The announcement that none of the potential pivate equity bids for TWE has come to fruition does not entirely surprise, although the purported attitude of some shareholders toward the price previously offered is curious. The nature of the due diligence and bidding process instituted by the TWE Board appears to have been designed to get just this result. The reports from TWE that both bidders supported the company’s strategy rather supports the hypothesis that this backing was a prerequisite for bid support, notwithstanding the fact that it likely reduced the value of the bids (unless both KKR/Rhone Capital and TPG really were clueless, which I doubt although without knowing who has advised them I can’t help but feel their wine industry nous is open to question). What remains to be seen is whether the agreement KKR and TPG will have signed up for in order to gain entry to due diligence now precludes them from returning with a new or revised unfriendly (i.e. unrecommended) bid. If so, this transaction appears to have been cynically managed to preserve the status quo, potentially contrary to the interests of TWE shareholders.

There have been many comments in recent weeks regarding the implications of private equity bidding for TWE. I do not believe that comparisons with Accolade are helpful. Accolade is a much simpler business and, as a consequence, its private equity owner CHAMP has been able to institute a much simpler strategy to add value.

By contrast, if I were a private equity buyer for TWE I would definitely be aiming to gear up as high as possible for the simple reason that I would be planning to sell assets quickly to reduce debt with a view to ending up with enhanced equity in the assets that remain after debt has been repaid from proceeds. The value adding process would not be a vainglorious attempt to grow earnings of the whole but rather an attempt to get the business back to a state of simplicity and focus. These are the hallmarks of the most profitable wine businesses worldwide, which TWE is not. Paradoxically, I also believe that the current wine conglomerate incarnation of TWE requires more capital and working capital investment than a smartly run smaller business cherry picked put of the balance of relatively unloved or undersupported brands.

Some media and industry commentators would have us believe that break up of TWE would be some sort of disaster for the Australian wine industry. I suggest this couldn’t be further from the truth, although part of that is a spectator’s desire to see how some of TWE’s famous brands could perform if actually set free and properly loved. Another paradox: it could be better for the Australian wine industry AND consumers AND investors. That would be a rare combination, but none are possible under the present configuration.



The ongoing takeover saga concerning what is now Treasury Wine Estates goes back to the misguided strategies of previous owners, made worse during the era of Fosters ownership.

Nevertheless, it appears that there may be some perspectives missing from the public discussion around the actions taken by Treasury, the manoeuvrings of the parties involved and the implications of change. In particular it always astounds how little the wine media understands the philosophies and the tactics of private equity (let alone the position of investors in public companies as Treasury presently is). By the same token, the financial industry and media often seem to display extraordinary naiveté concerning the business models and drivers of wine businesses. In this respect the fact that wine businesses are so markedly different to beer or spirits brands in terms of capital intensity, working capital seasonality, competitive pressures, brand and portfolio requirements and elasticity of demand are commonly misunderstood or ignored.

This was a problem for the now Treasury businesses during the Fosters era and long before that. Some would argue that the rot set in even before the Southcorp and Rosemount merger in 2001, when the two different business models collided in a catastrophic case study of what can happen when the new managers completely misunderstand both the drivers and the key relationships then underlying the business. The weakened Southcorp fell into the Fosters fold in 2005 and the process of value destruction continued for similar reasons.

Part of the problem is the nature of the key Treasury businesses. Penfolds virtually invented the icon-halo effect business model, centred on the image of desirability that spreads from Grange to the Bin series wines and then down to the mass market labels. This was a model that Rosemount had tried (with its Balmoral Syrah and Roxburgh Chardonnay) but never mastered. Its success had been driven by producing large volumes (especially of chardonnay) to a set formula using low price Riverlands fruit. Other brands within the portfolio had similar top labels, but these never achieved the same relationship perceived in the case of Penfolds (whether or not the so-called halo effect ever produced an economic benefit, which is open to argument).

This misunderstanding has been perpetuated through the Fosters and then Treasury corporate structure and hiring practices. For a long time Fosters wine divisional structure was based upon the end markets, which probably works well for beer but only created a gulf of separation from the production side of the business. Subsequently the structure has moved slowly back towards the production side as the imbalances between production and sales have become exaggerated. Even so, the company has still been caught doing what all of the other international drinks brand companies have done building up stock levels in China in anticipation of a boom, only to have found that the market was not as predictable as expected. For all the good ideas they may bring, both Fosters and Treasury hired consumer brand managers to run the business, not wine people with a deeper understanding of the industry (with consumer branding experts under rather than over them), and this has been a telling factor. It is a mistake that it is quite plausible private equity owners will also make if they have misunderstood the business.

Part of the problem is that Penfolds (and several but definitely not all of the other Treasury brands) is really an oversized boutique wine business. Its drivers aren’t entirely in common even with other mass market wine businesses. In its efforts to boost short-term profitability (partly based on the China blue sky myth) Treasury has been through a phase of aggressively lifting prices of Penfolds products and creating a range of new luxury Penfolds wines – possibly trying to emulate some of the value add strategies of spirits producers in recent years. The unsurprising consequence is that not all customers are happy with the perception that their loyalty is taken for granted. Even Penfolds Grange has lived in denial of certain realities: it is a multi-region blend at a time that the Australian wine industry is turning back to industry marketing based on provenance, while at the same time production levels are massively higher than they used to be so that Grange is far from being the rare luxury it once was. Once a mainstay of the independent wine trade it is now readily available (at a price) in supermarkets across Australia and New Zealand.

As a consequence many of the actions taken by Treasury in recent times have been misunderstood by both the financial and the wine press, albeit for different reasons. To many the changes in the Penfolds release calendar and the recent initiative to sell discounted wine fridges to boost wine sales have been perceived as attempts to boost short-term profitability in order to save the business from predators. This completely misunderstands the relationship between short-term profitability and economic value, especially since the most obvious consequence of both initiatives is largely to shift the timing of profits rather than the quantum. It was no surprise when a new bid emerged after all.

To state the obvious, the price at which KKR made its original approach to Treasury will not have been its best price. It was, nevertheless, rejected by the board. Few of the changes made by the company since, whether on costs, process improvements, marketing changes or sales initiatives, will have materially increased the value of the overall business. Nor are any of them things that a private equity buyer could not also do if it chose.

Moreover, it is clear that private equity buyers will have some options available to them that the present board either is unwilling to do or considers unpalatable. That means that private equity buyers may have the ability to enhance the value of the business in ways that the company cannot do.

The sum of the parts?

The simplest way of all is to recognise that the value of the parts of Treasury today is likely to still be greater than that of the whole (notwithstanding the fact that some of Treasury’s historically valuable brands have been neglected to the point they are already as good as worthless). This factor is most likely the reason why the takeover competition has developed the way it has. The fact there are two competing bids at the same price indicates that for TPG a matching price was really about having a seat at the table. This implies that the process may devolve into a behind the scenes auction of some of the parts to be followed by a formal offer being made (and recommended by the board) for the balance of the company. It is worth noting that while often competing, TPG and KKR have a long history of partnering on investments as well.

Treasury (and Fosters before it) has been a problem for Australian wine, but not always in the ways perceived in the media. It has simultaneous promoted the virtues of Australian wine but also unconsciously undermined the global market for Australian wine as well as for many of its own brands.

In a world of brands, brand hoarders often destroy value. The value of a brand is heavily dependent on both use and potential, but the lack of one of these can undermine the other. It can simply be impossible to maintain the level of marketing prioritisation required to maximise the potential of each of a portfolio of brands once a certain level of brand hoarding has occurred. Inevitably some good brands will be utterly devalued. By way of contrast LVMH is an example of a company owning a large collection of luxury brands that has developed clear strategies for what it adds to its portfolio and how it will seek to promote and add value to each brand.

Paradoxically, one of the most value additive strategies open to Treasury, or to a future owner, may be to sell Penfolds – the clear jewel in the crown. The problem with Penfolds is that its influence over the Treasury portfolio has continued to grow, and to assume increased internal prioritisation, so that it has become a dead weight on top of the rest of the business. The emphasis on marketing and selling Penfolds products has come at an enormous cost to sales of other brands. It is not inconceivable that the US stock glut, a consequence of poor market information, planning and inventory controls, was accentuated by the internal marketing priorities (whether of Penfolds or other US brands) suppressing demand for many competing products.

