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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.

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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.

Region

***

**

*

       

Northland

 

Marsden Black Rocks

 

Auckland

Kumeu River Mates

Man O’ War Valhalla

Villa Maria Ihumatao

 

Te Whau

   

Gisborne

 

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

Stonecroft

     

Villa Maria Waikahu

Wairarapa

Ata Rangi Craighall

Dry River

Martinborough Vineyard

   

Escarpment Kupe

Nga Waka Home Block

     

Palliser

Nelson

Neudorf Moutere

   

Marlborough

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

Waipara

Bell Hill

Pegasus Bay Virtuoso

Black Estate

     

Greystone

     

Mountford

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)

Region

Total

Hectares (2010)

Area Rank

Tonnes (2009)

Area Rank

Yield/ha

Northland

1

 

3

44

1

 

Auckland

4

122

1

490

1

4.4

Gisborne

7

1056

1

13283

1

12.6

Hawke’s Bay

14

1161

1

8787

2

7.6

Wairarapa

6

70

3

325

3

4.6

Nelson

1

121

3

909

3

7.5

Marlborough

11

1075

3

9959

3

9.3

Waipara

5

71

4

302

5

4.3

Central Otago

1

67

3

276

4

4.1

Total NZ

50

3865

3

34393

2

8.9

Northland

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.

Auckland

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.

Gisborne

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.

Wairarapa/Martinborough

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.

Nelson

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

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.

Waipara

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.

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.

One of the top wine stories in last week’s press in New Zealand, front page news in fact, was a report that wine prices (as a proxy for liquor in general) had fallen to such an extent over the last decade that they are now cheaper than bottled water.

The inference from this story was that the Government needed to act by increasing excise to stop the harm being caused by cheap alcohol.

This was of course the latest in a series of reports, this and several others emanating from the University of Otago, pushing the anti-alcohol agenda that dominates the Law Commission’s recent work (see https://doubtlesswinebusiness.wordpress.com/2010/07/23/the-tip-of-the-new-temperance-iceberg/ ).

Interestingly, the international press has cited the report as being “published in the New Zealand Medical Journal” when what was actually submitted to the Journal was a letter, meaning that it must have been accompanied by academic references (although presumably, as a letter, not subject to the standards of peer review required for full articles of scientific journals).  If it had been subject to such peer review it is surely questionable whether, on the grounds of either methodology, statistical sampling or analysis, it would have been accepted for publication.  Why? Simply because the article is patently polemical in nature and extraordinarily flimsy on each on each count as regards methodology or analysis.

By the next evening TV One News in New Zealand was already running a story scrutinising (and contradicting) the specific headline-seeking claims made in the report, even while missing the bigger picture analytical issues altogether.  The print media had missed this opportunity completely before going to print.

Of much greater importance is the stark reality that this type of lobbying, adopting an attitude of faux scientific rigour or justification, will continue to emerge and is frankly winning the publicity battle even if the Government has adopted a reform package missing some of the key Law Commission recommendations, such as huge excise increases.  Before that package is even fully in place, the anti-alcohol lobby is adopting a campaign designed to undermine confidence in the reforms (consistently criticised as inadequate even before there has been a chance to see if they have an effect).

What was claimed?

The headline was simple: alcohol is cheaper than water.  The report claimed that as a consequence of long-term trends alcoholic beverages could now be purchased for less than the price of water, the implication being, in other words, artificially cheap (because how else could it be cheaper than water, after all).

The published findings were that a 250ml glass of milk cost, and of bottled water cost “somewhat more at 67c a glass”.  By contrast alcoholic beverages, all cited as “standard drinks” rather than 250ml equivalents – a substantial difference in actual volume terms, especially as regards an “apples with apples” comparison – “can be purchased as low as” cask wine at 62 cents a standard drink, beer at 64 cents, bottled wine at 65 cents and spirits at 78 cents. The “can be purchased as low as” was strangely underplayed or missed altogether by much of the print media coverage.

It was conveniently pointed out by the report author, however, when queried by the TV News coverage, which found bottled water as low as 21 cents, cask wine at 71 cents and beer at $1.10,  that prices fluctuate and the low prices resulted from “specials” (which surely was worthy of having been spelt out in the original report if it was of such numerical significance).

