From the WSJ:
Australian winemaker Treasury Wine TSRYY -15.71% has for years benefited from quenching the thirst of the nouveau riche in China. The souring relationship between Australia and China has now left it with a nasty hangover.
China imposed anti-dumping tariffs on Australian wines last week after an investigation by Beijing, whose findings were rejected by the Australian government. There is a political background: Relations between the two countries have been on ice since April, when Australia campaigned for a global investigation into the origins of the coronavirus pandemic.
Importers of Treasury Wine will now be required to pay 169% tariffs. But the idea that the company is dumping cheap wines into China looks questionable. On the contrary, the country is a major market for the company’s premium offerings.
Asia is Treasury Wine’s most profitable market, and China accounts for two-thirds of Asia revenue. Margins in Asia were nearly 40% in the latest fiscal year, more than twice the level in Americas, its biggest market by revenue and volume. It’s hard to argue that the company is selling the wine too cheaply in the market where its margins are highest. China makes up around 30% of the company’s earnings overall.
Treasury Wine has been a major beneficiary as Chinese consumers have grown rich and more eager to put their hands on luxury goods from abroad. Its revenue from Asia has more than quadrupled since 2013. That boom has also created a lot of political risk, however: Treasury Wine’s Australia-listed shares have fallen 47% this year as relations between China and Australia have nosedived.
Passing on the tariffs to consumers may not be an option for Treasury Wine distributors as that would make its wines more expensive than comparable offerings from France, and thus less competitive. But absorbing the tariffs itself could mean an 82% drop in the company’s China earnings, according to estimates from Bernstein, even with some savings on marketing and distribution.
Treasury Wine said on Monday it will ship wines allocated to China to other countries in Asia as well as to Australia, the U.S. and Europe. The company will ramp up marketing in those markets, but it won’t be easy and quick as it faces strong competition.
Chinese consumers have been a big boon to many companies selling luxury goods. Shifting geopolitical winds, however, could change that quickly.