Treasury’s Australian wine portfolio alone includes more than 30 brands, a mix of famous old names and newish names somewhat obviously invented by marketers. Some of these brands, once household names in Australia, now either languish as homes for cheap supermarket bargains or are rarely seen. Even those brands receiving a little more love from the marketing department are still often competing against sibling brands or worse, have been formally de-prioritised in some markets. One of the difficulties with a demerger of the brands will be the extent to which previous management has closed down many smaller regional wineries, originally attached to individual brand companies, in the pursuit of a phantom holy grail of scale and lower costs.

The roll call of brands that once held significant (often quality-driven) positions in the domestic Australian and export markets, but which have now been relegated to bit rolls as multi-regional blends or price point gap fillers, is extensive. Some of these brands could recuperate and flourish with some love and investment. For others that could no longer be said, even for names with significant historic resonance.

Treasury Australian brand Roll Call (not comprehensive): Annie’s Lane, Bailey’s of Glenrowan, Coldstream Hills, Devil’s Lair, Great Western, Heemskerk, Ingoldby, Jamieson’s Run, Leo Buring, Lindemans, Maglieri, Metala, Mildara, Penfolds, Pepperjack, Robertson’s Well, Rosemount, Rothbury Estate, Rouge Homme, Saltram, Seaview, Seppelt, St Hubert’s, T’Gallant, Tollana, Wolf Blass, Wynns, Yarra Ridge, Yellowglen.

Even so, the parts are still worth more than the whole because the way the whole company works stifles the real potential of too many brands. New owners of parts might change that.

The recent decline in per capita domestic wine consumption in New Zealand (not to mention other countries where this has occurred) raises the obvious question: is the reduction across the board or variety specific? As one retail commentator recently mused, are we in New Zealand becoming slightly “sauvignoned out”? It is logical given our viticultural emphasis on the variety that the retail market share of sauvignon blanc might well be higher than in most of the countries we sell sauvignon blanc to (where there will be a larger overall selection of wines since the overall percentage of other imports will typically be much higher than it is here). I am not ignoring the fact that the percentage of sauvignon blanc we export from New Zealand is much higher than the proportion of any other varieties (or to express this in the reverse, we drink a much smaller proportion of the sauvignon blanc we produce than we do of any other variety). The issue is firstly whether the domestic market for sauvignon is close to saturation and, if so, whether future market trends will provide a useful lead indicator of the impact of changing preferences globally (whether or not sauvignon blanc’s local market share has actually diminished lately, given that I opened from the standpoint of a purely anecdotal remark and it is not necessarily proven to be the case).

The launching point for this discussion is the historic reality that wine sales globally have tended to be highly fashion or trend driven, for a wide variety of reasons. Styles and varietal preferences come and go over periods of time – often 1-2 decades. Even when a variety undergoes a recovery after a period of market neglect it is usually stylistically different to how it was previously. There may be an argument that generational change is a factor, for example. Climate change may also be an influence (as seasonal climate differences have long been proven to be an influence on many beverage markets).

Nevertheless, it is probably safe ground to suggest that at some point in the foreseeable the continuing global market demand (and therefore market share) of sauvignon blanc will stop and then start to decline. Unless global demand for wine continues to grow, diminishing market share will mean diminishing actual demand for sauvignon blanc. The rate at which these trends will affect New Zealand will be affected by global competition from other sauvignon blanc producers (which, in the immediate future most likely means our main international export market competitors France, Chile and South Africa).

Will demand for sauvignon blanc subside dramatically? Probably not. The nature of the demand that drives sauvignon blanc sales globally is that it seems to be adopted as a favourite variety of a certain proportion of drinkers in each market. This means that even if global fashion changes there will probably be a solid core of demand that will remain fairly constant for a prolonged period of time. This will then deplete slowly through natural “taste attrition”. The rate at which these drinkers switch to other varieties will depend on the rate at which newly fashionable varieties or styles shift from the low but important market shares driven by early adopters to the point of mass adoption. Most fashionable varieties never make the shift to mass adoption and so it is trite to try forecasting what it will be, but the likelihood of this process happening is inevitable.

The process can also be producer/marketer-driven to a certain extent. It is quite plausible that the current wide popularity of sauvignon blanc has been accentuated by the marketing efforts of New Zealand and other producers of the variety that have helped to increase its exposure to large numbers of drinkers. This is itself poses a risk and an opportunity, because once any style or variety reaches saturation in the market of its time, the marketers of that variety or style typically have two choices: diversify choices within those styles as a means of maintaining market share (something that has already started to happen with sauvignon blanc, or to shift marketing effort to the active promotion of replacements in order to be at the “ground floor” for future opportunities. The latter happens only very rarely in practice (in most other markets as well as in wine) because most producers only realise that the market has changed too late.

When the market changes, New Zealand will likely continue to make and sell far more sauvignon blanc than anything else for a considerable period of time. The first damage will be to the marginal growers – to those who planted in anticipation of ongoing growth – or to those existing producers who will lose out to the latecomers, possibly because of disadvantageous locations. In either case there will be growing overproduction and falling prices at the grape, bulk and bottled wine levels (except, most likely, at the very top end).

One of the factors that will influence this cycle will be the fact that not every producer will experience it in the same way. Even when overall market share is flattening or falling there will always be some market participants, large and small, who are still experiencing growth. Some of these may be so focused on their own success and need for product security that they are ignorant of the degree of change in the rest of the market and are continuing to plant vineyards that will not be in full production for several more years.

The process will then become one of adjustment and there are a number of reasons why this process could be unnecessarily painful. Market adjustment is always an unequal process. Some are affected more than others. Some react much earlier than others who do not. In a wine world where growers have the choice of pulling out vines or taking short cut and grafting onto existing plants, the key to adjustment is to have the options determined and in place before the need arises.

Diversification is an obvious solution, but it is problematic and much riskier if it has not been an ongoing process. This is one of New Zealand’s great problems. New Zealand nurseries have imported a growing number of increasingly high quality varietal plant materials. There is room for more yet, but it is a start. The problem is that, with a handful of exceptions, most of the work with new varieties is being done by small wineries and growers. The significance of this has been accentuated by the changes in ownership and marketing priorities of most of the larger wine companies that dominate production today.

While 25-30 years ago the likes of Montana (now Pernod Ricard), Corbans (now Lion), Matua Valley (now Treasury) and Nobilo (now Constellation) were active importers and triallers of new varieties, this emphasis has almost completely gone. The large wine companies primarily want sauvignon blanc, pinot gris and pinot noir for export markets. The corporate philosophy of most large producers eschews significant experimentation. Paradoxically these companies, which have the most at risk should the tide turn, should be the ones most advanced in trialling both the growing and winemaking development of new varieties. They are the ones doing a disservice to their shareholders because the time taken to catch up to any new trend can be as long as a decade (once the time is allowed for access to adequate quantities of buds, replanting or grafting over, getting new vines into production, learning the viticultural requirements for new varieties in different regions, sub-climates and soils, learning the individual winemaking process requirements and developing styles, not to mention trialling styles with the market).

Doing all of this from scratch after the market has changed is simply dumb strategy. (So is the arrogance of thinking you can just buy the expertise).

I do not ignore the fact that if larger producers were actively pursuing diversification experiments it could have mixed consequences for existing smaller experimenters. The positives could include increased access to more diverse sources of quality plant materials, the benefit of accelerated viticultural learning and the market exposure advantages when several producers are marketing a new variety rather than one producer doing it on their own. The negatives include the greater risk of geographical or stylistic cul de sacs being taken by small producers; or losing the uniqueness or marketing point of distinction that can be essential for small producers.

The strategy of diversification is multi-faceted. In the first instance it is about risk management but, if managed intelligently, it is also about ensuring or creating future growth options. In this respect it is an essential component of a value enhancement process. For this reason it is curious that shareholders and financiers alike fail to demand diversification programmes of some form or other from medium to large sized wine producers for whom the programmes would be a small part of existing asset and budget allocations.