In the meantime, the report, and its analysis, continues to gather international press coverage.

The Report Conclusions

Quite aside from the “results” of the analysis, the conclusions drawn in the press release have little causal nexus with the study itself.  A study purporting to be of the price of alcohol over time, and in particular as it compares with the average wage (presumably gleaned, unlike the price data, from Statistics New Zealand), concluded with a number of assertions including the need for an increase in tax on alcohol, restrictions on alcohol marketing and sponsorship, limiting off-licence premises and reducing the legal blood alcohol level for driving.

The news release on the report also referred to both the drink drive alcohol limit and binge drinking despite these being two quite different (and unrelated) forms of alcohol-based harm.

Professor Doug Sellman of the Alcohol Action Group (also an academic from the University of Otago) was quoted as saying the new study made the issue clear-cut – “No one can say you’re talking it up. Low prices equal harm.”  He may be an academic, but it would appear he is not a logician. The fact is that this analytical conclusion simply cannot be conclusively drawn from the study, regardless of the efficacy (or lack thereof) of the data.

Quite what several of the report recommendations had to do with the specific analysis is obscure.  In the absence of spelling out the causal relationships, it is difficult not to conclude that the research project suffered from analytical bias and predetermination of results.

For example, there is a strong appearance that the study avoided the lowest possible prices for bottled water but sought out the lowest possible prices for alcohol.  If so, this would amount to intellectual dishonesty.

Quite aside from the numbers (where different types of alcohol are priced), in the balance of the report alcohol is treated as a universal concept with no differentiation as regards the widely varied behaviour of different consumers of different alcoholic beverages in different settings.  The things that actually make up “drinking cultures”.

It is all the more a pity, because for some people this was really a missed opportunity to criticise the level of profiteering in bottled water prices (especially when compared with the low price of generally very reliable New Zealand tap water).

The two main flaws in the report are:

  1. Questionable methodology – not simply pricing water high and alcohol low, but the process of checking and verifying the alcohol prices.  Is wine really readily available (let alone sought out by binge drinkers) for $5.00 per bottle (65 cents per standard glass assuming 13% alcohol – probably high for most cask wine – and accordingly 7.7 standard glasses per 750ml bottle)?  Remember that at this level the ex-winery excise impost would be over $2.02 per bottle, including GST but before allowing for the fact that supermarket/retail margins are also marked up on the excise inclusive price they receive and if there is a distributor there would be an additional margin on excise as well.  The GST rate used here is 12.5%, presumably the level applied in the research despite the fact that this has increased to 15% since 1 October, and despite the fact that all wine will carry the additional GST on excise regardless of whether the price of the wine has been increased or not at retail level. 
  2. Lack of context. Given the sweeping pronouncements made regarding the price of different forms of alcohol, the fact of the economic environment was not mentioned in the University press release. The fact that the wine trade has been in the deepest recession in more than a generation is ignored, let alone the enormous implications this has for wine prices.  Not only is the industry globally dealing with issues of oversupply, but individual firms are responding with survival strategies that must affect pricing.  Ironically, the situation is exacerbated by the wine businesses that don’t survive, when the receivers and liquidators of such businesses drop stocks on the market at heavily discounted prices.  This is nothing to do with alcohol policy.  It is cold, hard reality. Having said that (and having seen examples of three such liquidation wine clearances in one supermarket today), I strongly question whether much if any of this wine has ended up being consumed as part of an alcoholic binge by a teenager or by someone older.  In the absence of any form of contrary proof, I must assert that the causal nexus of harm, surely fundamental to research of academic standards, is woefully missing.

