Navigating the shifting landscape of wine and alcohol

Since the pandemic-era surge in at-home drinking, share prices of the largest alcohol producers have fallen 46% from its June 2021 peak.¹ We believe the pullback in consumption since COVID is not a permanent structural change but rather a reversion back to pre-2020 levels. Despite investor gloom, the data suggests to us that demand remains resilient, although consumer preferences in the have changed. Beverage companies that can quickly adjust to these new trends with quality and innovative products will most likely emerge as the winners.

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While demand may not be falling, there are structural changes in consumption and companies that are able to reposition themselves to meet these new trends will thrive. Some key changes in the market are:

1. A shift to premiumisation i.e. quality over quantity

2. A preference for moderation and convenience style packaging

3. Growth in lower and no-alcohol products

We have seen these changes in behaviour reflected in the wine industry in Australia, which is undergoing some major challenges:

1. High-end brands continue to sell well, but low tier brands are struggling to differentiate themselves. This is evident in Treasury Wine Estates (TWE:ASX), where they continue to see growth in their Penfolds brand, but their Treasury Collective portfolio, which includes brands like Wolf Blass, Lindemans, Yellowglen and Blossom Hill is struggling, and they were unable to find a buyer for the business.

2. Moderation has been a trend for many years. One of the big tensions in purchasing wine is that a 750ml bottle purchase can be hard to justify when trying to cut back on alcohol consumption. Furthermore, it can be a significant cost commitment and potential waste if you do not enjoy the product. Consumers are looking for different sizes for different occasions. The “ready to drink” format has seen amazing success by offering a smaller, cheaper and easier to consume product.

3. Sales of low and non-alcohol wine have increased by about 15% per annum over the last few years and we anticipate this trend to continue. Additionally, sales growth for lighter and typically lower alcohol content styles of wine like Prosecco, Rose and Pinot Grigio are far outperforming the traditional “heavy” reds like Shiraz and Cabernet Sauvignon. (see below)

Source: Australian Vintage

Which Australian company do we think can win in this changing environment?

We believe that Australian Vintage (AVG:ASX) is going to emerge as a winner of this change in customer behaviour. AVG’s portfolio of brands include Mcguigan, Tempus Two, Nepenthe and Barossa Valley Wine Company. The company has been challenged post-COVID much like other wine producers, but under new CEO Tom Dusseldorp, they have launched several new products that are challenging the traditional branded wine company approach both in terms of product offering and package delivery, A criticism often levelled against wine companies is that their innovation has significantly lagged the spirit and beer categories and therefore largely failed to attract new and younger wine drinkers into the category. AVG has been proactive is addressing the issues facing the market we mentioned above

Regarding the shift to premiumisation, AVG’s sales have traditionally been dominated by the McGuigan brand. A brand dominated by red varietals targeting a budget conscious older demographic. AVG has done an excellent job in keeping Mcguigan sales steady while they have grown their higher margin and more premium bands such as Nepenthe, Barossa Valley Wine Company and the newly acquired MadFish. It is expected that this shift in the portfolio will continue which will naturally pivot the company into a more premium producer.

We believe the recently launched Poco Vino brand, represents a game-changer for AVG in seizing on the trend of moderation. It hit shelves in October this year in Australia and is sold in seven countries so far with more to follow. Poco Vino which translates to “little wine”, is wine sold in a 187ml bottle. The product has several key IP protections that stop it from being easily replicated, not to mention the significant benefits of mover advantage. In addition to the individual, patented bottle, AVG put considerable thought into the way these bottles are merchandised and sold in store, the bottles are stacked horizontally in a shelf-ready case that is simply slotted onto the shelf. Sales are exceeding expectations with over $15m forecast for this financial year and with ambitions to double revenues for the brand in the following year as AVG broadens the reach bringing in fresh new flavours and sparkling wine into the mix. While still in early stages, Poco Vino is the most innovative packaging innovation we have seen in the wine industry, and it looks set to be a game changer for the sector and Australian Vintage Limited. Visit your local Dan Murphy’s or BWS to see them in store.

Lastly, AVG were early in seizing on the market’s shift to low and no-alcohol products. They are one of the global leaders in zero alcohol wine which represents 10% of the company’s sales. New innovative launches including the 9.5% ABV Lemsecco spritz range are driving further growth in one of the fastest expanding segments in the market. These products are higher margin than traditional wine as competition is lower and less crowded.

Valuation

Today the market capitalisation of AVG is only $35m, down significantly from its COVID-era share price peak. However, the net asset position is $182m and with the Group on the trajectory towards posting meaningful sales growth for the full year and moving towards a free cash flow neutral position, a significant improvement from the recent past, we see a sustainable future of free cash flow generation where the gap between the market capitalisation and net asset value closes over time. This represents an approximately 5x increase from today’s share price. We believe it has hard to find many stocks on the ASX today with a similar upside.

¹As of October 31^st 2025