Australia Treasury Wine Becomes Chinese Drinker’s favorite

The world鈥檚 largest standalone winemaker, Australia鈥檚 Treasury Wine Estates Ltd, on Thursday said annual profit more than doubled thanks to growing consumption of mid-market wine by Asia鈥檚 young middle-class.wines

As the froth drains out of Asian economies like China, Treasury has found a lucrative market in selling $10-plus bottles of wine to millennial drinkers instead of relying on prestige sales to older, wealthy customers.

鈥淭he millennial consumer tends to be a very good target for us,鈥 Treasury Chief Executive Michael Clarke told Reuters in a phone interview.

鈥淲hat we are finding is that a lot of those consumers are moving away from other beverages like beer, spirits and baijiu in China and moving to wine.鈥

The Melbourne-based company, owner of brands such as Penfolds and Wolf Blass, posted annual net profit growth of 131.2% to A$179.4 million ($138 million), underpinned by a 76% surge in sales by volume to China, Korea and Japan.

Revenue from Asia as a whole, where volume sales rose 40%, comprised 14% of Treasury鈥檚 total revenue in 2015-16. Outside Asia, volume sales jumped in Europe by 26.4%, but volume growth was more subdued in Australia, New Zealand and the Americas.

Shares in Treasury leapt 11.5% on Thursday and are trading at a lofty price-to-earnings multiple of around 67, signalling both the popularity and risks associated with the stock.

鈥淲e鈥檙e dealing with a stock that already trades at a significant premium to the rest of the market. It鈥檚 good foothold into Asia probably has to do with that good valuation,鈥 said Ben Le Brun, a Sydney-based analyst at OptionsXpress.

鈥淚n such a fast-growing area of the market it does look as if that鈥檚 what鈥檚 underpinned the result.鈥

Winemaker Neil Howard, from Whicher Ridge in Western Australia鈥檚 Margaret River region, said he was preparing plans to produce a slightly cheaper wine to export to China鈥檚 young middle-class.

鈥淢ost of our product retails for between $25 and $40,鈥 Howard said.

鈥淏ut it鈥檚 well known here that Asian consumers want something a bit cheaper. If that鈥檚 what the market is after, that鈥檚 what we鈥檒l produce.鈥

Since a troubled foray into the U.S. mass market made Treasury Wine a takeover target in 2014, it has been taking its portfolio away from low-end wines to widen its margins. This included the A$754 million purchase of Diageo Plc鈥檚 U.S. assets last year, and the company鈥檚 sale in July of some of Diageo鈥檚 downmarket brands.

Treasury recorded earnings before interest and tax of A$342 million for the financial year, compared with its guidance of A$330 million to A$340 million.

($1 = 1.2999 Australian dollars)