Economics Case Study: Treasury Wine Estates Analysis

This case study examines Treasury Wine Estates Limited, an Australian wine manufacturing and distributing company, analyzing its market structure, cost of production, and the macroeconomic environment. It begins with an overview of the company's operations, including its global presence and various wine brands. The study then delves into the competitive landscape, highlighting Treasury Wine Estates' market share and key competitors in Australia's wine industry, emphasizing its oligopolistic market structure. The analysis further incorporates the cost structure of wine production, detailing fixed and variable costs. The study examines the macroeconomic factors affecting the business, including government intervention through taxes and regulations, and the broader economic conditions in Australia, such as economic growth, unemployment, and interest rates. The report also discusses the impact of exchange rates and externalities generated by the company. The case study concludes by analyzing the government's role and its influence on the wine industry.

Running head: A CASE STUDY ON TREASURY WINES ESTATES LIMITED
A CASE STUDY ON TREASURY WINES ESTATES LIMITED
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1A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Executive Summary
The objective of this report is to analyse the market structure and several factors affecting the
growth and expansion of the Treasury Wine Estates Limited. The paper initially presents a
brief overview of the location, nature and factors of the company. Additionally, it includes
the market share as well as various competitors of the company in the wine industry of
Australia. Afterward, the paper incorporates the cost structure and macroeconomic business
factors of the company. It includes the Australian economic activity that can affect the
development of the company. Lastly, the paper includes the externalities associated with the
market and the company. Apart from all these, it indicates the government to reduce tax rates
because of the several benefits rendered by the product.

2A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Table of Contents
Introduction................................................................................................................................3
Overview of the business environment......................................................................................4
Cost of producing wine..............................................................................................................6
Macro-environment for the wine business.................................................................................7
Government intervention in the market.................................................................................7
Macroeconomic environment of Australia for business........................................................8
Exchange rate factor in business............................................................................................9
Nature of the product...........................................................................................................10
Externalities generated by the Treasury Wine Business..........................................................10
Conclusion................................................................................................................................11
References................................................................................................................................13

3A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Introduction
The wine industry in Australia is famous for its high-quality vineyards and freshly
produced wines. Australia is the fifth largest producer and exporter of wine in the world. The
most demanded wine of Australia is Penfolds Grange (Chong, 2014). The wine
manufacturing sector provides a substantial amount of revenue to the government. As a
result, the GDP of the Australian economy depends on the wine industry.
Additionally, this industry derives a significant amount of support from the Australian
agricultural department as well as the government of Australia. Several producers and
growers are present in the market (agriculture.gov.au, 2020). They can be either privately
owned or government-supported. However, most of the winegrowers are small and have a
family-owned business. Among all these wine producers, the Treasury Wine Estates is a
renowned winemaking and distributor company that has extended its business operations in
several economies in the world. This wine company has developed under the brand name of
Foster’s Group, which is an Australian based beer group organisation. This agro-based
company is widely expanding and has made a significant mark in the Australian as well as
the global wine market. The reason behind its continuous development is its strategic merger
and partnership with specific renowned organisations.
This report is prepared to provide a brief introduction and knowledge about the global
brand wine of the Treasury Wine Estates. This report provides an analysis of its cost structure
and the market share of the company. Additionally, the report incorporates competitors’
analysis along with the analysis of the support that the company derives from the
macroeconomic environment of Australia. Lastly, the study tries to highlight the possible
externalities generated by the company.

