NZ wine reputation at risk

Growing pains or a correction? After a decade of stellar growth, the wine industry has entered a period of correction, but, as Agribusiness Editor Neal Wallace reports, sales of cheap New Zealand bulk wine threaten to undermine our reputation for quality.

Economic reality is tarnishing the romance and allure of the wine industry, but some vineyard survival tactics could be putting at risk New Zealand wine's enviable reputation for producing quality.

After a decade of unprecedented growth in which wine exports grew from $100 million to $1 billion, a wine glut has industry leaders saying "No more" to grape plantings, but also warning cheap, bulk, New Zealand-branded wine being dumped on overseas markets was threatening our reputation and market position.

New Zealand Winegrowers chief executive Philip Gregan said traditionally, 5% of the New Zealand wine was sold in bulk, but that had now grown to 25% as wineries and vineyards tried to find a home for surplus product.

"Without a doubt it's a growing market. The question is what impact will it have on our core brands?"

The wine industry's mantra has been quality, but a 39% increase in grapes crushed from 2007 to 2008 and a 100% increase from 2005 to 2008, has caused an oversupply and pushed wineries into survival mode.

It could have been worse: 2000ha of new vines' coming into production for 2009 could have produced 400,000 tonnes of grapes, but the industry worked to reduce the crop to 285,000 tonnes.

The result was the growth of bulk wine being shipped overseas, bottled and sold as New Zealand-branded wine at cheap prices.

Mr Gregan said the industry's future was in supplying high-quality wines that commanded premium prices, and overseas consumers were still prepared to pay for quality.

"Lower-priced brands are a function of a supply imbalance at the moment. Some of the product was being sold at a loss," he said.

But for some wineries it was a matter of survival.

The 2008 vintage was larger than expected, creating an oversupply at the same time the recession hit, forcing wineries to cap the volume of grapes they bought.

At least three wineries have gone into receivership - two in Central Otago and one in Canterbury - and many others have had supply contracts cancelled or have bought out their contracts.

The market for vineyards and wineries has also dried up: 94 properties are listed for sale on the website realestate.co.nz, 16 of those in Hawkes Bay, 23 in Marlborough, 16 in Canterbury and 14 in Otago.

The change in the fortunes of grape growers was illustrated by the Ministry of Agriculture and Forestry's viticulture monitoring report which compared the financial performance of two typical vineyards in Marlborough and Hawkes Bay.

The Marlborough vineyard has seen its profit before tax fall from a high of $404,000 in 2007-08 to $69,000 a year later.

The smaller Hawkes Bay vineyard has had a tougher time, the profit before tax falling from $36,600 in 2006-07 to a loss of $16,400 a year later because of frost damaging fruit, and then a small profit of $3600 in 2008-09.

Marlborough growers in the 2008-09 year had to trim yields by three tonnes a hectare due to caps imposed by wineries, while Hawkes Bay growers were able to lift volumes after the frost damage a year earlier.

The price of grapes also fell for that vintage, by 29% to $1720 a tonne for Marlborough Sauvignon Blanc, and by 11% to $1565 a tonne in Hawkes Bay.

Prices were expected to be at similar levels for this vintage.

For the 2009-10 year, Maf forecasts a $131,600 before-tax profit for the Marlborough vineyard and an $11,700 profit for the Hawkes Bay.

Mr Gregan said wine consumers had benefited from these depressed prices.

"There is probably never a better time to buy wine. The only problem is that it is not probably a sustainable business model."

Anecdotal evidence suggests domestic retail wine prices are 30% to 50% lower than a year ago.

Data from New Zealand Winegrowers shows most of the winery growth has been in small businesses.

Those with sales not exceeding 200,000 litres grew from 331 in 2000 to 523 in 2008 and to 577 in 2009.

In contrast, wineries with sales from 200,000 to 2 million litres, grew from 25 to 56 to 60 in those same years, while larger wineries grew from four to six and six.

Mr Gregan said that profile was not peculiar to New Zealand and smaller wineries added to the industry's culture.

"Small wineries bring excitement and colour to the industry, which is important because the wine market values diversity."

Many were started by wealthy individuals driven by lifestyle change rather than profit, similar to small lifestyle-block owners in the livestock industry, he said.

But there has also been what some observers call "loose lending" by financiers to the industry, which has resulted in some highly geared borrowing.

For Central Otago pinot noir growers, high debt has compounded what was a high-cost crop, but observers say this correction has reinforced the fact vineyards need size and scale.

Debt was among the issues which have claimed three businesses so far.

A year ago, Central Otago Vintners Winery in Cromwell was placed in receivership owing $7.2 million due to difficulties in financing the picking and processing of the previous year's heavy grape crop.

Its plight was accentuated by the failure of an investor to stump up with cash to complete the settlement of a major stage of the McArthur Ridge vineyard near Clyde.

Last May, William Hill Winery was placed in receivership owing more than $5 million, and then in August, Waipara's Daniel Schuster Wines was also placed under the control of receivers.

New Zealand Grape Growers Council president Stuart Smith said the export-crippling exchange rate has accentuated problems of oversupply and the recession, and put at risk the Government's long-hailed export-led recovery.

He said a solution had to be found to remove exchange-rate fluctuation, and he did not accept claims nothing could be done.

In addition, New Zealand's supermarket duopoly was pushing down the retail price, reducing returns for wine producers.

Mr Smith accepted not all the industry's growth was based on sound economics, and some developments were more about property speculation and how the industry had performed in the past, rather than where it was headed.

The wine glut meant speculators were now controlling a large chunk of the industry.

"That really has handed control of the wine industry to speculators and opportunists who have no long-term presence. When the bulk wine dries up, they will move to some other speculation."

The industry did not need any new grapes planted, he said, and he issued a challenge to increase export receipts to $1.5 billion a year by adding value to existing production.