A number of recent articles touting future trends or next big things that I have read in recent weeks have highlighted factors that I believe warrant some serious questioning indeed.  I am convinced that a great many wine professionals are influenced heavily by personal tastes sometimes to the detriment of judgement, and moreover that this influence causes many professionals to have blinkers on when it comes to what it is that actually motivates the choices of the buyers of most wine (other than, of course, price).

How much or how little do we know about the mass public that buys by far the large part of our industry’s product?  How much do we rely on consumer research – and therefore on its process of selecting the subjects and on the questions that are asked?

The following discussion touches on a few such canards that I believe we should sometimes step back and question.

Why not Riesling?

Could it be that two of the riesling grape’s strengths are also its weaknesses – handicaps against ever truly competing against the likes of sauvignon blanc or pinot gris?

Versatility.  Yes riesling is one of those few grapes that can produce excellent wines in every style from very dry to unctuously sweet.  Most often it is made in styles ranging between just off-dry to medium sweetness.  The problem is that most potential drinkers only have a limited preference range and find riesling’s range of styles confusing and unsettling. Notwithstanding attempts to introduce standardised guides to sweetness, unfortunately still too complex for most drinkers however well intentioned, most drinkers are scared to try a new riesling fearing it may be something they will not enjoy, unlike the “reliability” of pinot gris or sauvignon blanc.

In fact one of riesling’s problems has always been that it has been an “introduction to wine” sort of a drink.  An awful lot of wine drinkers, completely unaware of the pinnacles of riesling, think of riesling as being relatively sweet and view it as a past phase that they are unlikely to ever want to return to.

Flavours.  To put it quite simply, I think a lot of people (perhaps that should be most people) don’t actually like the taste of riesling: not when it is super tart and austere as some young rieslings are, and especially not when it is aged and starts developing the famous kerosene characters.  I believe that flavour characteristic turns off a great many riesling drinkers who simply don’t care that it is a classic varietal trait.

So why has riesling been enjoying something of a revival in the US?  And why has German Riesling been enjoying something of a revival in a number of markets?

The use of the word “something” is particularly indicative, and in both cases the nature of the revival is stoked by both the strong press given to the variety, and by past memories.  However, the reasons for each are very different.

The wine that has experienced strong recent growth in the US is very much “commercial riesling”, a wine made in a fruit forward style that riesling is perfectly capable of handling, but not too structured or demanding of the taster.  The lift in popularity of riesling in the US probably says more about the continuing growth in the number of wine drinkers in that country than about its participation in a riesling renaissance.

German riesling, by contrast, is now largely drunk relatively young when its spectacular acid freshness highlights its youthful fruit characters.  Most drinkers of German Riesling today wouldn’t recognise an Auslese from the 1990s as having anything in common with the style they enjoy, let alone a beautifully aged classic from 1971 or 1976.  One possible supposition that might be interesting to consider is that the last heyday of German riesling in the 1970s and 1980s coincided with the beginning of the love affair of the baby boomers with wine.  It was the “introduction to wine” beverage of a whole generation.  That may in fact have been its problem ever since.

Disclosure of interest: The writer is a fan of good riesling.  Unfortunately, however, I can’t make my mind up whether I would prefer riesling to be the eternal beloved niche wine or a true mass success.  I do fear that the latter, some form of popular reflection of approval for my personal taste, would inevitably lead to yet another period of decline that riesling seems destined to.

Minerality & Texture/Structure

I have recently read articles discussing future candidates for revived popularity (a subject that usually revolves around former favourites and rarely new ones) the idea being expressed that minerality and either structure or texture would be among the reasons for popular success.

The more I have thought on this, the more convinced I am that strongly mineral-influenced wines will only ever be a particular favourite of wine-educated niche markets.  In fact, I would go so far as to say that the wider public do not and would not recognise minerality, almost certainly might find the idea somewhat distasteful, and might actually be inclined only to think of minerality as a sort of off flavour distracting from fruitiness.  In short, I don’t think that the wider wine-drinking public particularly likes minerality at all.  Indeed, why are we (those of us who do enjoy mineral influences) deluding ourselves into thinking that many people do like these characters?

Structure and texture.  Structure has many aspects – body, roundness, acid, sweetness, etc. All influence the structure and texture of a wine on the palate.  The mass market consumer does not think about structure and never will.  Individual aspects of a wine’s structure do matter, but certainly not in an analytical way: only for how much they are perceived to make a wine taste pleasant, drinkable, or not.  The additional problem is, of course, that even in the mass market different consumers have different degrees of tolerance for different structural characteristics of wine.

In general, however, I believe that the characteristics that wine aficionados relish as texture are anathema to the wider market.

Surely we all know that success in the mass market does often rely on sugar, which has a very particular taste and mouthfeel.  That is what the phenomenal success of Yellow Tail and its copycats are built upon.  Indeed why not use sugar dosing: sweetness hides a multitude of off flavours that might damage consumers’ enjoyment.  How many inexpensive Australian shiraz (and not always inexpensive, for that matter), and increasingly some New Zealand red wines as well, does one have to taste to be able to say that they just taste sweet.  Not “fruit sweetness” but residual or added sugar sweetness. And yet they still pick up medals and awards, as attested to by the stickers on the supermarket shelves.

If ever there was a component of wine that needed the epithet “not too little and not too much” it is acid.  Too much and a wine can taste sharp, sour, austere, angular and even abrasive on the palate.  Too little and wines will taste flabby and loose, and will rarely cellar well.

Yet we need to remind ourselves that the right level of natural acidity conveys the sense of freshness to a wine.  This is the ingredient that carries New Zealand’s sauvignon blanc – without its steak of refreshing acidity the fruit flavours would completely lack the vibrancy that tells you where they came from.  It is the singular reason hotter countries struggle to replicate the Marlborough formula.

Most wine drinkers don’t think about acid in wine – it might even be a turn-off for many.  They just know that the most popular white wines the world over right now have refreshing qualities that highlight the fruit and the drinkability of the wines.  Structure?  Who cares – more of the same please.

What Faults?

One of the ironies of promoting medal winning wines in supermarkets is that identification of faults is such a significant part of the wine scoring system, and yet consumers for the most part don’t care at all about technical faults and are far more concerned about flavour and easy drinkability.  It is highly questionable whether the objectives of the two are at all aligned other than that the sticker on a bottle may make it easier to sell against other bottles on the same shelf at the same price point.

Indeed many faults that cause winemakers sabres to rattle have far less effect on consumers.

Take trichloroanisole or TCA (the cause of corked wines).  We readily lose sight of the fact that most drinkers have no idea what a corked wine really is, and a great many have quite low sensitivity to TCA.  Most of those who are sensitive to TCA would be most likely inclined just to think something’s wrong with the wine and never buy it again.

Reduction.  Very similar – who actually knows how many screw-capped wines suffer from reductive characters?  There is probably something to the theory that we have become accustomed to some of these characters instead.

High Alcohol’s High Wire Act

Why do high alcohol wines still sell?  Supposedly the world wants lower alcohol wines.  Indeed hot wines are supposed to be defective, are they not?  Yet the evidence from some wine competitions suggests that some judges are either not especially sensitive (or could it be that they are de-sensitised after tasting a lot of wines?) to alcoholic heat, and that this is a reason why it does not get marked down as often as it should – or how else can one explain regular encounters with high medal-winning wines with searing back palate heat.

Maybe it’s just that many current or former spirits drinkers also enjoy heat or are de-sensitised to the much lower apparent heat of wine?  That certainly might explain the tolerance of high wine alcohol levels in some countries, for example.

So we have the dichotomy of a world that, we are told, is wanting lower alcohol wines (but still with flavour, personality, balance etc), and at the same time defending our high alcohol wines.  How many times does one read reviews stating that although a particular wine has an alcohol level of 14 or 15% “it’s no problem because it is balanced”.

To be frank, I have tasted a number of wines that have received such reviews and I am perplexed. Why can it be that palates who I unhesitatingly believe to be far superior to mine can’t spot the elephant trumpeting in the back of their throats?  These wines had unmistakeably hot finishes. Sometimes you could even smell spirity characters.  Quite honestly I really believe that the number of truly “balanced” 14.5% alcohol wines is actually very small indeed, far rarer than the reviews.  I also suspect that many reviewers write about the wine being balanced for no other reason than that they like it, are seduced by its flavours and concentration, and want to give it a good score even though it really isn’t balanced.

