Why Australian wine is flowing in US sewers
A big vintner plans to dump $32 million worth of its product because of a big mistake in forecasting American demand.
Apparently, even cost-conscious American drinkers don't have a taste for cheap, easily spoiled wines sold at Wal-Mart (WMT).
As reported by Quartz, Australian vintner Treasury Wine Estates, a producer of more than 80 brands from discount store favorites to the more high-end Penfolds Grange, is taking a $145 million hit for the year ending June 30 because it wildly overestimated how much wine it would sell in the U.S. That doesn't include the $36 million TWE will spend to offload wine for pennies on the dollar, or the $32 million in wine that's just going down the drain.
Why is this wine getting the same shabby treatment once reserved for French vintages when its home country didn't get on board with invading Iraq? Well, because unlike pricier wines, these $2 to $5 bottles don't improve with age.
In fact, they turn sour and gross. Basically, if you've been keeping that bottle you picked up at Rite-Aid in the cellar, you're just making a really rancid bottle of vinegar.
According to the Wine Institute, an industry group, U.S. wine sales grew by 2% by volume and 6% by value in 2012, continuing 19 consecutive years of growth. However, low-budget imports from Australia are getting squeezed by homegrown products from California and elsewhere as the U.S. recovers from its recession. Sales of California wines plummeted from $18.9 billion in 2007 to $17.9 billion in 2009, then rebounded to a record $22 billion just last year.
That has TWE in a tough spot. Between an Australian grape glut that's pushing down prices and an American market increasingly smitten with its own wines, TWE's sales dropped by 13% since 2010.
Bank of America/Merrill Lynch analyst David Errington went so far as to insist that TWE give up on its U.S. business. "I can't remember ever getting the US right. . . . You've cleaned the business out now. Why not just sell it?" he said in a conference call with TWE.
In the meantime, TWE is in the odd position of dumping wine to avoid damaging its brand. Considering the company has already announced that it expects to ship less wine to the U.S. this year, it appears the damage will be done whether that spoiled wine is in America's wine racks or its sewers.
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Reports say the generous benefactor behind the huge gratuities is a former PayPal executive.
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