Should you invest in Australian winemakers?

No-one’s buying our wine – should you care?

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Despite being one of the world’s biggest wine exporters, Australia only has two ASX-listed winemakers, Australian Vintage Limited (ASX: AVG), and Treasury Wine Estates Ltd (ASX: TWE).

Both have had their troubles in the past few years, with debt afflicting the former and poor marketing and business decisions the latter. Both have suffered from a high Australian dollar, and although that wheel has spun in their favour, Chinese demand (a key growth indicator) has slowed.

Wine makers have warned about the decline for over a year, and the latest trade figures on wine exports to China show a 12% decline in volume, although the overall value increased by 2% to $217 million. The drop in volume is largely due to Chinese government austerity measures reducing the amount of lavish banquets held and wine purchased as gifts.

While it is understandable that a reduction in government spending reduces appetite for wine, it also says to me that wine is not yet subject to powerful demand from consumers. In Australia I would argue that all wines under $20/$30 or so could be broadly considered a ‘defensive’ asset class, with more or less constant demand from the population. In China it would seem to be a different story – of course everybody drinks Australian wine when it’s free at a banquet, but if it’s not being sold when it’s not free then it follows that there must be some problem with the product. The ‘problem’ could be related to price, competition, brand, demand or a number of other factors (or more likely all of them).

Unfortunately the decline in volume is not limited to China, with the US, UK and European sales all declining for both Australian Vintage and Treasury. This is due to a variety of factors, although demand is still growing in the US and the UK and both companies can still shine in the coming years.

Part of the challenge will be growing consumer demand for red and white wine, while simultaneously building the perception of value for individual brands. It’s fine to focus on luxury wines in China and Hong Kong as Treasury has been doing, but note that the word ‘luxury’ comes first, and it’s often the first to go when spending tightens. Treasury and Australian Vintage both produce mass-market prestige (‘masstige’) wines that are suitable for consumption by the average citizen and it is there that I think the real potential for growth lies. The growth in individual incomes, particularly in China, provides massive opportunities for restaurant and bar sales (to the average market, not in fine dining) to introduce Aussie wine to consumers. Familiarity is powerful and vital to brand-driven sales.

Foolish takeaway

Building appeal to the mass-market will be the key to success for both vintners as this can be used to broaden cultural appeal, as well as leverage the sales of higher quality wines. Investing in ASX-listed winemakers is not for the faint hearted at the moment, as Treasury is a lumbering behemoth with very poor earnings for its level of market capitalisation. On the other hand, Australian Vintage is leaner, meaner, and pays a 7% dividend, but it also carries significant debt. The best strategy might be to hedge your bets by halving your investments and buying both.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company mentioned.

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