The statement has become little more than a defence mechanism against the risk of criticism for reviewing or scoring such wines despite their glaring faults.

The Language We Use

If the wine industry, and indeed the wine press as well, is keen to distance wine as a beverage from its potential abuse as an intoxicating agent for immoderate drinkers, then why is there the continued use of language that equates squarely with the use of wine as such a beverage?  Examples?  Much of the press seems incapable of using the word “wine” in a headline when words such as “drop” or “tipple” could be used instead.  So, what is wrong with using such words?  Maybe to wine professionals they might seem innocent enough, but from a wider public perspective, words such as these have origins or messages with quite clear implicit meanings. “Drop”, for example, has implications of “down the hatch” and of language equated with heavy drinking.  “Tipple”, by contrast, has connotations of slightly illicit “guilty secret” drinking behaviour, and is the likely origin of the word “tipsy”.

Neither has any relationship to drinking with food, one of the strongest potential defences wine has (and rarely seems to try and use) against the onslaught of the neo-temperance movement. There are indeed other widely used expressions that almost certainly have similar, detrimental connotations.

Even if one disagrees with my interpretation, the fact is that if even a small part of the wider public recognises these words in a similar context (and I believe it is actually more than that), then the words have done a disservice at best, and damage at worst.  At the risk of seeming a killjoy, they are words we should be able to do happily without and should actively seek to stamp out.

CBA is the reverse of ABC

Ten years ago in 2000, New Zealand not only grew more hectares of chardonnay than any other grape, but that year (for the last time) it was also the largest variety by tonnage harvested, about 30% of the total industry output.

Today, even though still the third largest variety by plantings, chardonnay seems almost a pariah grape, especially in Australia and New Zealand.

The coining of the acronym ABC – “anything but chardonnay” – has famously passed into the consumer conscious along with “if anyone orders merlot, I’m leaving…”. Both are, of course, exceptionally unfair generalisations justified only because each grape variety has developed a ubiquitous reputation for overly fruity or oaky, mass produced blandness. If ever a style deserved to go out of fashion it was this! However, the generalisation ignores the facts that in the right hands and from the right locations, both chardonnay and merlot provide pinnacle examples of wine.

The Australian wine industry has recognized this in the form of moves to re-invent chardonnay from a marketing perspective. The problem it faces is that Australian chardonnay – the highest production volume white wine grape – has two very different faces. It remains the white wine lynchpin of the hot irrigated hinterlands, where the possibility of producing good volumes of qualitatively unique or expressive wines seems remote. However, the industry has to keep trying to sell such wines, regardless of whether so doing undermines the marketing of Australia’s other chardonnay voice: classically Australian wines from cooler climate districts that faithfully reflect their sources with not only power but also elegance and a sense of style.

The names of Giaconda, Leeuwin, Shaw & Smith, Tiers, Yattarna and others are deservedly having their new day in the sun.

Ironically, New Zealand does not have the same issue of having to contend with huge volumes of cheaply grown chardonnay, even if it does produce more, relatively inexpensive volumes that are still difficult to sell. Even many of the Gisborne vineyards that have focused on production of grapes for lower-priced labels in the past (ignoring grapes grown in volume for sparkling wine), could potentially be harnessed to produce better with yields restrained.

What New Zealand also has, a result of its wide latitudes of largely maritime conditions, is almost exclusively cool climate chardonnay, from every district. There is no comparison to the warmer climate areas producing volume chardonnay in Australia, California, South Africa, or even the South of France.

What New Zealand doesn’t do widely enough is to plant its chardonnay on the best or ideal sites (thankfully there are exceptions), and to act as if it really is in the quality game. If we believe the ABC press, failure to perform becomes self-fulfilling.

How to Sell New Zealand Chardonnay

The first step is so simple but at the same time so difficult: make better wine.

There is an overwhelming sense that shines out of some of the larger published tastings of recent months (including Decanter and Cuisine magazine tastings) that chardonnay has not received due attention from many winemakers. Perceived to be a “hard sell”, it has become an obligatory part of a portfolio to satisfy those few poor souls who still ask for it. Perhaps the fact that it is considered a hard sell is one reason why it is these days often accorded a lower priority in the vineyard and the winery. In other words, it can become self-fulfilling.

The thing is that if grown with care, not over-cropped or over-ripened, and then made with restraint (not over-oaked or handled) by winemakers, Chardonnay can be one of the most emphatic varietal portrayers of its terroir (not unlike that other oft-misunderstood grape, riesling). Perhaps what chardonnay and riesling also have in common is abuse by larger volume wine producers who seem to believe that consumers are only interested if these wines fit into a specific profile with upfront fruit and sweetness on the palate – styles of wine that set out to remove their intrinsic and unique qualities.

What chardonnay needs then, is stylistic clarity. This is not to say that every region should try and make the same styles, as that would be wrong. However, chardonnay is competing with other varieties and styles that make a virtue of cool climate freshness. By ignoring or denying that it also can reflect these hallmarks chardonnay may yet be able to let its own statement be heard.

A word should also be added regarding the clonal make up of the New Zealand chardonnay vineyard. New Zealand chardonnay is still dominated, as it has been for most of the last two decades, by clones 15 and Mendoza. Together these fairly similarly behaved clones, noted for their propensity to “hen & chickens” bunches – favourable for big upfront flavours and sugars – make up about 55% of all chardonnay vines. The balance comprises a mix of Californian clones and occasional imports, although the revolution in chardonnay clones began with the importation of clone 95 which I believe makes a contribution to a disproportionate number of the younger among the leading wines here. With newer and highly reputed French clones 548, 121 and 1066 now in the country and being sought out by several growers for replanting purposes, the revolution will likely change even further.

A New Zealand Chardonnay Classification

Rather than resort to slogans or other desperate ways of attracting consumer attention I have felt that the interests of chardonnay might best be furthered by drawing attention above all to its qualities – especially when these are not at all out of keeping with “fashionable” modern wine styles.

By focussing on quality, above all, chardonnay’s value quotient can also be enhanced.

As a step toward this goal I felt it might be useful to assemble a classification of New Zealand’s top chardonnay labels. I also felt that this exercise might enhance discussion regarding some of the specific characteristics of different regions and their climate and soils, reflected in the wines.

Aware of the risks associated with personal taste, I have attempted this exercise by relying not just on my own (relatively wide) exposure to these wines, but also on checking for consensus with published notes from other much more experienced tasters, including Michael Cooper, Bob Campbell and Geoff Kelly.

I have adopted some other notable methodologies that might not be preferred by others.

1. I have organised my selection of a Top 50 into 3 star ranking categories, with the pinnacle being 3 stars, the next level 2 stars and the balance of New Zealand’s best chardonnays receiving 1 star.

2. I have selected these on a regional basis, such that they are represented from 9 different regions.

3. I have chosen no more than 1 label per producer, from each region. This does result in the situation where producers with wines from multiple regions (notably Villa Maria and Pernod Ricard as it was) have multiple labels selected, whereas other producers with several labels that might otherwise justify representation have just the sole selection named. In several cases I have had to debate which wine to include when others have presented strong cases. In my view, the best producers, as represented here, tend to make solid chardonnays through their range.

4. I have preferred labels where there have been several representative vintages of consistent quality, although I have reserved the right to make exceptions and have not been a slave to this rule.

5. I have also checked most, and in some cases used, market prices as a tool for representation but not necessarily of ranking.

6. Several labels have attracted lower rankings than have sometimes been attributed to these wines based on other tasters in the past on account of my personal impression that either styles have changed, standards have not been maintained or else simply that other labels have overtaken them on a straight comparative basis.

7. I expect arguments, not only over omissions (I hope there are plenty!) but also over the implied rankings. I suspect there may be fewer arguments (but not no arguments) over my list of 3 star wines than over the other categories! Here then is my classification of New Zealand’s Top 50 Chardonnays.