4A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Overview of the business environment
The Treasury Wine Estates is a wine manufacturing and distributing organisation
situated in Australia. Treasury Wine Estates is a public and locally owned company that
belongs to the industry of processing and manufacturing of wine. The company has its
headquarters in Melbourne, Australia. It is engaged in the agriculture of grapes that helps in
the production of high-quality wine brands (Bianchi, Drennan & Proud, 2014). The company
is situated in several international markets, such as Europe, Asia, New Zealand, Canada and
the United States of America. The brands of this organisation vary from country to country.
In the United States, it sells under the brand name of Acacia Winery, Beaulieu Vineyard,
Australia has Annie’s Lane and Bailey’s of Glenrowan and so forth. The company originated
in Australia under the Foster’s Group. This group is the primary seller of beer in Australia.
The various products manufactured and sold by Treasury Wine Estates include a wide range
of quality, luxurious, and commercial wine brands. Under these brands includes Penfolds, 19
Crimes Beringer, Wolf Blass, Lindeman’s, Chateau, Sterling Vineyard and Stag’s Leap
(Tweglobal.com, 2020).
The brand has a vast customer base in both domestic as well as international platform.
People falling under different age groups, mainly the adults, prefer the consumption of
quality brand wines of the Treasury Wine Estates. The vast customer base of the Treasury
Wine Estates helps the company in maintaining sustainable growth and expansion (Varsei &
Polyakovskiy, 2017). The brand sells its wide range of quality products in more than 70
countries around the globe. They claim to operate as a vertically integrated organisation to
increase the profitability of the business. Additionally, the business is known for its grape
cultivation and distribution and strategical marketing. The company has both owned as well
as leased Vineyard in New Zealand, Australia, Italy, California and many others. The main
competitors of Treasury Wine Estates include Accolade wines Australia Holdings Ltd,

5A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Pernod Ricard Pacific Holding Pty Ltd, Casella Wines Pty Ltd. However, the statistics
suggest that Treasury Wine Estates Ltd has a substantial share in the market, with 10.2 per
cent of market share in the entire industry (markets.businessinsider.com, 2020). This market
capitalisation comparison between the major companies of wine industries has been
portrayed in the diagram below. Apart from the competition in the wine industry of Australia,
the company faces a significant amount of competitive risks from other companies, which
includes Finsbury Food Group, Beyond Meat and McColl’s Dairy Crest Group. However, the
market share of other wine producers together contributes to about 62.6 per cent in the entire
wine industry of Australia (statista.com, 2020).
Figure 1: Market share of a major wine producer in the wine industry
(Source: statista.com, 2020)
Thus, from the above analysis, this can be seen that the wine industry has substantial
market competition. This is because there are several manufacturers and sellers of wine in the
country. There is stiff competition in the market, which reflects the oligopolistic market

6A CASE STUDY ON TREASURY WINES ESTATES LIMITED
structure. This is due to the presence of a significant number of firms in the market.
Additionally, the wine manufacturing market in Australia consists of four major wine
producers that have strong dominance in the entire market. Therefore, the industry is likely to
face an elastic demand curve due to the presence of competition in the market. This is
because if one of the firms, suppose Treasury Wine Estates increases its prices, there can be a
shift of demand from the Treasury Wine Estates to other wine producers in the market. As a
result, the Treasury Wine Estates needs to set a price, considering the pricing strategies of its
competitors. If the firm sets a price above the marginal cost, it can lose its market share by
losing its customers. Therefore, it cannot charge a price according to its will. Thus, the wine
industry of Australia renders substantial competition to a wine-producing firm such as the
Treasury Wine Estates.
Cost of producing wine
Wine can be a fruitful business investment for investors in the industry. The demand
for wine is continuously increasing. The revenue generated by the industry participants is
substantial and reliable. Therefore, the cost structure of the industry is slightly different from
any other agro-industry. The wine industry requires significant and varied types of a factor of
production or inputs to produce a perfect quality of the wine. These inputs consist of grapes
or grape cultivation fields, bottling, vineyard, liquor license labour, research laboratory,
barrel and marketing or advertising agency (Ibisworld.com.au, 2020). These are certain
factors, which are required for manufacturers to set up their own business in the wine
industry. Thus, there is both fixed and variable cost in the industry. The fixed cost that is
unavoidable for the manufacturer consists of administrative rent and selling costs, office
expenses, liquor taxes, vineyard cost, grape harvesting land, marketing and sales commission
and administrative salaries. On the other hand, variable costs include grapes, bottling and

