Bloomberg News

Yellow Tail Maker Plans $10 Wine as Dollar Shaves Profits

August 27, 2012

Casella Wines Pty., the maker of Yellow Tail wine, is developing a product that will sell for about 50 percent more than its main brand to escape a squeeze on Australia’s wine exports from the strong local currency.

A good vintage during 2012 will allow the winemaker to introduce the new brand by the end of next year, with two red and one white varieties priced at about $10 a bottle, about 50 percent above the cost of Yellow Tail, John Casella, managing director, said in a telephone interview Aug. 22.

Australian wine exports fell 10 percent from a year earlier to decade lows during 2011 as the strength of the local currency and bargain-hunting by U.S. drinkers pared profit margins. The success of cheaper Yellow Tail, the third-best selling wine in U.S. supermarkets according to data compiled by Nielsen Co. and Goldman Sachs Group Inc., has also been blamed for pushing the image of Australian wine down-market.

“There’s scope for some premium Australian wines that are badly under-represented,” Casella said. “This dollar level isn’t sustainable for this economy.”

Some critics and rivals have said Yellow Tail’s low price and uncomplicated style has damaged the image of Australian wine overseas. A 2003 tasting by the Los Angeles Times described its 2002 chardonnay as “excellent lighter fluid” and reminiscent of “pineapple juice.”

Kangaroo Label

The dominance of Yellow Tail, whose labels carry an Aboriginal-style painting of a kangaroo, “left most Americans with the impression that Australian wine is sweet, cheap, and adorned with a ’critter’,” U.K.-based wine critic Jancis Robinson wrote in an April 18 article.

“A focus on volume sales and not value building” had hurt the reputation of Australian wine, Pernod-Ricard SA (RI)’s Premium Wine Brands unit said in a October 2011 government inquiry submission.

The success of Yellow Tail wasn’t to blame for the poor performance of other brands, Casella said. Treasury Wine Estates Ltd. (TWE), Australia’s largest listed winemaker, said net sales in constant currency terms in the six months through June fell 7.8 percent in the Americas, its biggest market.

“Yellow Tail is at a certain price point and people buy it because it’s there; the Toyota Corolla didn’t destroy the Lexus,” Casella said. “Someone buying $12 wine doesn’t buy $6 wine.”

Australian Exports

Australian wine exports have suffered as the local currency, driven by mining and energy investment, has risen in recent years.

The Australian dollar is the best-performer among a basket of major currencies against the U.S. dollar over the past three years, according to data compiled by Bloomberg. The currency is more than 24 percent stronger against the greenback than at the same time in 2009, the data show.

Accounting for about a fifth of Australia’s bottled wine exports, Yellow Tail has been squeezed by the move in the currency, Casella said. The company was having to explore alternatives to offset the effect of the currency, including buying vineyards overseas, developing the higher-priced product, and a move into brewing, he said.

It’s built a brewery adjacent to its vineyard in Griffith in central New South Wales state capable of producing 500 million liters of beer a year, equivalent to about 15 percent of Australia’s premium beer market.

Coca-Cola Amatil Ltd. (CCL), the country’s largest soft-drink maker, announced Aug. 22 a A$46 million ($47.8 million) convertible loan agreement with Casella that will give it rights to a stake in the business.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net


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