While on this subject, the attack on supermarkets’ prices must also be scrutinised. Supermarkets have long been accused, sometimes with reason, of using alcohol as a loss leader to attract customers.  It is not so clear, however, how prevalent this practice is any longer.  Both the major supermarket chains in New Zealand now maintain that they refrain from using alcohol as a deliberate price loss leader.  Despite the occasionally very low (not $5.00 though) level of prices in supermarkets, this assertion is credible.  The vast majority of low priced wine (although not necessarily other forms of alcohol) in supermarkets is brought about by the factor discussed above – businesses competing by lowering prices, in order to move stock, in order to maintain cash flows, in order to survive.  Forcing minimum prices is simply going to cut off the short-term ability of some businesses to survive.  It is not going to solve any social problems.

In the meantime another argument is lost, and that is whether the sale of liquor (at the moment meaning beer and wine) through supermarkets is on balance a socially positive thing rather than a negative.  Quite aside from the views of many in the wider wine industry regarding supermarkets, the fact is that supermarket shoppers are more likely to be buying wine to go with food.  Surely that is something to be encouraged rather than discouraged? Surely that is a huge step toward a more responsible drinking culture, rather than the opposite.

Behind the Actual Announcement 

Early last week global drinks giant Pernod Ricard announced that it had decided to base its global wine business in Sydney.  Not surprisingly this announcement attracted some attention, including some rather mischievous statements interpreting the announcement along the lines that Pernod Ricard New Zealand’s (the former Montana Wines, in the process of being rebranded as Brancott Estates) head office was being shifted to Australia.  The latter comments were swiftly and categorically refuted by Pernod Ricard.  They were very clearly beyond the scope of Pernod Ricard’s actual press statements.

However, the brazen misstatement with regard to PRNZ “abandoning New Zealand” obscured the reality that in fact the base of decision-making with regard to New Zealand operations has been shifting offshore for some time, and that the latest global re-organisation was very likely to continue the trend.

The reality also has its base in the history of Pernod Ricard’s wine business, and in the changing directions that have consequently resulted.  It is interesting that the press coverage of the Pernod Ricard changes mentions the four key regional volume brands (Jacob’s Creek, Montana/Brancott, Graffigna and Campo Viejo) involved and the comment that Pernod Ricard “acquired” Montana Wines in 2001. 

Of course Pernod Ricard did not in fact “own” any of the brands mentioned other than Jacob’s Creek until 2005, when it acquired Allied Domecq.  Allied Domecq had itself acquired Montana, Graffigna and Campo Viejo as part of a series of acquisitions in 2001.  Unlike its entry into New Zealand, Allied Domecq already owned other operations in both Argentina and Spain beforehand.

More importantly, the change of ultimate ownership of these three (and other associated) brands resulted in several significant operational and directional changes, especially in terms of marketing and distribution.   All were export-oriented brands, even though in all three cases the domestic market dominated sales.  Under Allied Domecq the philosophy was to augment existing successful international sales channels with Allied Domecq distribution into new or under represented markets.

By contrast, the Pernod Ricard way was to bring most international distribution “in house”, and then to focus more heavily on core products.  To some extent this change was necessitated by the increased level of intra-portfolio competition that resulted from combining the Allied Domecq brands with the existing Pernod Ricard wine brands. 

This is where the Pernod Ricard global decision really starts to acquire meaning.  It says that five years after the Allied Domecq acquisition, Pernod Ricard still views the world from a “Corporate Wine Australia” (as distinct from a wider Australian industry, or elsewhere) perspective.  From a similar perspective to Constellation and to Fosters/Treasury, where the keys to wine profitability are low cost base (exemplified by the hot irrigated vineyards of inland Australia), big scale wineries and lots of marketing and advertising dollars pushed in behind a limited number of brands aimed at a wide range of markets.

The next implication is that decisions regarding international marketing of the New Zealand, Argentine and Spanish businesses are being driven by the team responsible for Jacob’s Creek and what used to be the Orlando Wyndham organisation.

In practice this has already been happening.  Pernod Ricard New Zealand has for some time been reporting to Pernod Ricard Pacific, based in Sydney.  It has long been assumed by most in the industry that this was where decisions were actually made, including the huge de-stocking round of discounting that squashed domestic supermarket prices from late 2008 until earlier this year, single-handedly pummelling the profitability and cash flows of most of the rest of the industry, large and small alike, far more than export price pressures ever did.