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labelling, harvesting labour and crushing labour cost, research and laboratory expenditures,
barrels, waste management and supervisor expenditures.
Generally, the fixed costs of any firm are unavoidable and cannot be neglected by any
business. The wine industry has several expenses regarding the production and selling of
wine in Australia. The fixed of the wine-producing firm are lesser than the variable cost. This
is because the revenue of the industry is substantially high. Additionally, the firm produces a
considerable volume of output. Similarly, Treasury Wine Estates in Australia employs a
significant amount of Australian population (Tweglobal.com, 2020). The expansion of the
business suggests the size of the industry. The company has a tremendous asset structure
with a substantial amount of cash inflows. Treasury Wine Estates has strategic, physical and
organisational assets all over the world of its operation. This company has invested in several
French vineyards and Australian winemaking capacities as well. The organisation is engaged
in the research and development of wine to provide new varieties to customers. As of 2019,
the total agricultural assets of Treasury Wine Estates includes about 29.4 million Australian
dollars. Therefore, the total assets of the firm are 6000.2 million Australian dollars.
Therefore, the total current assets of the firm are about 2168.6 million dollar and non-current
assets are 3831.6 million dollars (Tweglobal.com, 2019). This indicates the large size of the
company. Treasury Wine Estates is known to be one of the top ten manufacturers and sellers
of wine in the world.
Macro-environment for the wine business
Government intervention in the market
For s sustainable growth of a business, macroeconomic indicators should be stable to
provide substantial support to the growth and development of the business. Similarly, the
wine industry requires a stable economic, political and international relation to foster its

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growth and development. The Australian government has imposed a restrictive tax on liquor.
This liquor has created problems in the path of its growth rate. The tax structure o the wine
industry of Australia is calculated on an ad-valorem basis. This implies per unit tax rate is
imposed on the output produced in the wine industry. The government intervention is
substantial in the market that creates a problem in their business operation. In addition to this,
a Wine Equalisation Tax (WET) creates additional expenses over the wine industry (Gogoll,
2016). The wine cultivators or the business owners need to face huge waste management
costs, which is another hurdle imposed on the profitability of the business. However, the
Australian agricultural department provides substantial support to the wine producers by
providing promotional support to the industry. In recent years, the government has removed
WET from several unbranded wine producers (Ato.gov.au, 2020). This has created efficiency
in the supply of wine in the market. As the contribution of the industry to the current account
is significant, the government is providing financial support to the winemakers as well.
Macroeconomic environment of Australia for business
Over the years, Australia has been witnessing a steep fall in economic activity due to
the continuous increase in unemployment and a fall in business activity. The current
economic growth rate in Australia is 1.7 per cent (rba.gov.au, 2020). This unfortunate and
weak growth rate indicates the deteriorating health of the economy. The prevailing
unemployment rate is about 5.2 per cent. This low employment rate is due to the 2.2 per cent
growth in the wage rate. As a result, inflation is low at 1.7 per cent. This indicates the low
purchasing power of Australian consumers. The business activity in the region is low. As a
result, the Reserve Bank of Australia has reduced the interest rate to 0.75 per cent
(Tradingeconomics.com, 2020). This reduction was made to support business growth,
increase job opportunities and boost the economic performance of Australia.

9A CASE STUDY ON TREASURY WINES ESTATES LIMITED
Although the cost of borrowing is low for companies like Treasury Wine Estates to
increase investments, yet several other factors are hampering the productivity of Australian
winemakers. These factors include climate change and high taxation on large winemakers.
Grape requires stable temperatures for growth; the ongoing bush-fire is affecting the
Australian climate (Fleming, Park & Marshall, 2015). This is hampering grape cultivation.
Thus, the future growth of Treasury Wine Estates is at stake. This is because the demand is
shifting from consumption goods to respirators and facemasks. The economy’s growth rate is
expected to reduce in the upcoming years (Galbreath, Charles & Oczkowski, 2016). As a
result, this can affect the business of Treasury Wine Estates. However, there is an increase in
investment in research and technological innovation to maintain the productivity of grapes
(Bouri et al, 2018).
Exchange rate factor in business
The exchange rate has a substantial contribution to the exporting business of any
country. Australia is a massive exporter of wine in the global market. Therefore, variability in
the exchange rate can affect the exporting business in Australia. If the exchange rate is low, it
can affect the profits of exporters. Although the import becomes cheaper, the return generated
from exporting to foreign countries provides a lower yield to domestic exporters. The current
exchange rate of Australia is one Australian dollar equals to 0.69 US dollars
(Tradingeconomics.com, 2020). This implies that the organisation or business will receive
lower revenue from exporting in foreign countries. This lower revenue can reduce the interest
of the owner in running a global business. However, there is an increase in demand for
Australian exports in the global market. This is because the price set by Australian exporters
seem cheaper to the foreign countries. This will increase the total volume of wine exports and
can meet up the loss caused by a fall in the exchange rate (Tweglobal.com, 2019). This is

