Treasury Wine Estates now has four regional business units including: America, Australia and New Zealand, Asia and Europe. Regional business units in Europe also include units in Middle East and African regions. In total the company is supplying its wine to 16 different countries across the globe. The company has production units in Australia, USA, Italy and New Zealand.
Separated from Foster’s group in the year 2011, Treasury Wine Estates has successfully completed its first year with a net profit of more than $135.5 billion. According to the director of the Treasury Wine Estates, “2013 presents some challenges for our business, and as a result we expect constant currency earnings growth to be below the average achieved for the last two years.
Despite its huge success during the first official financial year for the company the forecasts for the company in the coming year or two are not that great. The company is faced with a number of challenges and threats in the markets both domestic and international. In this section, we’ll highlight the threats faced by the Treasury Wine Estates currently and the expected market threats in the future which need to be worked on. By highlighting these threats, possible opportunities can be worked upon to minimize these threats to the future of the organization.
Although the market share and the overall performance of the Treasury Wine Estates are increasing but according to the forecasts market and investor’s data, “As of Nov 05, 2012, the consensus forecast amongst 13 polled investment analysts covering Treasury Wine Estates Ltd advises that the company will underperform the market. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Oct 22, 2012. The previous consensus forecast advised investors to hold their position in Treasury Wine Estates Ltd.”1 Keeping in market the growing market trends and the competition in both domestic and international markets, following are the possible threats to the current and future plans of the Treasury Wine Estates.
1. Currency Issues
Currency cycle has been one of the most important issues faced by the Treasury Wine Estates right now. A very strong Australian dollar slashes a large portion of earning from foreign exchange and through sales in international market. Currency conversion and depreciation has become one of the biggest threats to the future financial figures of the company.
Adjusting margins on the current currency rates has become an issue for the Treasury Wine Estates. More than 70% of the earning of the company is at the currency exchange risk which is unavoidable. This has not only depreciated the profit but also making the offshore business quite difficult to represent in the financial statements in domestic Australian currency.
2. Macro Environment and Threats to Wine Industry
Macro environment plays an important role in determining the fate of any company especially the ones dealing with consumer goods. There are various macro level factors which are important and can be possible threats to any industry if not handled with proper care. In case of wine industry the most important macro level factor includes the environmental conditions and their favorability for the production of grapes required to manufacture wine.
Environmental factors have always been an issue and threat for the production of products like wine in the market. Since environmental factors can not be controlled there is always a constant threat attached to them in maintaining a constant supply of wine in the market.
Environmental factors play a key and important role in the successful fermentation of the quality grapes. Without proper environmental conditions, proper taste can not be achieved. Attacks of pests and other related crop failures can destroy the production cycle and the company will not be in a position to supply the required amount to the market.
3. Oversupply in Wine Industry:
Oversupply of wine in the market is one issue faced by the whole industry right now. Due to this over supply, there is a potential threat to the wine produced and distributed by the Treasury Wine Estates. Structural surpluses have already caused enough damage to the Australian brand names in wine production and distribution. Oversupply of wine has not only affected the international market but has also had a considerable impact on the domestic market of Australia as well where the growing competition has distorted the prices of the brand and quality name that used to be valued before.
“Oversupply is unpicking our price structure, distorting perceptions about our product and exacerbating competitive pressures. Globally we have been forced to trade in the low-value / low-margin market to sell excess wine, yet our costs are too high for us to be viable in that market in the long term – we cannot match the cost structures of some competitors (including a subsidized Europe) at very low price points. Just as damaging is the image being created that Australia is only a low-cost producer, making it difficult for our premium wines to gain recognition and market traction.”2
4. Inability to Implement Long Term Future Strategy:
Being fairly new after their separation from the Foster’s group, the Treasury Wine Estates is unable to implement any long term future strategy due to unpredictability issue. There is over dependence on certain factors both macro and micro level which affect the production model and outcome of the unit in many ways. Company is still unable to implement or device a long term strategy to cope with these factors. However minute this might be but a great threat to the overall performance graph of the organization especially in case of consumer products like wine.
5. Health Consciousness
With increasing awareness among the common people about the health issues related to drinking wine and other forms of alcohol has affected the market of these products a lot. Campaigns and health conferences are being held in different parts of the world to increase awareness among people of developing countries as well since the wine and alcohol consumption is increasing in these countries is increasing with an increase in the purchasing power.
“Worldwide, drinking causes almost as much harm as smoking, according to the World Health Organization. The agency estimates that alcohol causes 1.8 million deaths around the world every year; about a third of those deaths are accidents that could have been avoided. The WHO also estimates that worldwide, alcohol causes or plays a role in 20 per cent to 30 per cent of all cases of esophageal cancer, liver cancer, cirrhosis of the liver, homicide, epileptic seizures and traffic accidents.”3
It is possible threat to the market of the Treasury Wine Estates especially in this fast growing international production of wine. With increasing risks attached to drinking wine and other forms of alcohol, market share of alcohol and related products have gone down considerably as compared to previous decade.
6. Political and Legislative Issues
Governmental policies and legislations regarding wine production and distribution are another possible threat to the industry in this fast growing market and can affect the production and distribution to a large extent. With growing concerns regarding the environmental and social issues related to wine and other alcohol products.
