When Michael Clarke became the CEO of Treasury Wine Estates (TWE) in 2014, there was so much hope. And in the end, some of the hope was justified. There were real changes in the under-performing, publicly listed Australian Company for the good. But then things started to go wrong, and what is left in 2021 is an overvalued, underperforming shell of its former self.
From March 2014 until August 2018, Treasury Wine Estates stock price went from $4 Australian to $20 Australian, or a total market capitalization value of $2.3 Billion US$ to $11.5 Billion US$. All this was under the rigorous management hand of Michael Clarke, a hard driven, micro-manager, originally from South Africa.
He sold wineries, cut headcount, increased marketing investments and hired an entirely new management team. There was no issue too large to solve or no detail too small to delve into and solve. The results were fairly substantial and rapid. Operating income and earnings increased significantly.
But the biggest change that was made during this glorious period for the Company was a huge bet on China with new operational management on the ground from the wine and FMCG industries that lived in China and knew the market in and out. The Penfolds brand had latent equity with a checkered history, and the Chinese market had never been developed with Operators who actually understood what to do in the local market. Results were outstanding and immediate. Operating income from Asia for TWE grew from 15% of total global operating income to 50%. China grew from negative operating income to 35% of total global profits. The strategy was working and times were good, the future was all set. Until it wasn’t.
It is sometimes hard to tell when a Company starts to decline from its Apex, but if you watch closely and keep a very independent viewpoint, it can be spotted. In TWE’s case, the signs were numerous. Firstly, there was too much management turnover, which was well documented by the Australian Press . The people and talent drain affected every part of the Company, but especially Asia. Good, reputable people left in droves. That was a clear start of the decline for the Company. Hindsight is 20/20, but the rear view mirror is crystal clear. The primary issue seems to be Clarke’s management style, which has been documented in detail in the Australian Financial Review in a slew of articles “I am Treasury Wine Estates”, “We are all Treasury Wine Estates”, “The 63 Million Dollar Man”. It’s hard to keep a global Company trying to perform at the highest level versus competition with a brain drain. Very hard. That was the beginning.
And then COVID. And then ridiculously high, punitive Chinese tariffs on Australian wine going into China. There is an old saying – “You make your own luck” – In TWE’s situation, the opposite is true. The stock is now hovering around $10 Australian, or $5.8 Billion US$, and has dropped as low as $7.87 Australian.
Let’s see where we go from here, but not on the buy list.