10A CASE STUDY ON TREASURY WINES ESTATES LIMITED
evident from the increase in demand for Australian wines in France. This is due to the
expensive vineyards of the French wine market. As a result, there is an increase in business
expansion and sales revenue of the winemakers of Australia.
Nature of the product
Furthermore, wine is considered a normal good. This is because, with an increase in
income, there is an increase in the consumption of wine. Moreover, wine has substantial
health benefits when consumed in the right proportion. During a recession, income and
expenditure are less. Thus with the recession, there is a fall in demand for standard goods like
Wine (Keys, 2013). Additionally, the low wages of Australia are affecting the labour market
by making labour shortages. Thus, there is a shortage of skilled workers in the Australian
market. This can affect the future operating costs of the wine producers of Australia.
Therefore, the Treasury Wine Estates can face problems from the weak economic growth of
Australia and low wage growth in the nation. However, the favourable exchange rate and
low-interest rate can yield positive outcomes for the business of the Treasury wine (Saliba,
Ovington & Moran, 2013).
Externalities generated by the Treasury Wine Business
Wine industry or wine beverages are classified as a normal good. This is because,
with an increase in income, there is an increase in wine consumption. The correct proportion
of wine consumption and intake can lead to a reduction in heart-related diseases and the
elimination of diabetes. Additionally, wine has several health benefits compared to other
alcoholic beverages (Xiang et al, 2014). This creates positive and social externalities in the
market. Thus, the government should reduce taxation on wine and increase tax rates on
alcoholic drinks. This can increase social benefits and leads to positive social externalities
(Adelaide.edu.au, 2020). Externalities, whether positive or negative, generates a certain

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degree of market failure. This is because of the tax rate that distorts the welfare in the market
by limiting consumption. Thus, the Australian Department of agriculture provides substantial
contributions and support to vineyard owners and grape growers to maintain the positive
benefit of winemaking business. Apart from this, wine consumption can lead to a negative
impact on the entire community (Businesschamber.com.au, 2020). This is because excess
consumption of wine leads to depression, liver disorders and addiction. This can lead to
negative social externality. This induces the government to impose a tax on wine processing.
An increase in the tax rate for maintaining public health can affect the long-term growth of
Treasury wines.
Wine cultivation has a positive impact on the environment. It ultimately manages
waste production through proper strategies. Moreover, viticulture is suitable for agriculture,
which again has a positive impact on the environment. Other than this, wine cultivation in
Australia follows traditional techniques. This is because this sustains the health and quality of
the land of grape cultivation as well as it restores the quality of wine produced. Thus, wine
supports and does not harm nature or biodiversity (Estates, 2016). As a result, the
government is planning to reduce the tax rate on wine manufacturers because of more
significant benefits to both society, environment and economy. Therefore, Treasury Wine
Estates can benefit from a change in the decision of the firm. However, the government has
reduced WET on unbranded winemakers. This does not help Treasury wine producers.
Additionally, this organisation uses environment protection techniques and follows traditional
wine-producing methods that limit the harm caused by the business.
Conclusion
Therefore, to conclude the report, this can be said that Treasury Wine Estates is one
of the renowned winemaking company of Australia. It has a substantial contribution to
Australian exports and international reserves. The firm generates significant revenue for the

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government and creates job opportunities in Australia. The demand for the quality of wine
produced is immense in the global market. Moreover, the contribution of the business is
significant in the GDP of Australia. Although several factors affect the business movement
and expansion of the organisation, yet continues research and development in quality has
maintained the growth of the wine business. Treasury wines are affected by both taxation and
government restrictions. This needs to be eliminated to maintain the long-run sustainability of
the major wine producer of the world.

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