Looking even deeper, the change in philosophy has meant that many of the old Montana’s virtues became vices.  In truth the company was to some extent burdened by old inherited assets and an unwieldy set of brands from its own past acquisitions, including duplication of facilities from the Penfolds NZ and Corbans acquisitions.  With the wider Montana portfolio, originally developed to support a portfolio that targeted the breadth of the NZ domestic market, what was a relatively balanced portfolio now became an unbalanced portfolio. Translation: too much product other than sauvignon blanc.

Moreover, previously Montana products were very successfully sold through a range of distributors in many markets.  While it is likely true that Allied Domecq substantially boosted sales in some markets, it also failed to deliver in others.  However, under Pernod Ricard stories are occasionally heard of successful distributors in several markets losing the brands they had nurtured owing to decisions to shift handling to local Pernod Ricard offices.

This was where new problems appeared.  Local sales people with a history, affinity and rewards systems built around selling Jacob’s Creek were always going to be slow off the mark selling competing products from New Zealand.  This may be one reason why PRNZ also seemed to get caught out by the sudden explosion of exports of New Zealand pinot gris – could it be the that fact Jacob’s Creek already shipped a pinot grigio label, largely sourced from early picked hot climate irrigated grapes, created confusion as to where a New Zealand Montana label might fit into the portfolio? In a similar vein Montana’s long standing Gisborne Chardonnay label, frequently cited internationally for its quality to price ratio, was a clear internal competitor to the much higher volume (and lower production cost) Jacob’s Creek chardonnay label.

The conclusion to this is not that what has happened to the Montana/Brancott labels is a consequence of overseas multinational ownership.  That is not a direct causal nexus.  What is more subtle and pervasive is the way that ownership and other changes can directly or indirectly change the business models used by producers in export oriented businesses, sometimes for better (and it must be stressed that Pernod Ricard has brought a number of positives to its New Zealand business) and sometimes not.  The implications of those changes can be very significant and lasting, and can affect other corners of the industry that would not normally have tended to consider themselves direct competitors.  Down the track, when restructuring results, the changes start to reach the people level.  In the case of Pernod Ricard in New Zealand it is well worth asking whether some of the enormous base of local knowledge and skills built up in the Montana and Allied Domecq eras, is now starting to dissipate. 

Whether Pernod Ricard has made the smartest call as to the ideal business model for its global wine business will be interesting to follow.

Lindauer – A Case Study?

Montana Wines introduced the Lindauer sparkling wine brand in 1981. Over the last three decades it has won a reputation for a level of consistent quality that can compete with much more expensive products while selling at a low price point for a traditional method wine (technically most Lindauer is made, however, through the more economical transfer method). 

The 1990s and early 2000s were a period of rapid export growth for Lindauer, especially in the United Kingdom and a number of smaller and European markets.  Indeed, export growth in the period after the Allied Domecq acquisition was rapid.

Under Pernod Ricard this growth rate was not maintained, leading directly to the situation in 2008/2009 where PRNZ identified that its stock levels were too high and the subsequent moves to cancel grower contracts and to severely discount Lindauer in the domestic market.  The two reasons most easily identified for this change of fortunes were:

  • The severance of distribution arrangements with some highly successful offshore agents, in order to bring distribution “in house”; and
  • A decision, whether tacit or otherwise, that Lindauer would play second string to the Jacob’s Creek Sparkling range.  The advantages of Jacob’s Creek in this situation were much lower fruit and production costs (and therefore higher margins at similar price points), plus the leverage of brand spending on the multi-faceted Jacob’s Creek brand versus the smaller and sparkling wine only Lindauer brand.

There is a considerable additional irony in the treatment of the Lindauer brand, and that relates to the events around the original acquisition of Allied Domecq by Pernod Ricard.  In each country affected by this acquisition Pernod Ricard had to deal with domestic competition authorities, in New Zealand the Commerce Commission.  In its original application to the Commerce Commission, reflecting what one assumes was an original analysis that there would be competition problems, Pernod Ricard entered into a voluntary deed of undertaking to sell the Lindauer brand (and certain other brands also) within 12 months.