Marsden Black Rocks



Kumeu River Mates

Man O’ War Valhalla

Villa Maria Ihumatao


Te Whau




Millton Clos de Ste Anne

Kim Crawford SP Tietjens


Montana “O”

Odyssey Iliad Reserve


Spade Oak


TW Reserve


Villa Maria Reserve BF

Hawke’s Bay

Craggy Range Les Beaux Cailloux

Babich Irongate

CJ Pask Declaration


Sacred Hill Riflemans

Church Road TOM

Coopers Creek Swamp Res


Clearview Reserve

Morton Coniglio

Esk Valley Reserve


Te Mata Elston

Ngatarawa Alwyn


Trinity Hill Homage



Villa Maria Waikahu


Ata Rangi Craighall

Dry River

Martinborough Vineyard


Escarpment Kupe

Nga Waka Home Block




Neudorf Moutere



Seresin Reserve

Cloudy Bay

Foxes Island


Dog Point

John Forrest Collection


Fromm Clayvin

Saint Clair Omaka Reserve


Mahi Twin Valleys

Spy Valley Envoy


Staete Land


Villa Maria Reserve


Bell Hill

Pegasus Bay Virtuoso

Black Estate





Central Otago


Felton Road Block 6


In truth I considered narrowing down a four star range with obvious contenders being Neudorf and Kumeu River. The only problem was that there were wines I feel can, on their day, argue a right to stand toe to toe with these icons – whether on long-term achievements, or on out and out pinnacle moments. It got too hard and I wimped out in favour of the perhaps oversized three star list above. In other words, there is a good argument for 2 tiers among these wines and I just wasn’t able enough to split them.

As a further aside, I find it interesting to note how many of the producers listed from Wairarapa south (but with the exception of Central Otago) are also among the leading pinot noir producers.

Overall my point is that the wines I have listed range from the merely excellent to the exciting. The best way to re-energise the market for chardonnay is to shift the perception of drinkers from stodgy sameness to intrigue. There is no better way to achieve this than by highlighting the excitement factor in the best chardonnays, and by giving consumers the tools to reliably find the styles that they want to drink by better clarifying regional taste characteristics.

Ultimately this means taking a leaf out of Australia’s book, as this is very much the strategy that Australia is trying to implement. In New Zealand the lack of the flabby hot climate chardonnays means we are not dealing with an immediate conflict to undermine such a programme. Most of all we need to get out and ask consumers who say they don’t like chardonnay, “well, have you actually tried one lately?”

Regional Chardonnay Notes

Classification Representation (and some additional useful information)



Hectares (2010)

Area Rank

Tonnes (2009)

Area Rank























Hawke’s Bay



































Central Otago







Total NZ








Northland carries a reputation of being warm and humid; less than ideal for growing grapes. This is a half truth. Parts of Northland are indeed warmer than most of the country in terms of accumulated degree days, and especially winter temperatures. However, Northland is also amongst the most maritime regions of the country with most vineyards quite close to the sea. It also has a wide and variable range of distinct sub climates and soil variations. The result is a very long growing season, often with greater disease risks despite being relatively windy, and occasionally being drought prone when the country is subject to predominantly south-westerly weather conditions. Chardonnay is the third most widely planted grape variety in the region.

Marsden Estate is located in Kerikeri on the East Coast. It has a decade long history of producing consistently high quality chardonnays under the Black Rocks label (winning several awards in the past). Chardonnay’s relatively early ripening means that, as in Gisborne, it is less at risk of autumn rain. The Kerikeri soils are predominantly free draining red volcanic clays, relatively unique in New Zealand and (unusually for the generally young soils of Northland) amongst the oldest soils in the country.

Other Northland flagbearers include Okahu Estate, Karikari Estate and Lochiel – all widely dispersed through the region.


The wider Auckland region has for some time ridden Kumeu River’s coat-tails as a chardonnay producer, often viewed as a curiosity because of its high annual rainfall. However, like Northland, it seems to benefit from the relatively early ripening of chardonnay after an early start to the season, reducing some of the risk associated with the variety. Reduced frost risk also improves the economics of chardonnay as a variety in the northern regions. Moreover, despite Auckland’s top chardonnays coming from diverse corners of the region, all are on clay soils of historic volcanic origins. A problem I had here is that there are quite a few people who think Hunting Hill is even better than Mates. Close call (or should I have plumped for the impressive Coddington). Aside from Villa Maria’s individual style from Ihumatao, Waiheke is also starting to make a reputation with chardonnay. Producers from the Matakana district (such as Mahurangi River’s Field of Grace) are also starting to forge reputations with the variety.


Is Gisborne’s self-proclaimed status as New Zealand’s Chardonnay Capital a help or a hindrance to its reputation? It has advantages and disadvantages in growing the variety. Like other more northerly regions its soils are often clay-rich, ameliorating climate warmth, providing steady access to water through the growing season and providing palate breadth to the wines. Gisborne chardonnays have a naturally riper flavour profile than other regions and I am convinced that the soils are as much a factor as the climate (which can certainly get very warm up the Valley).

For all its reputation as a producer of large volumes of lower priced chardonnays such as the over 30 year old Montana Gisborne label (itself often an exceptional value for its quality), the region has also an established group of stars, as well as a latter day group of up and coming labels – some made elsewhere in the country but using grapes from established high quality growers.

The Montana “O” label may have an unclear future following the sale of Pernod Ricard’s Gisborne assets, but it has never really achieved the wider recognition it has deserved as a regional flagship drawing on some exceptional quality-managed vineyards. Other established producers such as Millton and Villa Maria have produced consistent exemplary examples for over two decades. Newer examples (relatively speaking) include the Tietjen Witters TW label (the same vineyards contributing to Kim Crawford’s SP Tietjen), Steve Voysey’s Spade Oak and Rebecca Salmond’s Odyssey Label. There are arguments for other candidates, including the likes of Matua’s top chardonnay Ararimu, usually made from Gisborne fruit.

Hawke’s Bay

Hawke’s Bay is geographically very close to Gisborne and often shares similar climatic factors (temperatures, sunshine and rainfall) but its chardonnays are quite distinctive despite being grown in a variety of different sub-regions , soils and exposures. Half of the 14 Hawke’s Bay chardonnays I have listed are grown in the Gimblett Gravels. The balance are spread between the Te Awanga coastal area, the Ngatarawa triangle, the hillside vineyards of Havelock North (with some limestone), the Tutaekuri River valley and inland toward Mangatahi. This says as much about how the industry in Hawke’s Bay is taking shape as it does about the individual sites or producers.

The three wines I have ranked highest all come with well established reputations that have not diminished in recent years. In my opinion the styles of both Sacred Hill’s Riflemans and Clearview Reserve, both of which showed as high-powered wines early in their existence, have added more complexity and verve to balance the power. Craggy Range’s Les Beaux Cailloux may have emerged more awkwardly but reflects the degree of commitment and investment expended by the company on all its top labels with an elegance that belies the ripeness that comes easily in the Gimblett Gravels.

Stylistically all of the other labels illustrate the Hawke’s Bay ability to produce fruit that can handle reasonable oak treatment and retain a fresh acid spine. This style is more linear than that of Gisborne and to a certain extent seems to reflect the usually gravelly and always free draining soils. Another point of note is that it seems to me Hawke’s Bay growers lead the country in terms of upgrading the chardonnay clonal material, in part a measure of the importance of chardonnay among the white grapes of the region. This suggests that even better will be achieved in future.


Two things stand out in considering the Wairarapa contingent, all from Martinborough. One is the level of commitment these producers show toward chardonnay, something noticeable among those that did not make this list as well (including contenders such as Voss and Alana). The other feature is that Martinborough, like Hawke’s Bay and most of Marlborough, is based on gravel-based soils, in contrast to the clays that dominate in several other districts. I believe this influences the style of the wines in ways that cut across the climatic story. The standout, in my experience, is Ata Rangi for consistency, age ability, and stylistic clarity. Its chardonnays are paragons of elegance, in arguable contrast to the more powerful approach of Dry River. Most of the Martinborough wines seem to fit into a spectrum between the two, which to me makes the district extremely interesting and far from boring.

One other feature of the district is the relative age of its chardonnay vines, especially alongside more southerly districts.


