Sunday, November 3, 2013

Beringer & The Morgan Stanley Report

Beringer Vineyards & Winery
I had some really intriguing calls the past 6 weeks that all come out of activity in Australia and Treasury Wine Estates in particular (TWE.EX). The calls centered on Beringer which has been rumored for sale for years. Those rumors have grown since the disclosure that Treasury Wine Estates had Beringer destroy $150MM in wine inventory in the US. Things got more intriguing last week with the release of the Morgan Stanley Report that predicted dire shortages of wine supply. All that traffic out of Australia ... so I started to wonder if the two events might be related?

Trail of Breadcrumbs


In September just past, Treasury Wine Estates announced they were going to change CEO's. The disclosure came out during the company's Annual General Meeting just days after the departure of then CEO David Dearie. The announcement was made that.... 
"The Board is conducting a worldwide search, through the executive recruitment firm Spencer Stuart, to find a permanent CEO but this could take some time. We are advised that the average time for such positions to be filled is nine months." 

Corporate Execution
It strikes me as odd that the Board would react to the inventory write down by letting the CEO go. They had to know about the write-down before the announcement was made, since it was such a material issue. I can't ever remember something like that happening before. Maybe the Board thought it was an acceptable action at first, but there was just too much heat and a sacrifice was needed. That's a reasonable explanation. Still ..... nine whole months to replace a CEO at a public company seems like a really long search to me. It's probably not a plumb job given the amount of digging out required, but there have to be suitable candidates available.

It's also odd that there wasn't a capable person internally that could have held fort for a few months. I can figure a few good reasons someone internally wouldn't want a temporary role ... new owners coming in make changes or if there really is a new CEO, those temporary people can often be moved out when the new sheriff comes to town. Whatever - it all adds to the intrigue as lots of things can happen in nine months ... things other than replacing a CEO.

Morgan Stanley Report


The second set of calls I was taking this past week surrounded the Morgan Stanley Report which predicted dire shortages in world-wide wine supply. There was a Citi report also out of Australia in September that discussed inventory shortages in the US, but I dismissed it as uninteresting and dated at best. It seemed flawed on its face. But this second report got a lot of people's attention when Aaron Smith ( @AaronSmithCNN ) from CNN Money reported on it with the headline: 
"Thirsty? There's a global wine shortage." 
The phone and my email almost blew up from different news services and other industry insiders trying to make sense out of that one. The day after the CNN Money article, I got a call from Aaron Smith trying to make sense out of the blow-back on the report. He seemed like a well-intended professional. Not defensive in the least, he was digging for the other side of the argument. I wouldn't be surprised to see him write something at least offering the other view this week.

But back to the report: If you read it completely the analytics are pretty compelling. They really have done a good job pulling data together from multiple sources to deliver a top level view of the world wine market. They didn't rush to put this report out. It probably took months to research, write and produce. Most of the information is excellent - but it's the conclusions from the information that I question. Remembering they are a brokerage firm and writing investment opinions is their job, so a report will focus down from the economy, to the sector and segments, to a specific company .... the short read of their conclusion is:
  1. Decline in supply deepens world supply shortage, 
  2. With a shortage, those countries with lots of grapes ( like Australia) who like to export are advantaged, 
  3. Treasury Wine Estates (TWE.EX) is best positioned to take advantage of that landscape and is their top consumer stock pick

Thumbnail Summary of the Report


Is there a world shortage of wine? To the left is one of the charts they offered to further that premise. But when I look at it, it seems as if the world which for years has been sitting on a lake of wine, is actually getting closer to being in balance - at least in volume. That doesn't look like it supports their conclusion of shortage does it? Of course this isn't sensitized by price or by country, so we don't really know if there are pockets of shortages in price segments or within consuming countries and if there were, that could drive export volumes from countries such as Australia.

... but they covered consumption in greater detail too. Looking at the chart to the left. It shows consumption declines in France and Italy, but growth in consumption from countries like China and the US. The Morgan Stanley analysts noted many times that France which they see as the largest consuming country, has started a rebound in the near term. The problem is the 2012 consumption year is an estimate and 2011 is the first year of increase in French consumption. Its really hard to predict a trend change with one data point.
 
