Local errors prove costly for global wine giant

THE global wine giant Constellation Brands has been forced to report a "material weakness" of its internal controls due to improper reporting of inventory in its Australian division.

Constellation yesterday reported a $US301 million ($423 million) loss for the fiscal year ended February 28, due in large part to a series of writedowns which included a $US32.1 million loss on the adjustment of inventory in Australia.

Constellation, which bought the Australian winemaker BRL Hardy in 2003, has a local corporate office in Adelaide.

Constellation's chief financial officer, Bob Ryder, told analysts some of its Australian employees had not followed standard control procedures in recent years.

"We had some assets on the balance sheet, specifically in inventory, that should have been put into costs of goods sold," he said. "It was an oversight."

Mr Ryder said the company had taken "the correct action on the people involved" and would now increase reviews of its inventory and costs reporting procedures around the world.

Constellation reported tough trading conditions in the fourth quarter in Australia, where its branded wine sales fell 5 per cent compared with the same period in the previous year, adjusted for currency fluctuations, and its wholesale sales fell 4 per cent.

Constellation's chief executive, Rob Sands, said consumers had chosen to switch to less expensive wines as the effects of the global financial crisis were felt during the quarter ended February 28.

"What happened in the fourth quarter, I think you had some pretty quick consumer and retailer reaction to the economy," he said. "And if consumers could save $US2 on a bottle of wine, they might buy lower-end products."

Mr Sands said that had compressed margins for the company, since more expensive wines tended to have higher selling margins. Constellation's sales margin fell 1.9 per cent in the fourth quarter.

"There was probably some overreaction from distributors, retailers and consumers in the fourth quarter and we don't really expect that to continue to that extent in fiscal 2010 [this year]," he said.

Citi this week said average selling prices of bottled Australian wines fell 5.4 per cent in February compared with the same period the previous year, but cask wine prices increased 5.3 per cent.

Mr Sands said prices for Australian grapes were "declining quite considerably" even though this year's harvest was expected to be 10 to 20 per cent smaller than last year.

"This year, it is apparent that the business and volume is not growing for Australia at the same rate it has historically," he said.

Citi said the value of Constellation's wine sales in Australia fell 9.3 per cent in February, compared with a 0.5 per cent increase in the value of sales by Foster's Group.