Efforts have been made by governments to regulate the industry with the induction of legislations. Sufficient control has been shown by the government and political bodies in this regard which can be a possible threat to Treasury Wine Estates if violated. Different forms of permits and licensing have been introduced by the government which needs to be followed in all cases of domestic and international distribution of wine production and distribution.
7. Environmental Issues:
Other than environmental factors playing a role in the production procedure there have been issues raised in the past by the environmentalists regarding the potential threats to the environment by the production of wine. Threats like these can impact the performance of the company and change their repute in the markets especially international markets.
Studies show that the wine industry has tremendous environmental impacts, from manufacturing trough transport and distribution and finally the consumer who has to deal with the packaging materials which is a big hazard to the climate fuelling climate change as a result of the long term carbon emissions to the atmosphere.
Wine production accounts for a very large amount of herbicides, synthetic fungicides and other forms of fertilizers that usually end in the earth as a pollutant. Additionally, grape production requires large amounts of water. Likewise untreated waste water from wineries can harm the ecosystem in rivers, ponds and lakes.
A study carried out in 2006 showed that every bottle of wine creates a pound of waste. This is besides the 16g of sulphur dioxide into the air. These gases are responsible the changes in the climatic patterns as witnessed in the recent past. One of the methods through which these gases are produced is through manufacture of bottles, transport to the wineries and also transport of the finished product to retail stores.
Recent studies reveal that Italy is projected to undergo a substantial ‘’drying’’ with precipitation expected to decrease by about 10% to about 40% in summer. Another study also showed that a 1%/year Co2 emission will lead to a reduction in ground water by 2050 by about 21% to 30% and about 16-20% runoff in the Candelaro catchment is Southern Italy4. The above figures therefore quantify the negative impacts of wine production to environmental change and drought.
Competition plays an important role to determine the market of any product. Wine production is a fast growing market with an equally fast growing number of companies competing in the market to achieve the highest number of market share. Although there have been a tremendous increase and expansion in the wine manufactured by the Treasury Wine Estates but the market still has many opportunities that are unexplored. Recently the Treasury Wine Estates has decided to move operations and start supplying its products in Asian markets as well.
Although wine consumption has increased manifolds in the Asian markets yet there is also a growing competition from the local wine manufacturers. Entering the international markets has always been difficult due to higher import duties. In these cases, price of locally produced wine remains considerably low and proves to be a difficult level to compete with.
According to different estimates, the consumption of wine in China alone is increasing at the rate of 15-20 % annually. “A Vinexpo study by the International Wine and Spirits Record (ISWR) showed that even though China is only the eighth largest consumer of wine in the world, Chinese wine consumption is projected to rise by roughly a third by 2013. Overall wine consumption in Asia will jump by a quarter by 2015”5
Extra import duties limits the supply of wine produced by the Treasury Wine Estates and price remains the biggest issue as compared to cheap locally produced wine. A large market niche can’t be accessed just because of this fast growing competition and low price strategy of competitors in these Asian and American regions.
Treasury Wine Estates is also faced with the dilemma of competitors from France especially in the Asian markets. “The French wine industry overall increased its global exports by 10.5 percent last year, to a value of 10 billion euros. Exports to Asia rose sharply, with China jumping two spots to become the third-largest importer of French wine and spirits, according to Louis Fabrice Latour of the Federation of Wine and Spirits Exporters. France remains dominant, both in market volume and value, mainly due to the fact that well, it makes the world’s best wines, commands the best prices, and the product is utterly synonymous with the French culture in a way which other countries cannot match.”6
8. Global Warming
The industry will have to care for the global warning to cater to the production of the wine, as the vintage will be changed by the climate for the cultivation of the wine crops. The quality of the wine with the increasing level of the global warming will start to decrease. In many regions the impact of the global warning has started to decline the quality of the wine produced. Global warming is also expected to further lower the quality of the produced wine in coming times to greater extent.
Treasury Wine Estates uses technology is a number of ways. First, the implementation of a new cloud-based system for managing customer relationships was aimed at boosting the delivery of customer service. Lack of improper wine delivery systems often resulted in lengthened waiting times for restaurants and hotels that had ordered for wines7. Equally, a poor customer relationship management system reduces the efficiency on the part of sale’s representatives from the company because of the inability to capture data from the entire system at Treasury Wine Estates8. A decline in the system capability can make it difficult for the company’s customers to place orders using their internet enabled devices thereby leading to slowed processing process for wine orders. Another threat that can occur with the use of technology in CRM is the difficulty in searching information regarding to background details of clients. Such information includes past orders and their feedback on the company’s services. Interactions among customers and sales representatives is also threatened by technology and technological applications.
The second level of technological threats that can affect the management and operational system at Treasury Wine Estates is cyber threats. Declined safeguarding of the organizational systems can lead to great losses in revenue and data because cybercrimes has been on the increase. Perpetrators of cybercrimes have sophisticated their strategies to facilitate their criminal acts. Possible types of threats that can affect the organization’s system include fraud, phishing, social engineering, and insider threats. Cyber threats poses a great risk to the security system and networks of Treasury Wine Estates. Therefore, products, network solutions, and services from the company remain potentially vulnerable to increasing threats. Manipulation of data is also capable of compromising confidential information from the company.
Treasury Wine Estates registered higher corporate costs in 2012 because of developing a stand-alone IT system. This can be attributed to the demerger of Treasury Wine Estates with the parent company Foster’s.