I can't tell in the consumption chart how much of the earlier decline in French consumption was a secular decline due to changes in consumer patterns versus a cyclical change due to the global recession. I could see recovery from a recession explaining the one data point that went up in French consumption.
 
My guess - and one that seems to be supported from the OIV release, is there is a long term secular decline in per capita consumption in France, but the uptick in the past two years is due more to the global recovery. If that is true, that also negatively impacts the Morgan Stanley conclusions as once the global recovery were factored out of the data, we would expect to see a return to declining consumption patterns in France in the next year or so. Here's where I think they really went astray.

If you look at the chart to the left, it shows production and consumption. The Morgan Stanley analysts lag production by a year so as to account for cellaring. The problem is, they made up the production estimates for 2012 and 2013.

2012 might be a reasonable guess because it was a difficult year in much of the world with the exception of the record and near perfect harvest in the U.S., but what about the 2013 world harvest? The Southern Hemisphere was in the bag in the spring and the analysts had that information. Harvest down there was a good one. For some reason though, they guessed there is a massive decline in production that even exceeded the prior downward trend in production which started in 2004. The problem with the assumption is - it's just plain wrong because there is nothing that I can see that possbily supports that data point.

The OIV came out with a report recently that said world wine supply was back to 2006 levels in 2013. So I did the simple thing and corrected their chart above by drawing the next data point to match production level for 2006 as reported from OIV. Connecting the dots in green and .....voilà: no supply shortage! Actually there is an excess this year in production versus consumption, and upon that one data point in 2013 and the extrapolations therefrom, lies the complete foundation for the Morgan Stanley conclusions. They don't come close to holding water.

Is the Inventory Write Down at Beringer and the Morgan Stanley Report linked?


Inventory write-downs are the kind of thing that one might do if one were inclined to position a company for sale ... or a change in senior management. There is a change in management at Treasury as discussed, but rumors persist about Beringer being for sale and have permeated the market for years. 

Personally, I would love to see someone recover what has become a dusty brand, because Beringer has historic significance in the wine business. My own opinion is many of their vineyard holdings could produce unbelievably good wines. It's a rare opportunity for the right buyer to come in and course correct this business because the brand and vineyards have significant value from which someone with a fresh set of eyes might be quite successful..... especially if there is a shortage in wine grapes ..... which there isn't.

Finally, there are some footnotes and disclosures in the Morgan Stanley Report that are probably boilerplate as I've been told but still bear being brought out:

  • Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research.
  • In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Treasury Wine Estates.
I can't say for certain that Beringer is on the block. I can't say if Morgan Stanley is making a run at representing Treasury Wine Estates in a sale of the whole of the TWE operation, or just the Beringer assets either. While they have disclosed that they might have a conflict of interest and might seek compensation for investment banking services in the next 3 months .... a conflict like writing a buy opinion to ingratiate oneself to management .... I can't say they do have a real conflict nor do I have any knowledge that Morgan Stanley has been in the background encouraging an inventory write-down and preparing the company for a sale. I'm only thinking out loud and I'm just sayin' .....

So ....what do you think? What are your thoughts about the public activities at Beringer? What do you think they all mean? What do you think about the Morgan Stanley report? Is it accurate in portraying the present state of wine supply?


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36 comments:

  1. Intelligent and well-written as usual, Rob. That the CNN reporter called you shows he realizes he didn't do his job with the first report, which sort of makes up for not doing it with the first report. Though how a reporter for a national news outlet didn't see the connection between Morgan Stanley Australia and Treasury makes this cranky ex-newspaperman wonder if anyone knows how to do any reporting any more.

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    1. Thanks for logging in and weiging in WC. Hows the book sales going?

      I wouldn't be too hard on the writer. I can't say for sure there is a connection between the MS report and Beringer. Could just be conicidence. What isn't coincidence is the report's conclusions which are just wrong and there is no way to say it otherwise. I scratch my head trying to figure out why such a well-researched piece would turn on a single data point? You got me there. The reporter was rightfully impressed with the analytics and reported it. I'm hoping he does a follow-on piece to at least provide the other side of the debate.

