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Wine Spin-off Could Decant Penfolds True Value

Fine wines, as every connoisseur knows, improve with age and few new-world vintages have a price tag to rival Penfolds Grange.

But analysts at Macquarie think the Penfolds brand risks stagnating if it remains trapped within Australia-listed Treasury Wine Estates TWE.AU +0.42%. It recommends an in specie distribution to create The Penfolds Wine Company, worth 3.1 billion Australian dollars (US$3.24 billion), that could uncork its earnings potential.

“Treasury Wine Estates need only look at the auto industry for good examples of separating luxury brands from mass market brands – e.g. Lexus and Toyota,” Macquarie says.

Penfolds was founded in 1844 by Christopher Rawson Penfold, a young English doctor, who migrated to Australia and purchased an estate in South Australia state to grow wines made initially from Grenache. Its most-famous brand—Penfolds Grange—was created in the early 1950s by a young winemaker known as Max Schubert who experimented with shiraz grapes and techniques picked up on a trip to Bordeaux.

Since then, the Penfolds brand has garnered a huge following among drinkers and collectors alike, with bottles of the rarest vintages selling for tens of thousand dollars. It’s also been honored in some unusual settings: an exhibition in San Francisco two years ago included a Norwegian artist’s “scratch ‘n’ sniff” installation where touching the surface released the aroma of the 1976 vintage.

Macquarie says Treasury Wine Estates, which was spun out of brewer Foster’s Group in 2011 and, is overly reliant on Penfolds.

While Penfolds accounts for only 5% of sales volume, it delivers 15% of sales value and around 25% of gross profit. Weighing it down are several low-growth, mass-market brands.

Creating a new company to house the Penfolds brand could bring forward three strategies to dramatically improve earnings, Macquarie says.

The first would be to capture more scarcity value for Penfolds Grange by replicating the business model used in Bordeaux, southern France, for the premium wines made there. Currently, around 6,000 cases of Grange are produced each year, but this could be increased to 25,000 cases without destroying the brand’s scarcity value.

It could also bring about a change in the pricing model of Grange. Most Bordeaux wine is sold ‘en primeur’, or similar to commodity futures where it’s sold still in the barrel and brokers can later add their margin on top.

“Perhaps the most powerful opportunity to capture Penfolds scarcity value is to sell the Icon and Luxury wines direct to the consumer—perhaps also the Bins as well,” Macquarie says.

For every bottle of Grange sold to a wholesaler, Treasury Wine Estates currently gets A$368. But this could jump to A$619 if it switched to selling direct to the consumer, which would have increased last year’s earnings by more than A$150 million alone, Macquarie says.

If it becomes a separate company, Penfolds’s earnings before interest and taxes could exceed A$430 million within five years.

Despite this logic, investors are unlikely to be toasting a spin-off of Penfolds in the near term.

“We think it is unlikely current management will undertake an in species distribution to create The Penfolds Wine Company, but somebody else might,” Macquarie says. “Penfolds is a winemaker’s brand and should be run by one—the scarcity value of ‘Penfolds paper’ could match that of a 1956 Grange Bin 95!”