China still has a thirst for luxury wine
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China still has a thirst for luxury wine

China might be experiencing a softening of demand (at least, that’s the rumour) but one product that still goes over very well in the country is premium wines. It’s not just China that likes a classy wine – globally, drinkers have been gravitating towards the higher end of mass market wines (“mass-tige” as it’s known in the industry), and letting the cheaper bottles stay on the shelf. That plays well for Australian producer Treasury Wine Estates, which has been offloading its cheaper brands and focussing on premium for some time.

Treasury Wine Estates’ share price has declined by 1% so far this year

graph 17 wine

Source: Yahoo Finance

Morgans analyst Belinda Moore thinks Treasury’s strategy towards premiumisation puts it in a great position. She recently told the Australian Financial Review “Treasury is doing the right thing by positioning in luxury… That’s where you can incur the strongest growth in those categories and margins are a lot higher. Given the inventory for luxury and mass-tige on its balance sheet, Treasury looks well-positioned for growth over the next few years.” Last year, 37% of Treasury’s inventory was luxury – in 2011-12, that figure stood at just 23%.

Demand for Asia is fuelling global wine consumption. Exports from Australia rose by 21% over the past year, and there’s still plenty of room for growth. Asian drinkers consume far less per capita than other countries, with Chinese drinking, on average, five litres per capita. To put that in perspective, Australian wine drinkers put away almost 25 litres annually, and Italians drink almost 40 litres! As the Chinese continue to develop a taste for wine, analysts at Euromonitor see the country’s annual wine consumption increasing by 6% for the next five years.

Disclosure

Dominion holds Treasury Wine Estates in its Global Trends Luxury Fund.


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