Monday, 17 July 2017

Yellow Tail and Casella Wines

Some weeks ago I posted a discussion of whether wine imports into the USA fit the proverbial "power law". I concluded that US wine imports in 2012, in terms of number of bottles sold, did, indeed, fit a Power Law. This included the best-selling imported wine, Yellow Tail, from Casella Wines, of Australia.

However, bottle sales are not the complete picture, since ultimately it is the dollar sales value that determines profitability. Statista reports (Sales of the leading table wine brands in the United States in 2016) that Yellow Tail US sales were worth $281 million in 2016, which ranks it at no. 5 overall, behind the domestic brands Barefoot ($662 million), Sutter Home ($358 million), Woodbridge ($333 million) and Franzia ($330 million). Moreover, in July 2016, The Drinks Business placed Yellow Tail at no. 6 in its list of the Top 10 biggest-selling wine brands in the world, based on sales in 2015.


It is interesting to evaluate just how profitable Yellow Tail has been for Casella Wines. This is a family-owned company founded in 1969 (see Casella Family Brands restructures to ensure family ownership), currently ranked fourth in Australia by total revenue but second by total wine production (see Winetitles Media). This makes the Casella family members seriously rich, and even in a "bad" year they are each paid millions of dollars by the company.

Being a registered company (ABN 96 060 745 315), the Casella Wines Pty Ltd accounts must be lodged with the Australian Securities and Investments Commission (the corporate regulator) at the end of each financial year (June 30). This next graph shows (in Australian $) the reported profit/loss for each financial year since the first US shipment of Yellow Tail in June 2001. (Note: the 2015-2016 financial report has apparently not yet been submitted.)

Casella Wines profit since launching the Yellow Tail wines

The economics of Yellow Tail rely almost entirely on the exchange rate between the Australian $ and the US $. The company is reported as being "comfortable" with the A$ trading up to US85¢, and "happy" with anything below US90¢, as the cost of making the wine (in Australia, in A$) is then more than compensated by the sales price (in US$, in the USA). When the brand was first launched, the Australian dollar was trading at around US57¢, and the wine thus made a tidy profit for the winery; and also for the distributor, Deutsch Family Wine and Spirits (see The Yellow Tail story: how two families turned Australia into America’s biggest wine brand).

However, Casella then suffered badly when the A$ began to improve in value over the next few years. The A$ reached parity with the US$ in July 2010; and this is the reason for the unprofitable years shown in the graph. The increased profit in 2010-2011 was apparently due to some successful currency hedging, rather than currency improvements.

Casella refused to change the bottle price of the Yellow Tail wines during the "bad times", stating that they did not want to risk losing their sales momentum by imposing a price hike. Instead, the company used its accumulated profits and, most importantly, re-negotiated its loans, in order to wait for a better exchange rate. They reported that every 1¢ movement in the currency equated to around $A2 million in higher sales revenue.

However, realizing the economic risks of relying on currency exchange-rates for profits, Casella embarked on a premiumization strategy in 2014. The company has since bought a number of vineyards in premium Australian wine-making regions, mainly in South Australia, as well as acquiring some top-notch wine companies, including Peter Lehmann Wines, Brands Laira, and Morris Wines. This strategy is continuing to this day (see Bloomberg).

Finally, for those of you who might be concerned about these things, while the winery does have some vegan wines, the three Casella brothers are reported to all be keen shooters, one of them has actually owned an ammunition factory, and the winery is the largest corporate sponsor of the Sporting Shooters Association. Moreover, Marcello Casella has made a number of court appearances concerning his ammunition factory (Bronze Wing Ammunition factory to remain closed after WorkCover court win) and alleged involvement in drug running (see NSW South Coast drug kingpin Luigi Fato jailed for 18 years).

The recent embarrassment at the SuperBowl is best left undiscussed!

2 comments:

  1. Citing a Shanken News Daily e-mail news blast dated December 20, 2016 and titled "Deutsch Mounts Super Bowl Push Behind Yellow Tail, Looks To Expand Redemption Whiskey":

    Link: http://www.shankennewsdaily.com/index.php/2016/12/20/17409/deutsch-mounts-super-bowl-push-behind-yellow-tail-looks-expand-redemption-whiskey/

    "... for Deutsch Family Wine & Spirits ... Australia’s Yellow Tail remains the company’s largest brand by far. A partnership with the Casella family, Yellow Tail ($6.99) ranks as the fifth-largest wine brand in the U.S. at 8 million cases, according to Impact Databank, and the top imported wine in the industry by a margin of more than 4.3 million cases.

    "Recently though, struggles at the lower tiers of the Australian import segment have impacted the brand, which has shed more than half a million cases over the past two years. In an effort to reverse the tide, Deutsch is planning to turn up the volume on Yellow Tail’s marketing in a big way in the months ahead.

    " 'Typically when brands in this category plateau, marketers begin to dump price and reduce their marketing budget,' says CEO Peter Deutsch. 'We’re taking a contrarian approach. We’ve actually doubled down on the size of our marketing investment, and we’re excited to announce that we’ll be the first wine in 40 years to advertise during the Super Bowl, which airs next February. We want to remind consumers that wine can be fun, and can be enjoyed anywhere that beer can be enjoyed.' "

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  2. The Super Bowl TV ad campaign represented a U.S. $5 million-plus paid media expenditure.

    For argument's sake, let's "assume" that Yellow Tail importer Deutsch Family Wine & Spirits generates U.S. $1 in gross profit margin for each bottle of Yellow Tail sold in the U.S. market.

    By that math, Deutsch would have to generate an incremental +5 million bottles in unit volume (@ "assumed" U.S. $1 in gross profit margin) to fund their U.S. $5 million-plus Super Bowl TV ad campaign.

    Citing some early sales performance statistics reported by Shanken Daily News on February 27, 2017 in a piece titled "Exclusive: Yellow Tail Sees Solid Momentum Following Super Bowl Ad Effort":

    Link: http://www.shankennewsdaily.com/index.php/2017/02/27/17804/exclusive-yellow-tail-sees-solid-momentum-following-super-bowl-ad-effort/

    • +800,000 units sold in the calendar month of January 2017 above monthly annual average

    • an unknown number of units sold from February 1 through Super Bowl Sunday February 5, 2017 above weekly annual average

    • +350,769 units sold from February 6 through February 12, 2017 (post- Super Bowl) above weekly annual average

    Summarizing: +1,150,769-plus[*] increase in unit volume sales for the calendar month of January 2017 and first two weeks in February 2017

    [*"Plus" because we need to add in the unknown unit volume sales increase for the week of February 1 through February 5th leading into the Super Bowl.]

    U.S. $1 gross profit margin per bottle sold times +1,150,769-plus incremental bottle sales would generate $1,150,769-plus . . . equal to 23% of the their U.S. $5 million-plus paid media expenditure.

    I have not seen any sustained wine industry trade media coverage on Yellow Tail's unit volume following the airing of the Super Bowl TV campaign.

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