Treasury Wines pops the cork on a risky new strategy: Three key lessons

While the corporate catch-phrase is innovation, the market tells a different story. Commoditisation is infecting almost every product and service, from banking to media, from televisions to food.

Treasury Wine Estates is steadfast about taking a different path, despite reporting a 20% fall in earnings before interest and tax (EBIT) yesterday. CEO David Dearie’s strategy is one of differentiating his company’s products by building up its market (and supply) of premium priced wines and entering fast-growing markets including Russia, India and Brazil. As the Australian and New Zealand CEO, Chris Flaherty, told LeadingCompany last year, the focus for Treasury is to rebuild the value of its brands.

The earnings fall was one that Treasury had flagged and apparently shareholders did not feel too worried by, according to the Australian Financial Review. The paper reported that shareholders were relieved that the company did not announce a profit downgrade. The share price increased 8% to $5.30 after the announcement.

Treasury was part of the beer brewer Foster’s Group until May 2011, when the two operations argued they were not compatible. Treasury listed onto the Australian Securities Exchange, making it the world’s largest listed wine company. It had an excellent first year, posting a profit of $1.3 billion.

This year, growth appears to be more modest. This half revenue was $816.9 million, down 3.3% from the previous corresponding period of $845.2 million (a result affected slightly by the Australian dollar). Dearie yesterday repeated his company’s prediction of achieving EBIT growth in the “mid-single” digits for the full year. This would require a substantial uplift in EBIT to regain the ground lost in the first half of the financial year.

It’s quite a bold target for the company, which makes Penfolds, Wolf Blass, Rosemont, Wynns of Coonawarra and Pepperjack.

The company’s focus on the premium market is a differentiation strategy.

Amantha Imber, the CEO of innovation consultants, Inventium, says it’s always a brave move to differentiate. “In contrast, I come across many CEO that is think it is all about being a fast follower, which is not a very inspiring innovation strategy and has its own risk because you don’t know if you are copying the right thing.”

We squeeze Dearie’s ideas for their innovative juice:

1. Going backwards can still be an innovation

Wine companies once had a loyal following – wine drinkers were different from beer drinkers, and the two categories didn’t cross over. That has changed: consumers are no longer committed to one or the other product, and they might just as easily opt for spirits or a cider these days.

As the market fragmented, alcohol makers struggled to respond. A price war between the various alcohol categories had eroding margins and ended the last vestiges of loyalty.

The exception is premium wines – loyal wine drinkers will pay more for premium and luxury wines. But can a company’s return to an old strategy – higher prices – be an innovation? “In some markets it can,” says Imber. “It is all about understanding what the consumer wants. If they are in touch with the consumer, that is a smart way of going about it, even if it can seem counter to the usual idea of innovation in terms of finding in the new and different.”

Dearie pointed out that Treasury’s “luxury and ‘masstige’” (premium for the masses) brands constitute only 20% of 16.4 million wine cases the company sold this half year, but they deliver 60%-70% of earnings before interest and tax. Imber says: “I feel a lot of company would do the easiest thing, which is to go on cost cutting, which is incredibly damaging to the brand and margins.”

2. Take time

Imber is most excited by Treasury’s statement commitment to a longer term strategy. Dearie says Treasury plans to keep investing in its brands, as this is crucial to its long-term success.

Treasury bought 591 additional hectares of vineyards in an effort to shore up supply so that it can build a stock of premium wines – many of which are cellared for two to five years.

“What I love about it is that most companies want to do innovation, but they want quick results. Treasury are taking a longer time view. Innovating ad disrupting is a medium-term strategy; they are doing the right things,” Imber says.

3. Stay close to the consumer

As Flaherty explained to LeadingCompany, Australian consumers hate buying wine, even though they love the sophistication and status of drinking it. The problem is all but the buffs cannot remember the brand of the wine they enjoyed the previous week. In the end, they make their choice according to the amount they are willing to spend. A disappointing bottle at a premium price can see them return to discount brands.

Treasury has found a more confident consumer in Asia, in particular in China and Hong Kong, where sales grew by 24%, and Japan, which grew 31%. EBIT for sales across all Asia market were up 12.5%.

Dearie sees growth for Treasury’s premium brands in new emerging markets, namely India, Russia and Brazil.

These are not countries we immediately associate with premium wine drinking, but Imber says the move is a smart one, provided Treasury stays close to its customers. “These are massive emerging markets. [Whether it will succeed] all depends on their market intelligence. We assume they have done quite a bit of research into what consumers are looking for.”

Imber contends that Treasury has a greater chance of success, despite the uncertainties of its strategy, because it is taking a lead. “So few companies are doing so, they are trying to followers – fast followers, or even worse, slow followers. That is a case of the blind leading the blind. It is always exciting to see a company that is risking a differentiation.”

Kath Walters is the editor of LeadingCompany and an award-winning journalist of 15 years’ experience. Kath was previously a senior writer and editor at BRW magazine covering management, strategy, finance, entrepreneurship and venture capital across all industry sectors. In 2006, Kath won the Citibank Award for Excellence in Journalism (General Business). Follow her on Twitter @KathWalters. This article first appeared on LeadingCompany.