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  2. Here's another look at it Rob,

    There’s no global wine shortage
    By Felix Salmon
    November 1, 2013
    http://blogs.reuters.com/felix-salmon/2013/11/01/theres-no-global-wine-shortage/

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    1. EVO - thanks for logging in and offering this other bit of information. I did see this last week but didn't read thoroughly, outside of seeing he thought the report was wrong as well. I will definitely take the time today to see what his perspective is. Thanks for pointing it out for the SVBonWine community.

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  3. It is odd that TWE would be mentioned in the report and not Constellation, Diageo, or some other publicly traded company. Collusion perhaps?

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    1. Anon 8:11. I don't see any collusion whatsoever. The report is support for the TWE stock recommendation versus a discussion on American wine companies. Its writted out of Australia which is where TWE is traded and located.

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  4. Bob,

    Nice report supported by data as usual.

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    1. Thanks for logging in and the kudos JY. Tell a friend in the social media world if you think its a worthwhile piece.

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  5. As long as Treasury's US division is run by Aussies it will fail. Aussie business models, for reasons I have yet to fathom, don't seem to be compatible with American business. The Constellation folks were bright enough to figure this out, divesting all of their Australian holdings, which reduced them down from the largest wine company in the world. Yet it has shown to be a smart business decision...

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    1. Thanks for the comments Anon 8:30. Personally I have a high degree of respect for the Ausies and their business acumen. That said, this acquisition has been a disaster for years and it’s only gotten worse. It’s such an iconic winery in the US .... the oldest continuously operating winery in the country according to their site. Beyond that, the architecture at the winery and the vineyard holdings - someone with good business sense who will invest in the brand and run this like a business will be rewarded. There is any number of interested parties out there. It wouldn't surprise me one bit to see a hedge fund pick this up and run it as a stand-alone company. I’d much rather see that along with the focus delivered to the one brand, versus an industry wine company absorbing this into their portfolio. Whoever does though - if it is sold and they aren't already in the business, they will figure out soon enough that improvement in this business is glacial and requires patience.

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  6. While prices have risen somewhat it doesn't look to me like they are going to skyrocket further; I know we can't. And what is a better real life indicator of market conditions than prices; as they truly set the market. No skyrocket in price - no wine shortage. Charts and data aside, let's look to the market.

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    1. Thanks for commenting Anon 9:01. Feel free to join the site on the right if you would like to comment more often and get notice of new blog posts.

      I agree that market prices should tell the tale. The analysts could have looked at worldwide bulk wine prices and noted they were dropping. That could have given them a better guess at their production data point for 2013 and placed them a little closer to reality and the OIV release that said wine production this year is at a 7 year high, versus a 40 year low. The trend line changes entirely when that one data point is amended.

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  7. I was at a company meeting several years ago at Beringer, Dearie spoke at this meeting as did other upper level Australians.....it was obvious to the group of American workers that there was some elaborate scheme going on at the time, maybe several. It is my hope that the whole of the Treasury American properties are sold to a responsible company before they are destroyed.

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    1. Anon 9:48. I really appreciate the perspective. I think even the Board of Directors has to agree that the company hasn't been effective in building wealth for their shareholders. Letting go of the CEO isn't going to solve the situation. This needs to be reworked from the vineyards out through the distribution relationships so they produce what can be sold. I never remember this kind of an inventory write-down ever in my career. I think it’s unprecedented. Maybe someone else remembers something like this? I'd love to be set straight if a write-down like this has taken place before. I'd like to know what happened next to the company too.

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  8. The whole TWE adventure was epic for Foster's shareholders---epic like Napoleon's attack on and then retreat from Moscow. (Something as timeless as War and Peace will not be written about the whole affair--but then I don't think anybody died as a result.) That said, tip of the cap to our Rob for his data sleuthing, concise commentary and good graphical representation of the information.

