The Prime Minister’s office began receiving calls in mid-May and they continued regularly for the next three weeks. It was Michael Clarke, chief executive of Treasury Wine Estates (TWE), on the line and he was demanding action.
In clipped tones, betraying his upbringing in South Africa and years spent in the UK, Clarke not only insisted on meeting with the Prime Minister, but also wanted urgent attention paid to a hold-up in wine shipments to China.
Clarke or his staff would call the PM’s office nine times over that three-week period, much to the frustration of those involved, despite being told repeatedly the issue was being handled by the relevant ministries.
“He didn’t make many friends in government during that time,” says one person involved in the matter.
Turnbull never did meet with the TWE boss, while many in the corridors of power were irked by what they saw as Clarke’s “crazy demands”, including an insistence Canberra extract a commitment from Beijing that all wine shipments from Australia would clear Chinese customs within 10 days.
“He went about it [seeking help from the government] totally the wrong way,” says another person.
For his part Clarke insists he worked “very collaboratively” with the government, while stressing he was “not in denial” about the issues which needed fixing.
But his agitation and what many saw as extreme behaviour hint at the pressure the TWE boss was under as the financial year moved towards its close on June 30.
As it happened the maker of Penfolds, Wolf Blass and Rawson’s Retreat, met expectations for full-year earnings on Thursday and told the market to expect profit growth of 25 per cent this year, even as lingering questions remain over the sustainability of its China strategy.
Not that Clarke has given any oxygen to those who doubt his plans for China – a country which is estimated to generate around a quarter of the company’s earnings and half its growth.
But it does help explain the urgency of Clarke’s advocacy in Canberra, over that frenzied three-week period, even as those who know him say this performance is typical of a man politely described as a “hard charging chief executive”.
“He does not have much time for pleasantries,” says one person who has worked with him.
“He’s a pretty intense guy,” says another.
In an interview with AFR Weekend on Thursday, Clarke was firmly in character, dispensing with the usual pleasantries.
Instead, he opened with the observation that he and this reporter “had annoyed the hell out of each other” in recent months and that we should therefore “put all our cards on the table”.
“I’m a big believer in that,” he added.
During a half-hour call the 54-year-old, who has previously held big global roles at Kraft Foods, the Coca-Cola Company and Reebok, was more charm than menace.
And while his somewhat abrasive posture might have made him few friends in Australia during his 4½ years at the helm of TWE, there’s no denying his performance on the one metric which counts – shareholder returns.
Since taking over what was then described as a “troubled winemaker” in March 2014 TWE stock has risen 382 per cent.
When dividends are re-invested, total shareholder returns swell to 428 per cent, a performance eight times better than the benchmark ASX 200.
These results have delivered Clarke market darling status and seen him lauded by his own board as “truly a global executive”.
But over recent months those questioning the sustainability of TWE’s strategy, and the spectacular earnings growth this has delivered, have begun to grow.
Clarke has been typically defiant, even as three major broking houses Citi Group, Credit Suisse and most recently Goldman Sachs have downgraded the stock and recommended clients sell their holdings.
“There is always going to be some naysayers. I think it just takes time,” Clarke says.
“I’m not going to lose sleep that not everyone agrees with us.”
One market player points out the growing gap between the TWE doubters and the believers is partly because Clarke has spent so little time “duchessing” analysts, fund managers and the media.
This has set the scene for a battle between Clarke and the three broking houses which have a sell on the stock over the next year to 18 months. One side is going to be badly wrong.
At the heart of the issue is the so called “bundling” strategy championed by Clarke and his team to drive sales particularly in Asia, which accounts for 70 per cent of the company’s earnings growth.
This strategy forces customers to buy an equivalent dollar amount of less popular brands like Berringer, Wolf Blass or Rawson’s Retreat if they want access to the company’s premium Penfolds range.
“While the strength of the Penfolds brands enables such an outcome … TWE has misaligned supply of the lesser brands with demand, leading to excess inventory,” Goldman Sachs analyst Andrew McLennan said with reference to China in a note published in late July.
Clarke says this analysis is “misguided”, even though his own narrative around China has changed in recent months.
When The Australian Financial Review first reported on a bundling induced supply glut in China in mid-May, Clarke denied the problem went beyond a few disgruntled distributors.
“Squeaky wheels,” as he put it.
On a hastily convened conference call on May 17, as the stock opened 12 per cent lower, Clarke fluctuated between defiance and barely controlled rage.
In denying there were any major issues in China he pushed the stock back-up, but in doing so has staked his leadership and corporate legacy on there being no glut of low-end wine on the mainland in the coming years.
So far none of the problems in China have not showed up in TWE’s earnings, but the likes of Goldman believe the company’s accumulated problems on the mainland will begin to affect profits next financial year.
And for his part Clarke has re-calibrated his narrative around China.