Neudorf rules, not only for style but also for consistency. While its style has evolved slightly with time, Neudorf continues to exemplify the role of sympathetic winemaking and the fact that all of the country’s best chardonnays do indeed age well. Neudorf’s Moutere vineyards are based on soils with a mix of clay and gravel. The Nelson climate, with high sunshine hours and moderate rainfall clearly plays its part. Interestingly, some of the other contender wines from the region, such as Greenhough’s Hope Vineyard, Te Mania Reserve and Waimea Bolitho are grown on the alluvial sols of the Waimea Plains.


Marlborough, it should be stated, is not just about stony river gravels, just as it is not only about sauvignon blanc. As one would expect for a large district with more producers than anywhere else, the chardonnays are produced in a range of soil types including the stony river gravels the region is famous for and the clay slopes of the hillsides, ranging also from near the sea to several kilometres inland. Interestingly my list of the best of Marlborough has very little representation from the Awatere Valley – whether this is because there is relatively little chardonnay grown in the much newer plantings of the Awatere or owing to other factors, is not clear to me. (Note that Vavasour and Villa Maria’s Taylor’s Pass were candidates considered).

The Marlborough style, as would be expected given its latitude, windiness and positioning is typically lighter than that further north and with more pronounced acidity. In keeping with most South Island chardonnays it is much more a statement of freshness and pristine flavours, with the best makers lending some gentle oak assistance but avoiding excessive oak uptake that can unbalance the style.

The “promotion” of Seresin may, I admit, be one of the more controversial aspects of my classification. I justify it on the basis of the depth, purity and personality of the wines – not something that can be said of many higher production competitors, with the fruit showing through and representing the soil aspects. Seresin’s chardonnay grapes come from both clay and gravel soils and so are not easily pigeonholed in that respect. The Seresin Reserve is also built to age, not really coming into its own until it has as much as five years bottle age, and it reflects conscientious selection policies.

In total 11 Marlborough chardonnays made my list. I know of several Marlborough producers who have grafted over older chardonnay vines, regarded as not worth the effort. To me the first point of note is the rise of newer producers putting a real effort into the variety, such as Dog Point and Mahi (Kevin Judd’s Greywacke will surely be of interest), while the others I have listed are largely established operations whose knowledge of the district and the variety is surely a large factor in their success.


The Waipara district of North Canterbury, and surrounding areas, produces New Zealand’s most starkly unique style of chardonnay. While the base of the Waipara Valley features alluvial and limestone gravels washed down from the hills and mountains of the hinterland, the hills feature levels of limestone only occasionally encountered elsewhere. All of the wines I have listed have varying degrees of the distinctive mineral nose and flavour profile of limestone soils, sometimes quite reminiscent of the wines of Chablis in France, always matched to fine fruit and a clean spine of acid that together makes them very distinctive.

The wine I have ranked in front is the Bell Hill chardonnay, made in tiny quantities at Waikari and drawing widespread extraordinary reviews for its ethereal personality. I have not tried (and therefore can not comment on) the two even smaller production wines grown biodynamically at nearby Pyramid Valley.

Which is not to belittle the consistent quality being produced at the producers listed in the Waipara Valley proper. From the superb fruit and balance of the Pegasus Bay wines, exemplified by the slightly more concentrated qualities of Virtuoso as well as the excellent estate label, the beautifully constructed Greystone and Mountford, and the extreme minerality of Black Estate. It is interesting to note that until this year there was fractionally more chardonnay grown in Waipara than one of its signature grapes, Riesling. In my view it is quite wrong that these should have fallen so far behind sauvignon blanc in a region that shouts its terroir and is best suited to grapes that will reflect this.

Central Otago

Central Otago’s soils and climate are a clear departure from the rest of the country. The fact that chardonnay and pinot noir co-exist so well in Burgundy might have meant that more Central producers would make the effort with chardonnay (as occurred in Martinborough and Waipara, for example). This does not seem to have been the case as it languishes far behind in plantings – perhaps in part on account of the higher spring frost risk.

Felton Road has progressed markedly as a chardonnay producer over the last decade to earn its place with consistently stylish wines that highlight the minerality of the soil with a strong acid spine.

Other chardonnays from the region have impressed in the past, including examples from Michelle Richardson, Peregrine, Chard Farm, Akarua and Mt Difficulty, although seasonal variation appears very pronounced and it is not clear to me if the region understands the style that suits it or really puts the effort in.

Why access to capital is critical for the future of the wine industry

“Capital intensive” is a descriptor applied to industries that require substantial amounts of capital for the production of goods.  Investors usually also apply descriptors such as “long-term” for the simple reason that such industries rarely provide reliable swift payback on amounts invested. 

The wine industry is no exception.  This will hardly be surprising given the lengthy process required from the moment of decision to plant a vineyard, through preparations and planting to full levels of cropping as much as (or sometimes more than) five years after planting.  Even the resulting wine may have to wait (in the case of some red and sparkling wines as much as 3, 4, 5 or more years before it is ready to sell).  When someone makes a quick buck out of wine, it is an anomaly.

This is not like any other “typical” food or beverage, and markedly differentiates wine from most “FMCG” products in a supermarket or food store.

The economics of wine production is heavily determined by the amount of capital required to establish and, just as importantly, to sustain a wine business. 

The greatest capital requirement will always be for the vertically integrated business that owns its vineyards, processing capacity, warehousing, inventories and brands.  Such businesses almost invariably require bank debt to establish as the capital resources required to form the capital assets and then to sustain the business for several years before profitability is even a possibility, will usually be beyond the scope of most individuals or families (even if the underlying property has been in the family for generations).  The vertically integrated wine businesses without debt are, in the vast majority of cases, businesses that have been in operation for a considerable period of time or have access to additional capital sources.

Not all wine business models require as much capital.  The so-called “virtual” wine business is able to operate a completely contracted model, using purchased grapes or wine, contract processing and storage, and taking all the risk at the brand and inventory levels.  The nature of the risk of such businesses is different.  Banks will be less willing to lend without the support of “hard” assets, so that there is typically much greater equity risk, especially the risk associated with the ability to move (i.e. sell) the bottled inventory.  Another arguable facet of the virtual winery is that it is more likely to be a “volume play”.  Lack of direct control of grape production means that the upside of being able to build prices to ultra premium or luxury levels is extremely limited.  As a consequence, virtual wineries are forced to build sales and inventory levels in order to grow the level of income.  This may look easier at the start up phase, but becomes a much greater burden if the brands prove to be successful and grow fast (although if sales are sufficiently profitable the possibility of obtaining bank funding for working capital starts to improve – which may or may not be the case in the present risk averse climate).

One of the features of the wine industry is the annual cycle of working capital.  The high point of this cycle is the need to fund grape production or grape purchases before or shortly after harvest each autumn given that the resulting wine inventories will need to be funded for a minimum (with some small exceptions of early release wines) of 6-9 months for early drinking wines.  This includes the funding of bottling, labelling and packaging costs on top of production costs, the components of inventory.  So the typical cycle (ignoring sales) for most New Zealand wine operations is for a rapid rise in production costs over the late summer to shortly after harvest, then a progressive rise to a peak in early spring, followed by a progressive reduction into summer.  This will change if there is a large volume of red wine (as is the case in some regions) requiring higher costs associated with barrel purchases, followed by longer storage although bottling and packaging costs are deferred.  Another big factor can be exports, especially if the winery is exporting volumes to meet the Northern Hemisphere summer requirements – often shipping inventories held from the previous year’s vintage in the New Zealand autumn or winter of the following year, for example.

Funding the NZ Wine Equation

How much capital is tied up in the New Zealand wine industry?  Before attempting an answer, I would preface by saying that this is a moving target.  The value of invested capital is not based on how much has been spent, but on what it is worth at any given point at time (and the working capital is, as has been explained, constantly shifting).

So, for the point of differentiating, I have estimated that the historic capital cost of building the New Zealand wine industry to where it is today – i.e. the actual money spent on all parts of the industry – as somewhere between $3.4 billion after depreciation, or about $6 billion in today’s dollars before depreciation.

This is not what the industry is “worth” today, but thanks to falling land values is closer than it was perhaps 3-4 years ago.

