Hardy’s Chooks Come Home to Roost (8 August)

Well it had to happen. The only surprise was that it took so long to happen but then the announcement was more dramatic than anticipated.

When Constellation purchased Hardy’s five years ago I predicted that within three years resources would be rationalised, job losses would occur and the range reduced. It might have taken them longer to get round to doing it, but they have more than made up for the extra time with the depth of the cuts and the sell offs.

There were a number of reasons why this was inevitable. The first reason was the value of the Australian Peso at the time. Blind Freddy knew that the Oz currency was way undervalued and could only go in one direction. I guess Constellation Wines Australia (CWA) wasn’t as far sighted as Blind Freddy. CWA compounded their stupidity, because there is no other word for it, by investing both money and resources in trying to capture a chunk of the low end of the bottled wine market, especially in the US. This was doomed to fail, and fail it did. At the time, without the benefit of hindsight, it was easy to see this was a loss making proposition and doomed to failure.

To my way of thinking, CWA marketing (and Hardy’s before it) has always been “incredible.” I have never understood the marketing “brilliance” and doubt I ever will understand it. The brand name confusion over Tintara is a good example. That was a brilliant lesson in how to completely confuse the market.

Then there was the pricing of their premium wines. They put them up faster than Paris Hilton could drop her knickers. Classic Clare damn near doubled in two years, with no appreciable improvement in quality. In fact, if anything, whilst the wines may have become more approachable on release, for years the quality was all over the place. The likes of Eileen and Thomas Hardy went from $45 to $90 in a very short space of time. Also, predicting the style of these two wines for some years was like throwing a dart into a dartboard. You never knew what you would wind up getting. The top end Houghtons price increases saw it take them years to move some vintages of these wines. Having inventory banking up is a very costly exercise.

Their ability to respond to their customers was “interesting.” For years, trying to get defective wine replaced was like trying to extract teeth and took far too much effort and time. CWA ability to respond to customer emails took an unacceptably long time too. I always got the impression that CWA attitude was, “I could run a really good business if I didn’t have to deal with those pesky customers.”

Constellation has announced it is selling the Leasingham Clare Winery, the Stonehaven Winery in Padthaway, and the Goundrey winery in Mt Barker. In many ways, the sale of those wineries makes good business sense and good really good business sense would have seen them sold off four or five years ago.

They are closing the Swan Valley bottling plant and will be shipping the wine from WA to Reynella in South Australia. (I hope they don’t intend moving wine by truck across the Nullarbor in the middle of summer in unrefrigerated tankers.)

They are also selling twenty-three vineyards, (about 2,200 acres) in McLaren Vale. What that will do to the consistency and quality of their wine is anyone’s guess. It also begs the question, who will buy these properties? That’s a lot of vineyard land.

Three hundred and fifty people will be removed from the CWA payroll.

At this stage, the number of labels/wines that will be given the chop has not been defined, but you can bet the cut will be deep and painful. Early predictions are about 500 from a total of 1,600 lines. According to the President of Constellation, the parent company, the deletions will primarily affect cheaper products that sell at low margins. John Grant went on to state, "Our focus in streamlining the business is to move in recognition of global consumer trends, which are trading up ... it requires us to reset our portfolio to a premium price point, and those wines have higher margins associated with them.”

There are a number of implications here. Firstly, whilst people may be “trading up” from box wine to inexpensive bottled wine, in these tough economic times many of the buyers at the other end are looking to spend less on wine. This is especially so in the mortgage belt. That segment of the market will get even more competitive.

At the low end, the cheap cask wine may go as there is no profit in it for CWA. Although there has been no official mention of this, I have been reliably informed that CWA want to ditch their Riverland vineyards (where the cask wine is sourced) and hopes the Government will get involved so that their water allocation can be returned to the Murray River. If this is true, then someone from their Australian marketing department has been involved in the plan!

The vineyards will probably sell far faster than the wineries. According to CWA, it estimates the cost of this little restructure will cost A$153 million, but they expect to raise over A$200 million by selling the assets. But there is one other little factor at play here. Fosters! What will they do and when will they do it. Their wine problems may give both CWA and themselves an even bigger financial hangover in the longer term.

 

Feel free to submit your comments!

From James Hook: Saturday 9 August

I agree with your comments re: Fosters. The word on the street was CWA were tipped to do this – while Fosters were tipped to sell off some brands. Part 1 has happened now for part 2?

 

 

Copyright © Ric Einstein 2008