Fragile NZ Wine Industry Under Siege

15 March 2012

Adverse weather conditions, bulk wine sales, volatile exchange rates, a lack of confidence in government policy and the vagaries of fruit supply and demand are all dealing blows to an already fragile industry, according to the latest Markhams wine industry business confidence survey.

“Trading conditions for the January 2012 quarter were actually worse than participants predicted when surveyed in January 2011. There is little doubt that the industry is facing tough times. This view is supported by the fact that less than half (43 percent) of survey participants expect trading conditions to improve in the coming 12 months,” says Graeme Rhodes, national wine spokesperson of the chartered accountancy group.

Whilst many wineries remain “carefully optimistic” about the year ahead, nationally the poor weather conditions have impacted on fruit volumes, with lower yields expected, particularly in Marlborough. However the reduction in volume has had a positive effect with a number of grape growers without contracts this year now being able to secure supply contracts.

“For many growers with existing agreements, the lower yields may mean a drop in income. The flip side is that some growers are securing multiple year deals from wineries to ensure continuity of supply, which affords them a previously nebulous certainty of income,” says Mr Rhodes.

Nevertheless, it appears unlikely that the reduced vintage will create any significant pricing comeback. Even with some industry players predicting lower volumes for a further two seasons, the fruit price is unlikely to rise to any great degree, capped by the bulk wine strategy employed by many businesses still.

Bulk wine sales are also impacting on profitability. “Bulk wine sales strategies are here to stay and we are seeing them more often being used as an integral part of a sales deal. Bulk wine is being used as leverage, with wineries agreeing to supply in order to get their finished wines on supermarket shelves, particularly in export markets,” says Mr Rhodes.

On a bright note, 44 percent of respondents nationally are trading profitably, up from the 38 percent that predicted they would be when surveyed in January 2011. But with more than half of businesses surveyed reporting their business was not profitable due to being in the early stages of development (26 percent), margin pressure (14 percent), pricing and increased costs (12 percent), and a lack of capital (12 percent), it is clear that the difficult trading environment remains.

Confidence in the National-led government’s policies stimulating the industry has dropped dramatically from those who prior to the election believed the policies would positively impact the industry (60 percent), to 77 percent now believing they will not. Another blow to the industry has been the Rugby World Cup not being the ‘bright hope’ participants expected when surveyed in August 2011. Only 26 percent of those surveyed reported the event had a positive effect on their branding and sales.

According to the survey, export markets present the biggest opportunity for growth in the industry, with more than 60 percent of respondents looking at exporting to new markets in 2012.

Asia is increasing in popularity as the export market with the most potential and, whilst it is acknowledged this market will take time to develop, there is an optimism that such ventures will pay off in the longer term. Currently 47 percent of respondents are exporting to China and Hong Kong, with 76 percent saying they are planning to export there in the next five years.

Once again the biggest threat to the industry identified in the survey nationally is the volatile and high exchange rate, impacting export profitability. Although many respondents remain positive about the opportunities new export markets may bring, some markets, particularly Europe and USA, were identified as becoming increasingly uncompetitive due to the high New Zealand dollar.

On another note, there is a degree of unrest throughout the industry about some contract processors now making and marketing their own wines, effectively competing against their winery customers. This situation may accelerate the movement of mid-sized players to merge and consolidate with others to increase sales strength, and rationalise distribution and infrastructure.

The Markhams wine business confidence survey is conducted twice yearly by the national wine industry business development unit of the Markhams chartered accountancy and business advisory group.

It is conducted in Hawke’s Bay, Wairarapa, Marlborough, Nelson, Canterbury, Central Otago and Auckland and covers topics such as sales and distribution, capital investment, branding and profitability. The survey report is made available free to industry participants and is published on the Markhams website www.markhams.co.nz

ENDS

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