The following table provides my estimates of the “peak” and current values of the key components of the industry’s capital equation:

Asset (all figures NZ$mil) Peak Current
Vineyards 5,417 3,149
Processing & other fixed assets (incl barrels) 1,870 1,558
Inventories 949 904
Other Working Capital 240 275
Total Asset Investment 8,476 5,886
Net Borrowings 2,500 2,347
Other Liabilities 300 300
Net Equity 5,676 3,086

I should first emphasise that all numbers are estimates!  Each figure has been established by a process of breaking down vineyard plantings and processing capacities on a regional basis and applying value factors (such as average prices per hectare, which are often hard to pin down in different regions). A number of factors have changed, namely more vineyards in production relative to the earlier time, so these are not simple like with like comparisons.

For the purpose of estimating financial numbers, including inventories and debt levels, I have adopted a sampling approach based on published 2010 financial information (including 4 of the 8 current Tier 3 producers), extrapolating for estimated levels across the board. 

I do not pretend that this estimate will be exact and acknowledge that it may, in fact, be well wide of the mark. I use it here, therefore, as much for its explanatory and indicative value as for any other purposes.

The point?  Well for one thing I have estimated that the total capital investment supporting the New Zealand wine industry is current approximately $5.9 billion, down from a peak of about $8.5 billion thanks largely to falling land values.

It is this factor, combined with falling profitability owing to weaker overall prices (exacerbated by currency movement), that means banks are somewhere between shy and downright scared to lend to wine businesses.

However, looked at on a bigger picture basis, the industry’s level of borrowings has risen from 30% of total capital assets to 40%, thanks largely to falling land values.  In other words there is still more than 50% more equity invested in the industry than debt, even before allowing for the value if investment in brands and other intangible assets are brought into the picture.  Overall one might deduce that the industry is (or at least was) therefore carrying about $500 million more debt than it could comfortably bear (based on asset values and assumed aggregate cash flows).

Selling down inventories is one way to reduce this.  However, the numbers suggest that the scope to repay significant amounts of debt through inventory reduction is limited.  Maybe $100 million (including an estimated $40 million in product discounting already made over the last 12 months (but not yet accounted for in my numbers) is as much as could be expected from this source. (The fact that Pernod Ricard might sell its Lindauer and other brands, including inventories, as well as vineyards and plant, for just $88 million probably says about as much about how much inventory it has sold down in the last 15 months as it does about the values of other assets involved in the deal).

The best way to ameliorate the impact of high debt ratios is to improve profits and cash flows.  In essence high debt levels are never as bad if you are paying them down more rapidly from healthy cash flows.  Selling down inventories boosts cash flows in the short-term, but is never sustainable as a longer-term strategy. It usually results in short-term high market share, but long-term lower market share (which will have contributed to the materially lower value placed on the Lindauer brand relative to what it may have fetched a few years ago).

What does the lack of capital mean?

Bank credit and lending policies have two components.  If banks are lending without major constraints, not only may credit be available to fund vineyards and other industry assets, but funding will also be more likely to be available to investors seeking to purchase investments in wine businesses.  However, if bank credit is severely constrained, as it is at present, not only will there not be funds available for expansion projects, replacement projects or working capital requirements, but there will also be limited funds available for potential investors that might otherwise provide equity investment resources for companies (including business owners now finding it more difficult to even borrow against their homes or other assets in order to put money into their wine businesses).

Moreover, most banks appear to be pressuring wine industry customers to find ways of reducing exposures, rather than simply maintaining them.  The result is that businesses are forced into practices that compromise their long-term value.  Businesses are obliged to take cash flow short cuts, such as selling wine inventories at loss-making discounts in order to either repay debt or to find the cash resources for other essential projects.

Typically the short-term cash needs being funded will be working capital.  In a growing business working capital will usually be rising in tandem with volume and sales growth.  Taking an overall view of the industry, this is indeed what has been happening since sales volumes and values have both been increasing.

However, since inventory values of the largest companies have been static (and certainly have lagged sales growth), and since industry production has matched or exceeded sales over the last three years, the implication is that inventory levels have grown for the rest of the industry.  This in turn has other implications: working capital has needed to be funded, but there are few avenues to obtain the capital to do so.  This has further contributed to the level of short-term sales of bulk and cleanskin wines, and the financial pressure on small to medium wineries just increases.

In the mean time wine is not being aged before sale – instead even 2010 red wines are rushed to market. This is far from the environment conducive to the growth of fine wine value propositions.  The lack of growth and reduced ability to build higher value pricing of all but the very top wines means that the values of wine businesses, what they are saleable for, is diminished.  Take away growth, and business values fall.

So what happens when the bank won’t lend, and when the overdraft is near its limit?  In essence, there is a spiral effect that halts growth and, eventually, reduces business values.  In so doing, the value of a bank’s security is in turn further compromised in ways that are less obvious than short-term property values, but far more insidious and damaging from an economic perspective.  This is the wealth effect in sharp reverse.  This is years, or sometimes even decades, of hard work lost. 

On the other hand, succession and estate planning become much easier when the numbers are much smaller!


How do we shift the industry’s capital structure back onto a level or even growth footing?

Removing the excess inventories and some excess assets would clearly be beneficial.  Those excess inventories of lowest quality wine (some of which would be better distilled or as the basis for vinegar production, so as not to interfere with markets) are a bigger system blockage than the volumes of mid level wines that might seem harder to sell but are often suffering more from the structural issues of the retail end of the industry than from their own merits.  Those structural issues are the concentration of retail control (off and on premise) in a small number of producers and the impact of larger producer discounting on wider consumer behaviour.

Changes to either would allow a process of blockage clearing from the other sectors of the industry to gather pace.

Accordingly, steps such as further inventory reduction and, on the industry’s wish list, moves such as shifting the liability for excise on wine sales could reduce current industry indebtedness by as much as $140 million, or about 6%.

A further balance sheet improvement could simply come from the freeing of debt availability for acquisition purposes.  The values used to drive the industry balance sheet above are based on capital-starved depressed prices, prices being set sometimes by mortgagee sales in some areas, not necessarily economic values justified by future income levels in each area.  By my estimate, if prices were to rebound closer to a level reflective of a grape price increase of $200 (adjusted according to levels prevalent in different regions), the consequence for land prices would be a boost of close to $700 million nationwide, hauling the industry debt to assets ratio down by 6% to between 33-34%.

Improving the flow of product through the industry is the key, ultimately, to allow grape pricing to adjust to more sustainable levels, removing many vineyards from the critical list and allowing property prices to stabilise.  In so doing, pressures on the banking sector would ease and the relationship between a grape grower or winery and its banker to return to something closer to normalcy.

The other key step involves a shift back to spending on marketing.  With market stagnation, many wine companies have substantially reduced expenditure on higher risk (but potentially higher reward) marketing expenditure.  Why spend money on market research when you feel you know the markets that already work for you – even if price discounting strategies are presently the only way to survive in those markets.  What has happened is a default reliance on the Givernment to fund the market research and market opening initiatives in regions such as Asia, North America and newer corners of Europe.  In a proportionate sense, the rewards of a sensible market development strategy can far exceed to costs.  The potential cash flow benefits to the industry are not to be underestimated in terms of the flow through effect on debt levels.

Finally, removing blockages is the key to getting equity investment to flow back into the industry. Getting that investment back in will restart a virtuous cycle allowing asset values to rise, sensibly rather than speculatively.

In an ideal world there are such investors lined up already.  That may, however, be optimistic in a climate where offshore investment capital has become politically compromising.  Overseas investors rightly get mixed reports.  The best, however, care about the land no less than existing growers who live on it and are able to help open markets.  We should welcome them, or not, according to their merits.  The worst mistake we can make, because it will come back to haunt us, is to judge all foreign investors alike as rapacious asset strippers to be shunned.

The equation?  Firstly, I estimate that there are untapped capital resources of as much as $400 million in specific ungeared balance sheets.  This is not to say everyone who is presentable in a relatively comfortable position should go out and raise all the debt they can, so as to become as troubled as everyone else! However, I believe it means there is between $100 and $150 million of capacity that could be utilised in a sensible and controlled way to acquire assets and implement growth strategies that would ultimately pay of both in greater wealth for the investors and also “win win” benefits for the industry and community.