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    1. Thanks for logging in and the comments Pinot Graves. It’s really been a shame what the venerable brand has had to endure. I remember in the early 90's thinking that Beringer had it figured out. I couldn't name another brand that was as successful with a fine wine group, and a volume/production wine division. Doing both has always been difficult but they somehow managed to do it ..... at least for a while. I don't know for certain if they are on the block, but here's to hoping they are so TWE shareholders get something of a refund on their investment and Beringer resumes their position in the upper performing businesses in the US Wine landscape.

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  9. Rob: This is one of the problems one finds when you start messing around with commodities, and at the volume Treasury works at, wine is definitely a commodity. But, as you say, Beringer still has value. It will take time and money. but the core assets of location and more importantly, story are still in place. (And didn't that movie gut do something similar just down the road?)

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    1. Kurt - Thanks for the comments and good point. Francis Ford Coppola did in fact resurect the Inglenook winery and restored that estate to a historical place of reference.

      TWE has had a huge problem with the AU$ strengthening. It wasn't that long ago when the Ausies were advantaged in the balance of trade. But now with the trade near $0.97:$100, that advantage is gone and you can see it in the charts of Ausie exports which have flattened. Owning US assets should be a hedge if run right - but they aren't given that kind of write-down. Further, while China is a market where the Australians have thrived, I'm wondering if they've prospered versus just dumping excess wine there. I wonder if someone else has an opinion about that?

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  10. From a news story about the de-merger in 2010 (emphasis added):
    "However, profits from wine, which accounted for 40pc of the company's total just three years ago, have slumped by nearly a quarter as the surging Australian dollar, the global recession and a grape glut take their toll. Across Australia, thousands of hectares of vines are being torn up in an attempt to halt the oversupply and drive wine prices back up." Here's the link:
    http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7766460/Fosters-cheers-investors-by-giving-up-wine-ambitions.html

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    1. TWM - Thanks for logging in! Appreciate the article. The MS piece really didn't address the elephant in the room which is the strong AU$. That has really held them up from export at the level they might desire. Grubbing up vines in Australia is really an acknowledgment that they can't export what they want today ..... and back to the MS conclusions, if they can't do that against a strong AU$, why would they be advantaged in the world market when other countries like Chile and Argentina compete with them for the same boat space?

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  11. As a former TWE employee, the inventory issue was building before Dearie was even put in place. He is the scapegoat. The company has major issues the 1st being the lack of respect it has for it's employees, especially the one's trying to speak up about potential supply/demand issues. The second being the lack of respect it has for their brands and the equity they once had; especially Beringer.

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    1. Anon 12:23 - hoping for a better outcome going forward. I think investors, board, and employess alike would all agree with that perspective.

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  12. ROB,

    PART ONE OF THREE PARTS . . .

    ~~ BOB

    Excerpt from The Wall Street Journal “The Informed Reader” Column
    (May 16, 2007, Page B17):

    “Marketing Chiefs Might Add 'Scapegoat' to Their Résumés”

    Excerpted from Fast Company magazine (June 2007)

    . . . a survey by executive-search firm SpencerStuart shows that at 100 leading consumer-branded companies over the past three years, CMOs have held their jobs for 23 months on average, compared with 54 months for CEOs. . . .

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  13. ROB,

    PART TWO OF THREE PARTS . . .

    ~~ BOB

    Excerpt from The Wall Street Journal “Money & Investing” Section
    (December 5-6, 2009, Page B1):

    “Why Turning the Page on a CEO Isn’t Always a Panacea”

    [Link: http://online.wsj.com/article/SB10001424052748703735004574575880529756434.html]

    By Jason Zweig
    “The Intelligent Investor” Column

    How much of a difference should investors expect when . . . or any company . . . brings in a new chief executive?

    Not much.

    . . .

    It seems obvious that getting the right boss in place ought to make all the difference in the world. . . .

    Management is important, which is why Warren Buffett puts such stock in the character of the people who run the companies he invests in. But management isn't nearly as important as many investors think, which is why Benjamin Graham, Mr. Buffett's mentor, paid so little attention to it.

