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Lower yield and marketing efforts to flatline Delegat profits

Monday 26th August 2019

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A lower yielding vintage and a yet-to-be deployed marketing effort will hamper profit growth for Delegat Group next financial year despite an expected boost in wine sales.

Delegat said following a 14 percent boost in operating net profit before tax to $51.4 million in the 12 months to June, the figure, which strips out movements in the fair value of grape investments and derivatives, would flatten in 2020. 

Analysts were told on Friday that Delegat now sells 345 glasses of wine every minute, and sales are forecast to grow by 8 percent to 3.24 million cases next year. But challenges to its cost of goods sold would drag margins down. 

A lower yielding vintage this year, down 11 percent to 35,500 tonnes, would have some impact on margins next year. The company emphasised that despite fewer grapes, the quality of the harvest was still very good. 

With a reduced harvest, things might be “a bit tighter,” the company said. But there were things Delegat could do, such as reviewing release dates if there became real concerns about inventory. 

Managing director John Freeman said the business expects to roll out new consumer marketing in 2019. He said the company was being careful not to rush its approach. 

“We think that in this day and age, you have to make sure you win the consumer and then win the key accounts and they are more connected than they used to be.” 

He wouldn’t give a figure on how much the company would spend on marketing, saying that it would monitor product awareness and affinity levels and then set targets. 

However, he described the marketing effort as a “three-year rolling plan,” indicating investment would be sustained. 

Responding to analysts' questions, Freeman said China is not a focus for the company within the next three years, describing it as a “long burn”. While China is a market that had expanded, the volumes sold there are still low, the managing director added. 

Freeman also said excess supply due to the US-China trade war was not an issue for Delegat, which was benefitting more generally from the trend for US consumers to import their wine. The US did not export much of its wine but consumed most domestically, he added. 

Delegat shares last traded at $11.72 and have gained about 18 percent in the past year.

(BusinessDesk)

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