Investing in ASX wine shares

What are ASX wine shares?

ASX wine stocks are publicly-listed companies involved in producing, distributing, and selling wine. Given that only a couple of genuine winemakers are listed on the Australian Securities Exchange, the label 'wine stocks' often also includes other companies on the wine supply chain. 

Investors might consider a retail stock like Endeavour Group Ltd (ASX: EDV) a wine stock because the company owns the popular Dan Murphy's and BWS bottle shop networks. However, given the diversified nature of Endeavour Group's operations (it also operates pubs and hotels in addition to other retail liquor brands), its share price is affected by many factors outside the wine industry.

Why invest in them?

Wine is big business, especially in Australia. According to information on the Federal Government's Wine Australia website, the wine industry contributes more than $40 billion to the Australian economy each year¹. In fact, Australia ranks as the fifth largest wine exporter in the world, with most of the wine produced by Australian winemakers destined for overseas markets.

This means that some of the world's best wine investments are trading right here on the Australian Securities Exchange. You can gain exposure to world-renowned Australian labels like Penfolds, Wolf Blass, and Pepperjack in one easy trade.

Of course, whether you want to invest in wine shares may also come down to your personal ethics. Some investors might consider the alcohol industry detrimental to society in much the same way as the cigarette industry. In that case, you may wish to avoid investing in wine stocks.

Top wine stocks on the ASX

Somewhat surprisingly – depending on your attitude toward alcohol – wine stocks are usually grouped under the consumer staples market sector rather than consumer discretionary. This reflects the fact that consumers tend to keep up their alcohol purchases even when money is tight.

This can make wine stocks good shares to own during an economic downturn or recession. As demand for alcohol remains elevated throughout these periods, wine companies can continue to turn a decent profit, making them less risky shares to own. 

Here are three top ASX wine stocks ranked by market capitalisation from highest to lowest.

Endeavour Group

Although it may not strictly be a wine stock, Endeavour Group still relies heavily on the strength of the Australian wine industry to turn a profit. Endeavour owns the Dan Murphy's and BWS brands, two of the country's most recognisable liquor store chains. 

The group also has some wine brands of its own. It owns Paragon Wine Estates, a portfolio of wineries and vineyards dotted across Australia and New Zealand. Some wine brands under Paragon include Krondorf Wines in the Barossa, Riddoch Wines in the Coonawarra region, and Josef Chromy in Tasmania.

A diversified alcohol, gaming, and hotel company, Endeavour Group might be a good choice for investors seeking lower-risk exposure to the wine industry. Because Endeavour has other revenue streams outside of wine, it is less reliant on wine sales for its overall profitability – meaning adverse events in the wine industry would have less impact.

Treasury Wine Estates

The most prominent pure-play winemaker on the ASX, Treasury Wine owns a portfolio of leading wine brands. Among its globally respected brands are Penfolds, Wolf Blass, Lindeman's, and 19 Crimes, which American rapper Snoop Dogg spruiks.

Treasury Wine has suffered through a difficult few years. Like all wine stocks, Treasury Wine shares plunged at the onset of the COVID-19 pandemic when social restrictions forced the closure of hospitality venues, stifling demand. 

Soon after, China imposed severe tariffs on Australian wines, further damaging the industry – particularly Treasury Wines. This was because the company had relied on sales to the Asian market, especially China, for a large proportion of its profit. Revenue from sales to China plunged to just $2 million for the half year ended December 31, 2021 compared with almost $80 million a year prior. 

With the Chinese tariffs set to remain in place until 2026, Treasury Wines has had some success expanding its premium wine brands into markets outside of China. However, growth has still been sluggish, particularly in the US, and its share price is only hovering around half its pre-COVID highs. 

Australian Vintage

Another winemaker, Australian Vintage owns the award-winning wine brands McGuigan Wines and Tempus Two, among others. It is a global leader in the wine industry, and its Buronga Hill winery has some of the most advanced winemaking equipment on the planet.

Australian Vintage is much smaller than Treasury Wine Estates, with annual revenue for FY22 coming in at a little over $260 million (versus a whopping $2.5 billion for Treasury Wines). This is reflected in its small market capitalisation of only about $150 million. While this gives Australian Vintage plenty of room for potential growth, it makes it a riskier investment option than Treasury Wines.

Pros and cons of investing in ASX wine shares

We've already discussed some of the benefits of investing in ASX wine stocks. 

Size and quality of the industry: The winemaking industry in Australia is one of the biggest in the world, and some of the world's best wine brands are available on the ASX. 

Defensive qualities: Wine shares can even be good defensive plays when the economy suffers a downturn. This is because people still tend to keep up their alcohol purchases, even when issues such as inflation force them to cut back their discretionary spending.

However, there are some cons to investing in wine stocks as well. 

Reliance on overseas markets: Australia exports most of its wine, which makes it heavily reliant on demand from overseas markets. In fact, about 75% of Australia's wine is exported to just five key regions: Canada, China, Hong Kong, the United Kingdom, and the United States.

When the largest of those markets – China – imposed significant tariffs on Australian wine in 2021, it rocked the local wine industry. Wine sales to China fell from an eye-watering $1.1 billion in FY21 to a paltry $25 million in FY22².

Australian winemakers have recouped some losses by increasing sales to other regions. But it demonstrates the high risk of relying on particular markets for the bulk of the industry's revenue.

Grape quality can fluctuate: Sometimes, wine companies have an off year. Grape supplies aren't as bountiful, or the smoke from summer bushfires taints the fruit. Climate change also affects the types of grapes that can be grown successfully. Many wineries and vineyards face these risks, which can cause wine brands to fall out of favour with consumers.   

What does the future hold for Australia's wine industry?

China's crippling tariffs on Australian wines are meant to remain in place until 2026, severely dampening the outlook for the local wine industry. However, Wine Australia still expects short-term demand for Australian wine and grapes to rise, particularly from overseas markets (at least those outside China). 

While this could boost sales for Australian wine labels in the near term, the longer-term outlook is harder to predict. Winemakers are at the mercy of consumer tastes, which can be notoriously fickle. Despite Australia's strong standing on the world stage, there's no guarantee another wine region won't come along next year and steal our place on the podium.

Are ASX wine stocks a good investment?

We've already discussed the many positives of investing in ASX wine shares. 

The industry contributes significantly to the Australian economy, and many award-winning wine brands are based here. There's also an argument that wine stocks are solid defensive shares to own to help recession-proof your portfolio.

All that being said, the tariffs imposed by China revealed some structural weaknesses in the industry, and the long-term outlook remains uncertain. 

So, before investing in ASX wine stocks, carefully consider your financial situation and ensure you fully understand the potential risks.