The implication of this undertaking was very much that Lindauer would be competing with Pernod Ricard’s own sparkling wine brands (inter alia Jacob’s Creek).

Within less than 12 months Pernod Ricard came to its senses once it realised just how foolish and damaging the undertaking would likely prove to be – not to its export business, but rather its domestic market.  What it realised is that Montana Wines had built a domestic on premise distribution business that dominates the lower to middle end of the domestic on premise market.  It is widely estimated that this distribution system controls more than 60% (and in some regions as much as 80%) of the on premise licenced cafes, wine bars, theatres and restaurants in the country.  It achieved this through a portfolio covering all major styles likely to be required, excellent service (brought about by having a level of scale advantages that smaller on premise distributors cannot compete with), and perhaps most important of all, Lindauer. 

Lindauer is the anchor product without which the system most likely would not exist.  What Pernod Ricard most of all realised during that few months when it was staring at the possibility of losing Lindauer was not just how difficult it would be to replicate, because Jacob’s Creek simply would not have been accepted as a replacement, but rather the potential damage to the market share and profitability of whole distribution system that might result if it was forced to sell Lindauer to one of the several companies that had opted out of the mass on premise market for the simple reason they did not have a Lindauer substitute product.

In short, regardless of how it was itself priced, Lindauer underwrote the profitability of a very significant part of the entire domestic business.

During 2006 Pernod Ricard went back to the Commerce Commission with an application to be released from its undertaking to sell.  The Commerce Commission’s analysis looked only at the broad market for sparkling wines and found that competition would not be unduly affected by allowing the acquisition of Lindauer.  Whether the Commission even thought to ask questions about other implications of the transaction, rather than just a largely perfunctory analysis of market share numbers dominated by retail, may never be known.

Many will be familiar with the concept of the price/volume “pyramid”.  This is a simple diagrammatic way of displaying the typical situation in many product markets (wine most definitely included) where the largest volumes of sale are sold at low prices and decreasing volumes as prices increase.  In other words, like a pyramid the diagram is widest at its base and rises to a peak at the highest price levels.

Given the events of the last four years of recession, global market weakness and lingering oversupply, most people would expect that the pyramid for the wine industry has been squashed down across the board.  In most countries that is exactly what has happened, with the most glaring exceptions including the feeding frenzy around the top Bordeaux wines, and especially the 2009 en primeur campaign. 

However, in New Zealand, even though the overall impact of widespread product discounting has been consistent with the expected “squashing” of the pyramid, this has not happened across the board.  Indeed, the very top of the pyramid has risen higher, not fallen.

The peaks are the top wines but even lesser wines from the same producers have sometimes risen within their price bands.

For the first time there are signs of a real separation in New Zealand wine pricing between the industry’s “aristocracy” and the rest.

At the same time as discounting has been rampant, an increasing number of individual premium labels are selling at luxury prices (by NZ standards $80 dollars or more, though some would argue even lower prices still constitute luxury, as opposed to “ultra premium”, by New Zealand standards).

How has this happened?

Arguably this is to some extent made possible by the fact that top Australian red and white wines have traded at luxury price points for many years, selling for prices from NZ$80 up to several hundreds of dollars on release.  The fact that leading New Zealand wines have developed track records in wine shows and in competitions such as the Tri-Nations with Australia and South Africa, including competition wins in the prestige Pinot Noir and Syrah/Shiraz classes, can only have helped.  Pride in top NZ wines has moved beyond the “cultural cringe” of the past to increasing levels of chest-thumping fervour. 

The fact is that any statements that New Zealand wines might be in a comparable class to those of any other wine region of the world are hollow if no one is prepared to pay prices that at least reflect some kind of comparable relationship.

There has been a trickle of New Zealand wines asking luxury level prices for over a decade.  Examples such as Stonyridge Larose, Martinborough Vineyards Reserve Pinot Noir, Montana’s Tom, Esk Valley The Terraces and even Morton Estate’s Coniglio Chardonnay come to mind.

