flip side, a bigger 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. In addition, TWG manages “the cheapest brands very well”. He adds that the purchase is also “an interesting opportunity for the TWG to consolidate its role in the value segment of the market”.

Given the recent wave of IPOs and SAVS – an acronym for a special purpose acquisition company that is publicly traded and has no assets other than cash – including Vintage Wine Estates which is expected to close in May; and Duckhorn, a company that just declared its intention to go public, some wonder if the sale is the precursor to a larger merger with TWE.

Only time and the ever-changing wine market conditions will tell.

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Jean H. Vannatta

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