After initially denying there was any major issue, Clarke now admits TWE got it badly wrong with Rawson’s Retreat on the mainland.
But he says the brand’s performance in China is a “rounding error” in the company’s earnings and the problems will be fixed before Christmas.
“I’ve been very public that we didn’t get it right on Rawson’s,” he says.
“There was an exuberance in my team … then we realised, ‘Shit, there is more inventory here than there should be’, so we course-corrected. We addressed it.”
Clarke says efforts to restore the brand in China, one of the largest volume drivers for the company on the mainland, have been focused on cutting the number of distributors to reduce discounting.
Such discounting has become severe in recent months. China’s largest chain of liquor stores, 1919, is now selling Rawson’s for just 33 yuan ($6.62) a bottle.
That’s just 10 per cent more than the label sells for at some outlets in Australia, compared to a 163 per cent premium the brand enjoyed in June 2016, according to Citi Research.
“The risk for this brand is retailer gross margins may have shrunk and incentive to shift volume may be lower,” Citi’s Craig Woolford said in a note to clients.
Those on the ground in China tell a similar story, with one person saying; “As far as I can see China is still awash with TWE’s products.”
Clarke however maintains the turnaround is happing and says he’s “determined to build a portfolio of brands over time”.
But many question if this is possible if the company continues to pursue its bundling strategy.
“If you are a company that wishes to build brands then you don’t bundle,” says one wine industry veteran.
“What bundling says is that you have one brand [Penfolds] and everything else is a disadvantaged label.”
While doubters in the industry and among broking analysts may be growing the broader market is not yet prepared to bet against Clarke.
The stock has rallied 22 per cent since the Financial Review aired concerns about the supply glut in China, leaving it close to a record high on Friday.
While China remains the biggest risk to the stock, Clarke’s longevity in the role has also been a point of speculation, with some suggesting he would leave over the next year or 18 months.
The idea that TWE was a short-term stop on the road for Clarke, stem from comments he made after his departure from UK-listed bread maker Premier Foods.
Clarke quit the company abruptly in January 2013 after less than 18 months in the top job, saying the restructuring of the debt-laden outfit was complete and he was looking to be the “CEO of a large corporation”.
Clarke went even further saying he’d been approached with a number of offers and he was ready for a “large CEO role in the UK or the USA”.
“I’ve managed much bigger businesses in the past,” he told The Guardian, insinuating the messy restructuring of a mid-level food company was not for him.
“Now people are aware I’m open to a large opportunity.”
But this big job in the UK or US never eventuated.
Instead, Clarke would spend 14 months on the sidelines before joining TWE, which was not only a similar-sized company to Premier at the time, but also another turnaround story.
Clarke now says he’s no longer interested in a big job in the US or UK, saying TWE, with its market value of nearly $14 billion, is a truly global business.
“I’m not looking to go and work somewhere else,” says Clarke, adding that he wants to obtain permanent residency in Australia.
Gaining Australian residency been made more difficult as Clarke has been spending much of his time in the US over recent months, as the company seeks to re-engineer a business which has never delivered on its potential.
“I am not just here for the turnaround. It has taken five years to turn this business around [and now] we have got the foundations in place for all the regions.”
“But there’s still plenty of work to do.”
Clarke also says he’s “more of a growth” guy than a turnaround specialist, a subtle reference to what many believe was his unhappy experience at Premier Foods.
Those who remember his time at the high-profile UK food group say Clarke’s departure was a little more textured than the press release and his comments at the time would suggest.
“Premier at that time was a hugely stressful place … people lost count of the number of near death experiences. In that situation there is always lots of conflict between the board and senior management,” one person who asked not to be named told AFR Weekend.
“The chairman and he basically agreed he could not go on.”
The person added Premier was not the right job for Clarke, who was a “brands guy” rather than the restructuring expert the company needed.
“He is a very professional manager, but one that is used to a highly controlled environment,” said the person.
“I think he found it very tough on multiple levels including emotionally.”
In private comments to investors in Australia Clarke has said the Premier business was in far worse shape than he had been led to believe and once realising this he made a deal with the board to stay for two years.
The disputed narrative around Clarke’s departure from Premier meant his arrival at TWE in March 2014 was not without controversy.
Investors, who had seen the stock price fall 50 per cent over the previous year due to a supply glut in the US, were sceptical about his lack of wine experience. The issue was that the English-based South African came from a consumer products background. While this brought much needed international experience to TWE, there remained a perception moving fizzy drinks and packet cheese was very different to TWE’s suite of luxury brands, including Penfolds.
“He was a controversial appointment at the time as he had no wine experience,” says one fund manager.
“He didn’t know the wine business but he did know how to make money.”
Clarke, in his time at TWE, has surely affirmed this ability to make money, but now he needs to show the market this run can continue for the next five years at a company which has had as many downs as ups over its 174-year history.