With the growth of new reputations, a number of newcomers have joined the early runners. These have in the main tended to come from four regions (south to north):

Central Otago – starting with Felton Road and increasingly now the top labels of several other producers both fuelling and feeding on the Region’s growing international reputation;

Martinborough – Dry River, Ata Rangi, Escarpment  and others are now producing pinnacle wines – proximity to Wellington and consequent high land prices have supported the economic equation in favour of higher prices;

Hawke’s Bay – The success of the Gimblett Gravels area especially, with international recognition, has supported the growth of luxury labels from Craggy Range, Trinity Hill and a band of relative newcomers with lofty quality ambitions;

Waiheke Island – Supported by the proximity of Auckland, top labels from the likes of Te Whau and Passage Rock shone even when Waiheke seemed to struggle to deliver on its relatively high price points. This has now changed as established labels perform and relative newcomers such Destiny Bay, Hay Paddock and Man O’War produce top labels that justify luxury price points.

There are luxury priced wines emerging from other regions.  In my view (and not judging the rights or wrongs of this) these are generally more scattered.  Marlborough, for example, has its share of wines at price points above the rest, but the ones that reach levels comparable to other regions (the likes of Seresin, Fromm, Herzog might be mentioned) are more the exceptions. These serve to remind us that Marlborough’s reputation is still built on a grape variety that only very rarely reaches luxury price points even in its homeland. Similarly in Waipara and North Canterbury, the exceptions such as the top labels of Pyramid Valley, Bell Hill and Pegasus Bay, rightly or wrongly, stand out from the rest.  These are all reminders, however, that this is an ongoing process – that others who strive for excellence will win the reputations that allow them to join these names.

To a certain extent there are parallels among the regions.  From the late 1990s (the freak 1998 vintage aside) into the early years of the last decade there was a pervasive sense, despite notable exceptions, of overall underperformance, lack of stylistic clarity and direction, made worse by some indifferent vintages.

Over the last 5-6 years there has been a broader sense of change and, despite the economic circumstances, energy in these regions.  At the same time as a series of good to excellent vintages, viticulturists and winemakers have been hitting their straps and starting to craft wines of focus and ambition.  Competition at the top level has become intense, and price has become a justifiable measure of achievement – just as it formed the basis for quality rankings, most famously the 1855 Bordeaux Classification, in Europe in the past.

The evidence from Bordeaux 2009 En Primeur, and from other wines with global markets, is that while recession has suppressed overall wine prices this has not happened at the top.  The collapse of pricing for some highly rated Californian Cabernet Sauvignons has perhaps underlined the global emphasis – these were sometimes wines without a track record that relied on a specific domestic rather than global market.  When the pyramid reflecting supply and demand for that marketplace was squeezed, only those with established reputations and alternative avenues to market could maintain their position.

As in New Zealand, and despite the well documented difficulties in that country’s industry, Australia’s top “icon” labels have mostly defended and in some cases increased prices.

What is now also becoming evident is that there is indeed a flow on effect from having “icons” within the portfolio – that wineries producing individual wine labels with pinnacle reputations, operating in the fine wine space, increasingly achieve higher price points for their lower tier wines than do competitors with comparable products.  Perhaps in part because consumers come to expect that the care and attention that goes into the top labels will be repeated through the portfolio.

Another factor may well warrant investigation, especially in New Zealand and Australia.  Social media has been widely adopted by the mostly smaller producers who produce the wines that justify luxury pricing.  Many may have done so to ensure they remain above the difficulties associated with crowded and discounted supermarket aisles, but in the process they have forged closer ties and greater visibility with their customers.  The economic payback for this visibility and for what it has contributed to their reputations is very clear, if not easily calculable.

The pyramid is continuing to change.  Already there is anecdotal evidence that the worst discounting is starting to dry up in some parts of the market – so the bottom of the pyramid may even be starting to push up for a change.  In New Zealand the effects of the GST increase are still working through the system.  However, those producers who have worked hard on building their reputations based on better than simply solid quality, and who have maintained or even enhanced their visibility in the marketplace, are still able to do well.

“Prices are going to go up. How far? I have no idea. The market will decide.” Corinne Mentzelopoulos, Chateau Margaux

A number of wine producers in New World have dipped their toes into trying to sell their wines through an en primeur-type system, setting prices and obtaining the advantage of certainty of sales and early cash flows.