    In fact, Mr. Graham seldom bothered to meet the managers of the companies he invested in, partly because he felt they would tell him only what they wished him to hear and partly because he didn't want his judgments of business value to be influenced by impressions of personal character.

    If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology's Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn't much better than the flip of a coin.

    "Some people," Prof. Schoar says, "may have this almost blind belief that the manager at the top changes everything. Our results show that managers do matter, but they don't change everything."

    Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.

    As Mr. Buffett likes to say, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

    But something else is going on here, says Princeton University psychologist Daniel Kahneman, who won the Nobel prize in economics in 2002. "We believe that people with certain characteristics will produce certain consequences," he says. "But we're wrong, because there is way, way more luck involved in determining success than we're prone to think."

    [Bob's aside: see Caltech professor Leonard Mlodinow's observations below on expertise and luck and success below.]

    The real force in corporate performance isn't the boss, but regression to the mean: Periods of good returns are highly likely to be followed by poor results, and vice versa. High returns attract fierce new competition, driving down future profits; low returns leave the survivors with fewer rivals, leading to better results down the road.

    Most researchers agree that a company's results are determined less by its CEO than by its industry and the economy -- which, in turn, are shaped by a host of factors that most CEOs can't control, like the price of raw materials, the value of the dollar, interest rates and inflation, bursts of technological innovation and so on.

    . . .

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  14. ROB,

    PART THREE OF THREE PARTS . . .

    ~~ BOB

    Excerpts from The Wall Street Journal Online
    (April 30, 2008):

    “Numbers Guy Interview: Leonard Mlodinow”

    [Link: http://blogs.wsj.com/numbersguy/numbers-guy-interview-leonard-mlodinow-329/]

    By Carl Bialik
    “The Numbers Guy” Blog

    WSJ: You argue persuasively that much of what we consider a track record of expertise is really an accident of luck. Is there any true expertise, in your opinion? Are there any experts you trust?

    Mr. Mlodinow: . . . Given that we are discussing an endeavor in which it is possible, how can you tell if someone has expertise? That is hard, because expertise plus bad luck can equal a failure, and lack of expertise plus good luck can equal success. The only way to tell the two apart is to observe the individual over a long time, which in statistics often means 100 or even 1,000 trials. This is obviously often not possible, so I recommend instead that we judge people by a thoughtful analysis of their intelligence, philosophy, work ethic, etc., rather than simply by their results.

    WSJ: Just because a certain human achievement . . . exhibits the normal statistical variation, does that necessarily mean the best performers were just lucky? Or is there something about human intentionality that makes it possible that the best performers really did exhibit extraordinary skill and were deserving of the result?

    Mr. Mlodinow: Intentionality and talent always matter. An extraordinary feat is certainly made more likely by someone’s focus, hard work, etc. But chance also matters. And since there are few situations outside the science laboratory in which the random influences can be eliminated, luck is almost always a part of the statistical variation we observe in people’s feats.

    . . . the fact that luck matters means you can help yourself by being persistent.

    A failure doesn’t mean you are unworthy, nor does it preclude success on the next try.

    As Thomas J. Watson, the highly successful IBM pioneer, said, “If you want to succeed, double your failure rate.”

    . . .

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  15. I joined the Beringer team in 1974, and, along with the likes of Ed Sbragia, Myron Nightingale, Guy Kay, Tom Aquilano, Dick Maher, Herbie Schalegger, Chris Weber and other fine individuals, worked hard to build a proud business and Brand on the foundations acquired from the Beringer family. Respect for the individual, be they employee or customer, was coached and encouraged by our leaders and Swiss ownership. Sadly, those values belong to another time but those Aussie pirates are paying the price now for ignoring them.

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    1. The Nestlé’s pirates preceded them, then the Texas Pacific Pirates, then the Fosters Pirates..... The company has gone through change after change. Fosters I’m sure doesn’t feel like Pirates given their performance.

      Don't get me wrong. I totally sympathize with you. I think the Nestlé’s era was probably the best. I think the company at that time was doing the impossible and making a million cases of white zinfandel on the one hand and unbelievably awesome cabernets out of Napa and Knight’s Valley at the same time. That’s so hard to do. I’d so love to see the history, story, and place restored in the wine world.

