Wine industry pain will worsen before it gets better

Vintage 2010 survey predicts wine industry pain will worsen before it gets better

Fifth annual wine industry financial benchmarking survey shows
continued downward profitability trend and high debt levels

New Zealand wineries continue to experience steadily declining profitability and rising indebtedness, according to a new survey, and prospects for improvement are unlikely in the short term.

Vintage 2010, the fifth annual financial benchmarking survey for the New Zealand wine industry, was released today by Deloitte and New Zealand Winegrowers. It tracks the results of 35 survey respondents (accounting for approximately 30% of the industry’s export sales revenue) for the previous financial year.

Deloitte partner Paul Munro says while the survey results don’t portray an image of significant volatility, apart from in the smallest wineries, an increase in bulk wine sales at reduced margins has resulted in declining profits across the board.

Philip Gregan, CEO of New Zealand Winegrowers, says turbulence resulting from the bumper harvests of 2008 and 2009 coupled with the global financial crisis continues to afflict all sectors of the industry. However, the industry remains on a solid foundation.

“The wine industry has achieved some significant recent milestones and continues to be a relative success story for the New Zealand economy,” Mr Gregan says. “The level of exports remains positive, with more than 50% of sales in all categories generated by overseas sales.”

Mr Munro says a reduced vintage in 2010 has gone some way to alleviating problems caused by the previous two years, but predictions that the 2011 harvest could exceed 300,000 tonnes threaten to add to the industry’s woes.

“Future supply must be matched to global demand, otherwise a cheapening of our wines in key international markets could occur,” Mr Munro says.

“This may result in a rapid undermining of the industry’s premium positioning, which has taken many years to build.”

The current ability to price New Zealand wine at premium levels has a crucial flow-on effect for grape growers and domestic companies which service the industry, and any reversal would have a similarly negative impact.

Large scale wineries (with revenue over $20 million) continue to be the most profitable with an average profit before tax of 7.8%, while the smallest wineries (revenue under $1 million) are suffering the most with an average loss of 31.9%. For the smaller wineries, this translates to a loss of around $50 per case.

“Declining winery revenues in the past few years have been matched by significant cost reductions, but these appear to have bottomed out in 2010. Combined with static production costs, profitability has inevitably taken a hit,” Mr Munro says.

In general, there are a number of wineries from all the size categories measured in the survey which have generated reasonable returns, suggesting that there are viable business models for different sizes and circumstances across the industry.

An ongoing problem with high debt levels, however, needs to be addressed in the year ahead, with all categories within the industry experiencing increasing indebtedness, Mr Munro says. This is particularly concerning given the downward trend in land values and the fact that banks are increasingly anxious about land as security for outstanding debts.

“Banks and shareholders need to work together to examine the options and agree a plan to allow all stakeholders to move forward in a co-ordinated way.”

To read or download the full Vintage 2010 report, go to www.deloitte.com/nz/wine.

ENDS

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