The Bordeaux 2009 En Primeur campaign, conducted in the Spring of 2010, has been characterised by record price levels as buyers have grabbed almost everything they could get their hands on. 

Against this we have reports that US demand overall was poor, Asian buying was up on the past but much more muted than had previously been forecast, while high prices scared off many traditional European buyers.  The campaign was conducted, after all, against a back drop of continuing global economic weakness.

Moreover, everywhere there were reports of small allocations. 

Then again, according to the authoritative vintage account published each year by Bill Blatch of Vintex, except for pockets of hail affected vineyards (which missed most of the key areas) crop yields were quite high.  The health and balance of the vines in the ideal weather conditions will have meant a reduced need for green harvesting and other forms of yield control.  The level of production of a quality oriented producer certainly need not have been unduly reduced – high production and high quality have occurred in tandem many times before, with the famous 1982 vintage a case in point.

Something in this doesn’t quite seem to add up.  If price setting is a factor of the market, of the law of supply and demand, the balance on the apparent evidence does not seem as one-sided as the pricing would seem to suggest.  Moreover, the question arises whether the supply was as it seemed, or whether this was a case of a “manufactured” shortage?  Was Adam Smith’s “invisible hand” tied behind the market’s back?

This goes to the heart of the way that en primeur marketing works if, as in Bordeaux, it is used as a clearing mechanism.  The way that the Bordeaux system works, with the network of courtiers and negoces as middlemen with selling conducted by importers/distributors and retailers in different countries, clearly implies a mechanism far more sophisticated than the typical direct-style selling campaign referred to as en primeur selling by some New World producers.  Such producers can ill-afford to indulge in the degree of information asymmetry mastered by the Chateaux of Bordeaux.

For this is the secret of the high prices achieved by the often large premier crus of Bordeaux.  Information asymmetry is the market equivalent of a poker bluff. The difference is that the chateau has five cards, but the other players have only been dealt two or three and must decide whether they will ever get another chance to buy at a comparable price. 

In a poor or merely average vintage the answer is often likely to be yes, so that producers are forced to reduce prices and therefore rely heavily on the way wines are reviewed to create some degree of countervailing pressure.

In a potentially classic year (disregarding the sceptics who may point out that every year is a potential classic these days), the chateaux owners have honed and perfected the methods that ensure no one will ever know how much they are actually selling.  By combining small opening tranches that will inevitably be sold out, the lack of information how many tranches may be released or what actual proportion of production will be withheld, then tightly managed allocations so that even reduced demand will be difficult to satisfy.  In the middle are the importers trying to judge the demand of their end customers and well aware that if they do not participate they may experience reduced allocations in other years.  Played carefully, prices may rise even if demand falls – the antithesis of a normal market.

If this is the case, will prices actually be sustained in the post-delivery market?

One can only assume that the gamble taken by the producers is that the wine they withhold from sale during en primeur will be saleable at good prices in 2 years time; that thanks to any unfilled demand and in the absence of other price signals, prices would be unlikely to fall materially.  In the meantime they may be able to open new markets or to sell in regions that struggle with the concept of paying and waiting for delivery later.

The sceptics might also add that there is no saying samples provided to the wine media at the start of the campaign will necessarily bear any relation to the finished wines two years later.  While technically correct, and not ignoring the fact that there are certainly wines every year that turn out markedly differently, it does appear that for the most part there is some degree of consistency between samples and finished wines.

In the case of smaller but highly renowned producers, the likes of some of the leading crus of the Right Bank, for example, there is little doubt that almost all production that is going to market will be sold through the en primeur system.  If loyal regular buyers want it, they have little choice but to buy through the system.

A flawed system?  There is no shortage of commentators who will say so, including many in the Bordeaux trade.  There are regular calls for an overhaul.

For now, however, it is hard to see how the major beneficiaries of the system would want to see a change.  The cards are loaded in their favour, with the 2009 vintage a spectacular example of how lucrative this can be.

An opportunity for producers elsewhere to get in on the act?  I do not think so.