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TWE suffered 97% revenue loss in China under harsh tariffs

vino-joy.com by NING SANG LAWATI21/02/2022  

Treasury Wine Estate (TWE), the parent company of popular Australian wine brand Penfolds, revealed its revenue in mainland China has plunged by more than 97% or about AU$76.2 million from July to December 2021 due to China’s crushing anti-dumping tariffs.

In its latest report for the first half of its 2022 fiscal year, TWE said its EBITS (Earnings before interest, tax, SGARA and material items) from Australian COO (Country of origin) wine sold in mainland China declined to just AU$2 million from AU$78.2 million of the same period last year. The drastic decline represents almost a 97.4% loss. 

The drastic contraction in the mainland China market consequently dragged down the group’s overall revenue. Overall net sales revenue was AU$1.3 billion, a 10.1% decline from the first half of F21, which reflected the impact of reduced shipments to mainland China under “anti-dumping and countervailing measures”, the report said.

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Penfolds, the group’s well-known brand in China, saw a 19% decline in EBITS to AU$165.1 million as a result of reduced shipments to mainland China.

Explaining on Penfolds’ performance, the group added pandemic related disruptions have also impacted on-premise and global travel retail channels despite the strong performance in retail and e-commerce channels.

But it said the figure was partly offset by the 32.1% increase of EBITS outside mainland China, especially in Asian markets. The net sales revenue in Asia excluding mainland China increased by 119% due to “strong depletion trends”.

Despite the hit from the China market, TWE recorded stronger growth in its America and premium brands businesses with a 19% EBITS increase in both sectors.

Overall, the wine group’s EBITS declined by 6.7% to AU$262.4 million, slightly unmatched with market expectation of AU$265 million, while its total net profit after tax dropped 7.5% to AU$109.1 million.

Commenting on the result, TWE’s Chief Executive Officer Tim Ford said, “Following the past two years of significant change within TWE and the markets in which we operate, we have shifted our focus from a mindset of ‘recovery and restructuring’ to one of ‘growth and innovation’.”

“We have great confidence that by leveraging the unique strengths of our business – our people, our brands and our asset base – we are well placed to capitalise on the significant opportunities across the global markets in which we operate.” he said.

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Challenging environment in China

Before China announced the 218% anti-dumping tariff on Australian wines, China was formerly Australia’s largest market in value and second-largest in volume in 2020, according to an Australian government report. 

TWE was among the top wine importers in China with 25% of its top-quality Penfolds range exported to the country. It sells about AU$500 million of wine annually to China, which accounted for about 30% of TWE’s earnings in F20. 

The group’s profit in China later experienced a downturn when it was subject to a total of 175.6% tariffs under the harsh punishment imposed by China on Australian wine from March 2020.

Previously in its F21 annual report, it said its Asian market reported a 15% decline in EBITS to AU$205.4 million and an EBITS margin of 38.2% (down 4.9ppts), given that China normally accounts for two thirds of its earnings.

Recent figures from Wine Australia also show China’s tariff has cost the Australian wine industry AU$ 1 billion and a 30% decrease in Australia’s overall wine exports in 2021.

To break through the punitive tariffs, TWE actively developed a series of strategies including producing wines in China. The group has confirmed to Vino Joy News last month that it has partnered with state-owned conglomerate COFCO and bottled its popular Penfolds Max’s series in China’s Shandong province.
TWE expects that trading conditions in its global markets for the remaining F22 will be consistent with those in 1H22. Given the challenging environment in China, the group has not given up the lucrative market and said it will continue to explore the potential for China sourced wine portfolio in its additional analysis.