China may be a sore point for some Australian wine producers at the moment, but not for Australian Vintage (ASX: AVG).
When the Adelaide-based company, producer of popular brands such as McGuigan and Tempus Two, revealed in April that it was on track to lift annual profit in FY21 by more than 60 per cent, it defied the general market view that the wine sector was on its knees.
Strong growth in its biggest markets, Australia and the UK, supported the company's robust outlook in the current year, and while China may be a tough market to penetrate right now, Australian Vintage is chipping away at building a base there.
Australian Vintage can afford to extend its reach into China. The market only accounts for 3 per cent of its current sales. That compares with Treasury Wine Estates (ASX: TWE), which relied on China for 30 per cent of its total sales in FY20.
However, for Australian Vintage CEO Craig Garvin there are lessons to be learned by Australia from the past year as China slapped Australian wine imports with tariffs of up to 200 per cent.
"One of the positive things out of this is that it has forced us to look at other markets," Garvin says. "With our business, for example, we're focusing very hard on South-East Asia right now and that's paying some dividends."
These markets include Singapore and Malaysia, with Garvin conceding Australian Vintage wouldn't have been looking as hard at those countries if China hadn't shut the gate.
While Garvin also sees India and Japan as future growth opportunities, he isn't turning his back on China.
"We see China as a strategic, long-term market to be in, whether that's three months or three years; we're certainly setting the table for China long term and we have some good partners there."
So, why China and why now?
"I've been with the company 20 months and in that time we've identified China as a very strong strategic play. I think in the past the company wasn't quite ready for it."
China's appeal to Treasury Wines is evident with the popularity of the premium Penfolds brand.
"China is a very aspirational market and we've got some brands to take there," says Garvin. "We weren't ready for it in the past, but we are in the future and we're working on that now."
Australian Vintage is aiming to grow its premium range through its Barossa Valley Wine Company division.
"It has some great reds, and they could be really big international wines for us in the long term."
Enduring the short-term pain
Garvin says the trade shake-up will eventually position Australia for a better-balanced export market over the longer term.
"You go through some short-term pain reset when this happens."
From Garvin's perspective, the past year has given Australian Vintage time to focus on its key markets in Australia and the UK.
"Especially during COVID, this allowed us to really get our business into shape with our core portfolio.
"We've rolled with it and tried to bring flexibility into a changing market with COVID. It fitted our strategy of being a brand-driven company off the back of some very good assets that have been put in place over a very long period of time. We've also had a big focus on online sales."
Sales of the company's four core brands, McGuigan, Tempus Two, Nepenthe and Barossa Valley Wine Company, are up 17 per cent compared to last year.
One of the surprising stars for the company is the popularity of McGuigan Zero, an alcohol-free wine that has captured 7 per cent of all McGuigan wine sales.
In Australia and the UK, McGuigan Zero has become the top-selling zero alcohol wine in the UK and Australia in the last three months.
"It has been a real positive for us," says Garvin. "Heineken has created a very good flashing light space called zero alcohol and we're right next to them in UK supermarkets."
A sustainable drop
And it's not Millennials driving this trend, which Garvin says was the initial expectation when the concept was launched. The root of zero-alcohol growth lies in a renewed flight to sustainability and COVID has played a part in that.
"We've been surprised on the upside by how mainstream this is," says Garvin.
"COVID has done a few things. If you look at sustainability these days it means three things: environment, health and wellbeing, community. Sustainability has a much more anchored, deep meaning, and within that we're finding people, such as more mature-aged couples, are having a Wednesday night 'zero night'.
"They still want to have a wine with their dinner, but they're more health conscious as part of this sustainability."
However, Garvin says many players tackling the zero-alcohol niche aren't taking it seriously enough.
"Innovation is key in any business, especially in retail. We've embraced it very, very hard and we've really focused on the quality of the wine.
"You can't have the Ribena-juice effect. You have to have a proper wine where we spin off the alcohol.
"We make the wine fully fledged in a McGuigan's style and, at high speed, we spin off the alcohol, just like Heineken did with their beer. We believe we have the best quality product and to a discerning drinker they are not being penalised from a taste perspective because our wine has no alcohol."
Australian Vintage is expanding this concept further with plans to launch a mid-strength wine containing about 7 per cent alcohol.
"We see this as part of mainstream portfolio of innovation. It's a key piece of the jigsaw. Winemakers need to embrace the concept and consider it a real wine."
Australian Vintage is targeting a profit of between $18.2 million and $19.2 million in FY21, up from $11 million last financial year.
Garvin says the performance of the company's portfolio is "well up" on two years ago.
"We're investing more in marketing, and pushing our portfolio."
After announcing a 10 per cent share consolidation, accompanied by an 8.5c-a-share capital return to shareholders this week, the company's stock price has risen accordingly.
The payout is aimed at returning excess capital and creating better returns for investors. The company says there is sufficient capital remaining for potential acquisitions.
While the wine sector has recovered lost ground since the China tariffs shock in October, Australian Vintage has seen a steady trajectory in its share price since then, almost doubling in value.
"We have a number of growth initiatives that are either in play, activated and working or coming online," says Garvin. "That's why we are very confident with our outlook."Never miss a news update, subscribe here. Follow us on LinkedIn, Instagram and Twitter.
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