Australia's Treasury Wine warns of demand hit from inflation

Bottles of Penfolds Grange on sale at a wine shop in Sydney

By Navya Mittal and Echha Jain

(Reuters) -Australia’s Treasury Wine Estates warned on Thursday that inflation was squeezing demand for its commercial-grade wine and driving up packaging costs, sending its shares nearly 8% lower.

The country’s biggest winemaker flagged challenging market conditions and consumption outlook for commercial wine, especially in Australia and the United Kingdom, and said it was undertaking a review of its domestic supply chain.

“Wine is probably more of a luxury item rather than an essential. So, I think when consumers are feeling the cost of living crisis, they are going to be pulling back on certain items like wine,” said Josh Gilbert, a market analyst at eToro.

Winemakers across the globe have reported strong profits on the back of solid sales of premium brands.

Customers of premium brands will continue to consume wine even during the cost of living crisis as opposed to budget-conscious consumers, said Carl Capolingua, a market analyst at thinkMarkets.

Treasury Wine is also considering divesting selected assets, either individually or in combination.

Shares of the company fell 7.8% in their worst session since Feb. 16, 2021, and were the top losers on the benchmark stock index.

Treasury Wine estimated a 2%-3% drop in fiscal 2023 group net sales revenue, weighed down by a weaker performance of its Treasury Americas and Treasury Premium Brands.

The owner of the Penfolds label has been re-calibrating its business strategy in the last few years, moving away from low-margin “commercial” wine towards higher-end, more profitable products.

Consumption of entry-level premium wine in the United States remains challenging and has shown signs of further deterioration in recent months, Treasury Wine said, adding that its “19 Crimes” portfolio – endorsed by American rapper Snoop Dogg, in particular had continued to perform below expectations.

The company, however, said it expected a rise in fiscal 2023 earnings before interest, tax, SGARA and material items to between A$580 million and A$590 million ($393.41 million-$400.20 million), from A$523.7 million in the previous year.

($1 = 1.4743 Australian dollars)

(Reporting by Echha Jain in Bengaluru; Editing by Subhranshu Sahu)