      New ownership - and from what I hear in the Blog, a change in culture would be such a great thing for this brand. This is a once-in-a-lifetime opportunity for some hedge fund out there. Nobody will find another US winery of this size, with these assets, and with this history

      …. and whoever you are out there ….. I have a perfect bank for you when you get to that point, and I promise you I am anti-pirate and pro-Beringer!!

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  16. Beringer...really? Imagine in today’s world building your Business Plan around White Zin - the plan has been flawed for years. I work with a distributor in the Great Lakes area. Beringer has been a great competitor for us - in that it they been easy to beat. Trouble within this brand has been obvious for years - their focus has been on White Zin - grown, produced and bottled by someone else. Sure, they have other good wines but the street sales people we compete against have been focused only on their White Zinfandel. Management has been a sleep at the wheel for years. Lesson to Management 1: Pay attention to your customer and your consumer. Lesson to Management 2: Don’t always assume you are smarter than everyone else.

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    1. Man this is a tough crowd. Its so tough, the hat check girl's name is Dominic. *ba-da-bing!!

      No but seriously ... Its really sad to hear the state of disrepair being discussed in the community here. The Beringer name at a time was a very strong one. Hopefully if it is sold .... soon .... the new owners will make the investments to return it to a place of stature.

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  17. Rob: I don't think Morgan Stanley makes any secret of the purpose of the report: to tout TWE as a stock buy. There are strong reasons to doubt that. I just think we're all getting excited about this report because the mainstream media reported it as "My favorite Cabernet is going away!" instead of what it actually is.

    BTW, pro tip: you might get more pageviews by putting a topless woman on your post. Cheers.

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    1. Thanks for weighing in Blake .... and for the pro tips on your blog.

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  18. Over the last several years, Treasury has terminated many of their experienced and loyal Winemakers to save money. The Australian Treasury philosophy is that any premium (less than $15/bottle) Winemaker is able to make any premium brand's wine. Accountants now watch every penny it costs to make a bottle of wine and Winemakers are forced to use lower quality wines to bring down the cost. Individual lots of wine are moved from brand to brand based on where it's needed for sales and cost control. The Beringer group wines used to be known for quality and value, but now they have been commoditized with loss of quality and individual character. Many other long term loyal employees in Operations, Marketing, and Sales have also been terminated or have left in frustration. The Australians put their own country people in high level USA positions and their arrogance has resulted in where Treasury is today.

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    1. Oye ... next thing someone's going to accuse the AU management team of using Martha Stewart to locate underage Tiawaneese children to lick and apply labels.

      Your honor, I stipulate to the fact by the weight of the evidence including obscene inventory writeoffs and the release of the CEO, that management is in need of an overhaul.

      The facts in evidence and in question surround Morgan Stanley's report and motive. I would ask your honor to remind opposing council to tell us something we dont know.

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  19. I agree with your overall conclusions etc, however i think your point re the writers assumptions for production (being crazy) in 2013 might miss the 12 months lag the writer has applied ? ie it appears to me in the chart above the writer wasnt forecasting a sequential fall in 2013 (a forecast for 13 harvest would have shown up as 2014 in that chart?). Rather appears they were lagging the 2012 production decline that, as you rightly point out, they had pretty good visibility over...?

    Seems to me the writers conclusions really required an ongoing declining trend, but there was always going to be a bounceback in 2013...

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    1. Thanks for contributing Anon 11:22. Good observations and appreciated.

      The consumption component was lagged 12 months. Production wasn't lagged though and that's where they made their gaffe.

      The 2012 harvest was already in the bag (barrel) when this was written so it should have been close to accurate. 2013 started in the Southern Hemisphere and by the time this was written, we already knew about good harvests in Chile, Argentina, etc. Somehow, they ignored that data and still decided to estimate even lower than the trend line, or even any reasonable moving average for the Northern Hemisphere and then took that out as the findings. Doesn't make a bit of sense, especially for what are clearly smart analysts.

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