Wine Industry in Crisis?

I was interviewed this morning for TVNZ’s NZI Business programme on the Breakfast show regarding the state of the “industry in crisis”.
I felt that for those with the time to read it might be helpful to add to and amplify my comments (which for the time being may be found at http://tvnz.co.nz/business-news/nzi-business-wine-industry-in-crisis-4-15-video-3855494).

When the going stays tough
The focal point for much of the industry media commentary has been on the growing number of receiverships and mortgagee sales of wine and grape businesses.

It is easy to understand why people focus on these as the sharp evidence of industry problems. However, the truth is always a little more complicated. I would argue that many (maybe half or more) of the wine industry receiverships of the last three years could be traced back to reasons that were not strictly the fault of the industry downturn (e.g. property developers with vineyard interests, personal problems etc). In other cases the nature of the problems has sometimes been “atypical” – such as the failure or default of offshore importers, loss of contracts etc. Sometimes optimistic mistakes or flaws in business models have been highlighted.

What can not necessarily be said is that all these collapses occurred because people were bad at business. One of the most important things now is that some very skilled and knowledgeable people, who may have lost much of their wealth and savings but who still have enormous value still to contribute, are not lost to the industry.

Another thing to recognise is that receiverships, liquidations and mortgagee sales typically peak after the bottom of the cycle. Businesses have held on, scrambling to pay creditors and the bank, waiting for an improvement until the position gets stretched beyond their ability to manage and they run out of options.

Indeed one of the most interesting statistics to me is that of how few receiverships and mortgagee sales there have actually been. The reason is not hard to fathom. Most vineyard owners owe at least a little (and sometimes a lot) to their bank. With low grape and wine prices the industry is, overall, wallowing in red ink. The last thing that any rational banker wants to see is vast swathes of vineyard land and millions of litres of wine stocks being sold off into an already depressed marketplace. This would, simply, turn a bad situation worse. Most of the banks have simply no option but to nurse the industry through the worst. However, this does not mean that there will be no more businesses falling into the receivers’ hands.

Turning the Corner?
At the bottom of any economic or industry cycle, there are always mixed messages. There are always positive statistics and good news stories to go with the gloomier indicators.

I consider that we are now at that point in the cycle where enough things have turned that the positive indicators outweigh the negatives. It has taken a long time to get this far! Evidence has taken the form of overseas export markets holding up (not many countries today can claim this), reduced levels of discounting (bit domestic and offshore) compared with a year or even six months ago, bulk wine supplies tightening and prices improving, plus more positive press about the industry’s key initiatives.

However, New Zealand is not out of the woods just yet, and one critical reason is that for all we are close to a supply demand balance at our latest production levels, we still suffer from a “structural” imbalance. This takes two forms: (1) we are still not selling enough of our wine in the secure branded form that gives us the control over price and quality that is the hallmark of stability; and (2) we still have the vineyards planted that could in a generous year, and without yield discipline (as was the case in 2008), produce more than 100,000 tonnes more grapes than we did in 2010.
Until that structural surplus is whittled back, whether through increased sales, more explicit yield controls, or the removal or “re-assignment” of excess vineyards, we run the risk that we will continue to shoot ourselves in the foot through periodic overproduction, followed by the inevitable practices that follow. Our inability to sell excess bulk wine to new markets rather than to our best markets, has caused long-term brand damage.

In the meantime the biggest worry is the obvious one: wine is an agricultural product and New Zealand has a marginal, maritime climate. The double hit of a big crop and a wet, poor quality vintage is the type of nightmare scenario that could set the entire industry back three years or more.

The bigger issue is time.
If you have been fighting hard to hold onto your vineyards or your company for the last three long, hard years, how would you feel if someone turned around and said “good news, we are past the bottom, only it is going to take many years to get prices and markets back to the point you can make a living again”? A lot of very sane people might ask the question “well, what’s the point of carrying on?”

It is too easy to hide behind the truism that grapes and wine are long-term industries. Yes, they are, but not in the sense implied by saying that industry recovery may be a long, slow process.

There is a choice, however. One can choose to either work hard over the long haul, hoping that neither unscrupulous people, changing fashions, nor the weather will upset the recovery process, and hope for the rewards at the end; or else seek to participate in collaborative initiatives to speed up the process.

Collaboration is a two pronged concept. On the one side it recognises that while the industry may comprise a large number of small businesses, working together can allow wineries to gain some of the economies of scale of much larger operators. On the other side collaboration, in its many guises, allows us to reflect on the fact that each of us or our businesses may lack certain skills, attributes, assets or other resources that someone else may have. There may be a price to pay for accessing those skills, attributes or resources, but bear in mind that the potential partners are also paying a price.

This is not simply a pitch for formally merging a lot of businesses, although that might be an option that makes sense for some – especially if the merger creates a business that is secure and worth much more than the sum of its parts.

Other forms of collaboration or partnership might be as simple as co-ordinating vineyard operations or administration, joint marketing initiatives (such as the Family of 12, Specialist Winegrowers, and MANA Natural Winegrowers groups of like-minded people), or new ways of sharing other resources.

The options for any given vineyard or winery, will probably be intrinsic to that business. The hard part is actually admitting the value to be found in looking, and in entertaining the possibilities in a serious way.
The fact is that without collaboration, the chances of speeding up the recovery process are, frankly, remote.

Shuffling the deckchairs (sorry for the Titanic analogy)
The emergence of some high profile wine industry deals at this time is almost certainly coincidental in the main.
The Delegat’s bid for the shares it doesn’t already own in Oyster Bay Marlborough Vineyards (a company that owns vineyards contributing roughly 25% of the grapes for the Oyster Bay brand, but doesn’t own the brand) appears to have been brewing for a few months now following the deal with Peter Yealands at the end of June, while the deal for Pernod Ricard to sell certain key assets and brands to Lion Nathan and Indevin appears to have taken place more quickly.

Both deals have a considerable amount of background “history”, including takeover battles and very public disputes. Both deals aim to resolve situations that had become increasingly uncomfortable, for differing reasons.
The more important facet of these transactions is that they are being done by companies that possess or are able to access capital resources in the first place, as lack of capital is the industry’s Achilles heel right now. The industry’s recovery would be significantly sped up and strengthened if capital were readily available.

The Future
Long slow haul, or fast track to the future? On one level, that of the bystander looking on and trying to make an assessment based on the visible facts, it is extremely difficult to judge. The real key, as it always is, is people. People have options. The choices between doing one thing or another, or doing nothing at all. Time and again history proves that people react to situations in very similar ways, so that the critical requirement for breaking out of past behaviour and grabbing at opportunities is the willingness to actually be prepared to look out at what options might be there.

There will never be a single one-size-fits-all solution. A better analogy is that of the toolbox that allows one to fix or improve all manner of problems inside a house. But outside, the cladding and the roof, we are much more reliant on the protection of the Building Code and on the councils, engineers, professionals and materials that have a duty to ensure the house is habitable.

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