$32 million of wine is going down the drain because the US doesn’t have a taste for it

Notes of oak, hints of oversupply.
Notes of oak, hints of oversupply.
Image: Reuters/Alessandro Garofalo
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One of the world’s biggest wine companies can’t seem to get US demand right, and it’s costing them millions of dollars and thousands of gallons of wine.

Australian vintner Treasury Wine Estates (TWE), which produces over 80 brands that range from cheap wines carried by Walmart to top shelf fare like Penfolds Grange, announced earlier today (paywall) that it will be writing off $145 million for the year ending June 30, because it grossly overestimated how much wine it would sell in the US last year.

But that’s not all. The miscalculation also means the company will have to spend $36 million to fund a fire sale of excess stock and pay its US distributors to dump some $32 million in spoiled wine.

The bulk of TWEs exports to the US, its largest market, are of the mass-market variety—or, roughly, the $2.50 to $5.00 per bottle range. This sort of wine, however, doesn’t carry anywhere near the shelf life that other, pricier wines do. In fact, while other wines improve with age, these turn sour. Oversupplying a market with perishable wines means either having to risk selling a past-due product or wind up dumping the excess. The company simply isn’t willing to risk its brand by selling rotten wine, CEO Dean Dearie told the newspaper The Australian. “Only the freshest and highest-quality wines are available for brand-conscious US customers,” he said.

TWE, which relies heavily on the sales of its cheaper labels, isn’t new to market troubles. It has struggled mightily since it was spun off beverage mammoth Foster’s Group Ltd. in 2011, suffering grape gluts in Australia and disappointing sales in the US. The company already had to write off $1 billion before the spinoff in 2011, and its sales to the US and Canada have dipped nearly 13% since 2010. Citing the company’s knack for underperformance in the region, Bank of America/Merrill Lynch analyst David Errington even said the company should give up on its US business. “I can’t remember ever getting the US right … you’ve cleaned the business out now, why not just sell it?” he said in a conference call with TWE.

Despite the wine dumping, multi-million dollar write off and cloudy outlook, Dearie still believes the company’s agressive US strategy is sound. “It’s a fantastic growth opportunity, at the right price points,” he assured investors. The company has already announced that it expects to ship less wine to the US this year, so it’s unclear where Dearie’s enthusiasm comes from. Unless, of course, TWE is quietly trying to lure bidders into buying the struggling business.