Separately, in my opinion the industry today is short of equity capital to the tune of approximately $230-270 million, depending on other steps coming to pass.  The point is that, unless someone like the NZ Super Fund was willing to commit to a material sum for investment (say, on a co-investment basis) this amount will simply not come from local capital sources within the next 3 years.  Being more realistic about what local investors might be in a position to put in, the present equation suggests an overseas investment requirement of about $200 million (spread over a number. 

What is simple and clear, is that the suffering will linger without it.

New Zealand Winegrowers has made two public statements regarding excise in recent times.  In the first it advocated shifting the accounting for excise to the retail end of the chain.  In the second it advocated that the Government give the annual excise increase due on 1 July next year a miss owing to the significant impact it would have on the wine industry.

There is an unfortunate irony in that I suspect New Zealand Winegrowers is hamstrung by the technicalities (in particular that the true cost is not simply excise) in respect of its public pronouncements.

The fact is that excise on alcoholic beverages is a multi-layered beast.  Demonstrating this may go some way to show why shifting excise to the retail end of the chain is both economically and ethically more desirable, and yet unlikely to happen.

Moreover, in pulling its punches New Zealand Winegrowers has refrained from pointing out the double up in the excise increase attributable to this year’s increase in the rate of GST.  In short, the 5% forecast level of CPI inflation by next year includes the 2.2% annual effect of the increase in the rate of GST from 12.5% to 15%, which increase has already been factored into the excise impost (if not in theory, very much so in practice).

Allow me to illustrate this.  The following table shows the impact on either the winery or the consumer (or, as often than not, both) in the event of a 5% excise hike next year.

Case Bottle
Current Excise 23.42 1.95
GST on Excise 3.51 0.29
Total Excise Impost 26.93 2.24
Add retail margin (e.g. 35%)
Excise portion of markup 8.20 0.68
GST on markup 1.23 0.10
Total Excise Impost incl margin 36.36 3.03
Adding a 5% excise increase
Resulting Excise 24.59 2.05
GST on Excise 3.69 0.31
Total Excise Impost 28.28 2.36
Add retail margin (e.g. 35%)
Exise portion of markup 8.61 0.72
GST on markup 1.29 0.11
Total Excise Impost incl margin 38.18 3.18
Resulting Increases
Ex-winery excise 1.17 0.10
Consumer excise (ex winery) 1.35 0.11
Consumer excise (retail all inclusive) 1.82 0.15

While the 35% retail markup is an approximation (as some distribution and retail combined mark ups will be less, and others more, depending on the channels supplied), the true impact at the consumer level will be greater when restaurant margins and other costs are added in.

Note also that the Government collects income taxes on the proportion of the margin on excise that may be retained as profits by the retailer.

Of course this is not the whole story.  The 2010 GST increase had the following impact on the ex winery (GST inclusive) excise impost:

Current Excise (ex winery) 23.42 1.95
2010 GST increase on Excise (ex winery) 0.59 0.05
Pre increase Total Ex-Winery 26.35 2.20

What this means is that when you add the double slab of 2010 GST and 2011 increase, including GST on the increase, you get:

Total GST (ex winery) 4.27 0.36
Total Excise Impost (2010 & 2011) 28.86 2.41
Total Increase from 1 Jul 2010 1.93 0.16
% Increase on 1 Jul 2010 7.3 7.3

So how might excise have risen over 7.3% in 12 months? It is the proverbial anomaly when you have a tax on a tax.

Of course, it is one thing to have a double up – where the increase in a tax causes the increase in excise and, therefore, in the tax on that excise.  The other question is the extent to which that reaches the consumer.  If the retailer refuses to pay a higher price or compromise on its margins, the economic cost to the winery for continuing to supply that retailer is not the level of excise it must absorb, but the level of excise including the GST on the cost that is not able to be passed on.

Based on the assumption that at present a little under 40% of New Zealand wine is drunk domestically (and therefore subject to excise), and that about two thirds of this is tied to “immoveable” price point structures, accordingly about 66% of the total increase in excise, plus GST, is worn by the industry, and a mere 1/3 (representing about 13% of total NZ wine production) will be passed on to consumers or borne in some proportion by retailers.

It is curious then that the Law Commission and other advocates for higher levels of excise as a consumer behaviour influencer have not wholeheartedly supported NZ Winegrowers on its stance regarding shifting excise payment to the retail end of the chain.  The fact that excise may be paid, by the winery, months or years before a bottle is sold is conveniently overlooked.  More importantly, the whole situation goes to show how impotent and irrelevant the present system is from the perspective of using excise as a tool to fight alcohol abuse.

Two reasons, both morally questionable and conveniently overlooked from a revenue perspective, why an excise shift won’t happen:

  • The tax on tax factor – Government would lose both the GST and income tax on the profit margin earned by downstream distributors and retailers on the excise charged as part of the price to them.
  • The breakages and losses factor – a certain amount of wine will always be damaged or stolen after it has left the winery.  The Government still collects excise on these losses.  There is no provision for reversal, since the people who handle wine after it has left bonded warehouses (usually the winery or storage facility) are not accountable to NZ Customs.

On closer inspection, however, are either of these actually material or true?

The breakages and losses factor is difficult to quantify without adequate data.  Assuming 2% as a breakages and losses factor (and I do not know if that is low or high) would mean a revenue loss of approximately $13 million on current excise estimates (including beer, spirits and other beverages also).

As regards the “tax on a tax” factor, if retail prices do not change from present levels, this need not be the case at all.  There will be a range of costs and savings shifted between the upstream and downstream sectors.  Retailers would be able to justify higher margins on the basis of taking on administrative costs (although in the age of GST compliance these should be not be onerous).

Let me illustrate. Under the present system, using a 35% indicative mark up rate, the general pricing economics look as follows:

Case Bottle Industry ($mil)
Case ex-winery 100.00 8.33 708.61
Excise 23.42 1.95 165.95
Total ex-winery price 123.42 10.28 874.56
Add retail margin (35%) 166.62 13.88 1180.66
Retail Price incl GST 191.61 15.97 1357.75
Effective total excise (incl GST) 26.93 2.24 190.84
Total value of GST 24.99 2.08 177.10

However, if the excise collection is shifted downstream, the same formulae would produce a different result:

Case Bottle Industry ($mil)
Case 100.00 8.33 708.61
Add retail margin (35%) 135.00 11.25 956.63
Excise 23.42 1.95 165.95
Retail Value (excl GST) 158.42 13.20 1122.57
Retail Price incl GST 182.18 15.18 1290.96
Effective total excise (incl GST) 26.93 2.24 190.84
Total value of GST 23.76 1.98 168.39

The level of total GST revenue lost is just $8.7 million under this scenario.

If, instead, prices are maintained at the same levels as originally, and we then work back to obtain the retailer margin:

Case Bottle Industry ($mil)
If price unchanged: 191.61 15.97 1357.75
Less GST 24.99 2.08 177.10
Price excl GST 166.62 13.88 1180.66
Less ex-Winery price 100.00 8.33 708.61
Less Excise 23.42 1.95 165.95
Retail Margin 43.20 3.60 306.10
Retail Margin (%) 43.20 43.20 43.20

While the percentage margin is expanded, the actual value remains the same so that, aside from shifts in compliance and funding costs, the net taxpayer position remains the same.

The biggest single added cost would be the transitional cost of establishing bonded storage areas and the downstream compliance regime – although this is no different to what a winery with a cellar door or restaurant operation already has to manage, and would continue to have to do so.

Overall, however, from a wine industry perspective the small reduction in compliance costs (since all would need to continue as bonded areas) is less important than the balance sheet impact.  Based on the (occasionally substantial but usually a matter of months) gap between incurring excise liabilities and receiving payment for most wine sales, the estimated working capital requirement incurred by the industry averages approximately $40 million and may well peak at closer to $50 million, not only incurring debt costs but also tying up valuable working capital that is not able to be utilised elsewhere.

At the present time, that release of overdraft working capital could mean the difference between survival and failure of many businesses under pressure from their banks.