Call for collaboration in wine industry

Although the New Zealand wine industry's story is a tale of expansion, winemakers feel the narrative's hard edges as sharp growing pains.

That was the message last week from ANZ economists who have highlighted key issues facing the industry.

Issues include a splintering of approaches between small and large wine companies, bulk exports undermining branded and bottled wine, frequent over-reliance on a single variety, increased regulation/taxes/compliance costs, and higher productions costs.

The past two decades had seen some significant achievements across the industry, the latest ANZ Agri-Focus report said.

Marlborough sauvignon blanc had been established as a world-leading varietal, bringing many international accolades.

Over the 20 years there had also been enormous export expansion into a wider range of markets.

Total exports had now hit the $1 billion mark with total sales of $1.5 billion.

The recent supply imbalance had its roots in the 1980s and 1990s. Internationally, New Zealand attracted attention as a New World wine producer, with Marlborough sauvignon blanc a major point of difference.

Subsequently, the door was opened for other New Zealand varietals.

On the domestic front, changes to licensing laws, the emergence of baby-boomers as wine drinkers, a greater exposure to foreign wine-drinking habits and the improved quality of New Zealand wines all combined to help boost demand.

In the 1990s, the amount of land planted in sauvignon blanc vines quadrupled.

Industry development further accelerated in the 2000s when those factors were turbocharged by the mood changing to a highly speculative environment in which capital was easily accessible, risk-appetites were high, and there was a penchant for capital gain over profit.

During that period, the total area of vineyards in New Zealand increased more than three-fold to nearly 34,000ha, an annual compound growth rate of 11.5%.

The timing of the economic downturn could hardly have been worse, as it coincided with New Zealand producing record-high tonnages of grapes.

The year-on-year increase in supply between the 2007 and 2008 vintage was 40%.

Grape yields had been on an upward trajectory since 2000, and the expansion in the growing area from the early 2000s was also influential.

While supply was stabilised in 2009 and 2010 at the higher level of production, the 2011 sauvignon blanc vintage was a record 13.4 tonnes per hectare.

That pushed total sauvignon blanc grape supply in 2011 up nearly 30% to 224,000 tonnes, and the total New Zealand grape supply to a record of 328,000 tonnes.

The fallout affected the industry by:

• Pricing pressure, significantly reducing net margins.

• Increased inventory levels, combining with pricing pressure to considerably reduce cash flow. The result was increased debt levels, weakened balance sheets, suppressed asset values, and restricted ability to exit.

• Aggregate grape-grower debt increased from $1.07 billion in 2008 to $1.40 billion in 2011.

• Wineries' aggregate debt also increased from $0.89 billion to $0.97 billion over the same period.

• Consequently, funding pressures rose at a time of elevated uncertainty in many markets.

• There was an increase in the supply of relatively "homeless" wine to shift excess production. That pushed down margins throughout the supply chain for bulk wine and created competitive pressure on packaged/branded products.

• The dilution of New Zealand's brand and quality characteristics from packaged/branded wine to bulk and house brands. This occurred in some of New Zealand's key export markets and mostly in the high-volume retail channel.

The national vineyard acreage grew sharply until 2008 but levelled off considerably when prices began to fall.

Limited appetite for expansion and very little new area coming into production meant the size of vintages over the next three or more years would be driven primarily by yields.

The forecast lower yields for the 2012 vintage, courtesy of a more average growing season in Marlborough for sauvignon blanc, would help with the short-term picture.

However, questions remained about whether that would be enough to compensate grape growers for lower volumes, the report said.

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Wine industry remedies
• Grow demand, through targeting expansion in existing markets and opening up new markets
• Continue focus on "super premium" positioning for New World wines
• Strengthen relationships and rebuild trust within the industry
• Collaborate to manage supply and inventory
• Focus on productivity and collaboration to drive efficiencies throughout the supply chain
• Continue research and marketing to maintain a high-quality public image of New Zealand wine
Source: ANZ Agri-Focus

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