Archive

Marketing

Five Strategies for a More Sustainable and Profitable NZ Wine Industry

It may be entirely moot, indeed pointless, to propose that an industry might return to its “fine wine”/boutique roots if that proposal is not based on actual strategies, on a series of tangible steps, to achieve the objective. 

More importantly, the NZ wine industry has benefited immensely from its flirtation with “industrialisation”, especially where that may be blamed on our signature product – sauvignon blanc.  The explosion of sauvignon blanc production was more than just a chase for money.  It was based on demand, created by smart marketing and a process whereby New Zealanders actually learned lessons about world markets.  We gained networks of contacts. We received substantial inward investment from companies that recognised our values as well as our product.  We are much smarter/less ignorant regarding costs, product economics, pricing strategies – i.e. the fundamentals needed to survive in a global marketplace. This is critical in the sense that the industry is now a vastly larger beast than it was 10 or even 5 years ago – as we go about changing, we will still need the rest of the world on side with us; and we will continue to need to be smart enough to compete.

Losing the good things we have learned in a blind rush backward towards an illusory memory of a golden era (which really was not) would be a retrograde step.

These are the broad steps needed in unison to take a significant industry, farming over 30,000 hectares, capable of processing almost 300,000 tonnes of grapes, and exporting more than NZ$1 billion of wine, and changing its nature into one more likely to ensure the sustainability of the industry as a source of wealth and income to its members and to the wider economy.

Most of these can practically be implemented at any level of the industry, from an individual grower or winery through to a region, through to the country as a whole.  The intention is to achieve an industry that is stronger both in practical and economic terms, and is less vulnerable to external shocks or fashion changes.  Moreover, even the healthiest wine sectors of other countries are not without their own problems.  Even so, as a statement of a general target, we could do a lot better than to emulate a region such as Champagne – recognised the world over for its name, which stands for quality and luxury, yet produces wines in extraordinary volumes, often using ultra-modern technologies to do so, and which pays its growers grape prices that even our best growers today could only dream of.

The question is how to get there.

1. Upscaling what we have in the ground

New Zealand’s immediate potential is inextricably connected to the quality of what it has planted in the ground.  For the most part our vines are young, an obvious consequence of a last decade of extraordinary growth.  Some of the national vine stock has been marked by compromise, by the difficulty of obtaining the best quality clones and rootstocks in the past as demand has outweighed supply of top quality planting materials. There is still a material portion of our older vine stock affected by virus infections; the economics of these vines must look even worse with lower grape prices.

While we must be patient now and let the potential of our quality vineyards express itself naturally with age, where we have the wrong vines in the wrong places we must face this and continue to upgrade, to seek out better clones, better rootstocks, to plant using better trellising and with more quality oriented planting densities. As difficult as the concept may be at this point in time, the industry must not become afraid of investment – our competitors will not be.

For all the importance of improvement, the fact is that vine age is not something that can be rushed.  It is the single greatest impediment not simply to producing quality, but to being recognised for a quality focus.

The nature of the problem can be shown by comparing the national vineyard today with that of 10 years ago.  Based on national vineyard survey data more than 68% of the producing area was not there 10 years ago (excluding replanted and top grafted areas not apparent in the data).  Making that look worse, the age of our four most sought after grape varieties is much younger with the less than 10 year percentages of pinot noir at 76%, syrah 79%, sauvignon blanc 85% and pinot gris 91%.

In other words, most of what we sell the rest of the world is from young vines, while what we drink at home is actually much less so.

The message is that it will take time for our vines to age sufficiently to overcome this quality impediment, but we should not be shy of other means to improve the quality of what we can produce from what we presently have, whether through replanting part (setting the age process back), or through keeping yields in check in search of better fruit (able to be made into better wines that are more likely to attract a premium price than poor quality fruit that may as well be dumped in today’s market).

2. Expanding where there is potential (and shrinking where there is not?)

Have all of the potentially great sites for growing wine in New Zealand already been planted?  Frankly, to suggest that they have is ridiculous.  New high quality sites are continually being turned up in the never ending search for better.  That is how new regions such as Awatere, Martinborough, Central Otago, Waipara, Waitaki, Matakana, Clevedon, Ohau, Cheviot Hills and more come about.  Unique terroirs are because they are, not because they have been discovered.

Placing an overt or even implicit prohibition on searching for new and better would be an extraordinary error.  The NZ wine industry’s history is predominantly populated by pioneers; we can never stop history.

On the other hand, the planting frenzy in some regions over the last 10 years has resulted in extremely marginal sites being developed, sometimes for reasons more to do with property development and local zoning requirements rather than suitability for grape growing.  If we are to better balance the industry, removing vines that can never produce suitable quality or saleability might be preferable to the removal of potentially good sites.  That, unfortunately, may be wishful thinking.

3. Diversifying

Lack of diversity was ignored not so long ago.  Now it is widely recognised as one of the industry’s biggest issues – the degree of reliance especially on one grape, sauvignon blanc.  There are two main risks associated with lack of diversity: reputation (i.e. as a “one trick pony”) which may affect the market’s perception of the ability to do alternatives; and disproportionate downside risk if the areas of excess reliance go into decline (either in volumes – falling out of fashion – or values).

To give sauvignon blanc its due, it has given the industry recognition that might have been much harder to come by without it.  It has single-handedly brought in foreign investment, earned large profits and funded significant elements of the wider industry infrastructure that we have today.

It has also been responsible for developing New Zealand’s unique stylistic identity.

The problem is not reliance, but over-reliance. The death of sauvignon blanc as a category has been widely overstated.  Prices may have plummeted but the world is drinking more of it than ever.  But can we keep those consumers if prices rise?

One way of keeping those consumers is to offer them alternatives.  It is a process we have started, but not necessarily with full understanding of the consumers.  The main drinkers of our sauvignon blanc are, first and foremost, white wine drinkers (so making good red wines is not a strategy for keeping these customers).  New Zealand has long prided itself (until relatively recently) as being particularly strong as a producer of white wines.  Yet compared with most other significant producing countries of the world, our range of varieties of more than just a few hectares planted is extremely limited.

Another question is whether we can adjust the perception of New Zealand sauvignon blanc by increased stylistic segmentation.  This means not just hunting for super premium sauvignon icons, but active differentiation of Waipara, Central Otago and Hawke’s Bay sauvignon blanc styles from those of Marlborough and perhaps even actively promoting the distinctiveness of Awatere or Waihopai Valley fruit (by way of example) over “generic” Marlborough.

Nationally, improving and diversifying a clear portfolio of other quality varietal wines, both white and red is important from the perspective of diversifying industry and producer risk.  Nevertheless, we need to be clear about differentiating between wine styles that have potentially broader appeal (which sauvignon blanc has certainly gained) and those that are, by any definition, niche market prospects. The latter may not have the volume appeal, but may be able to command greater long-term consumer loyalty.  Pinot noir certainly comes under this latter category.  Syrah may do. Wines such as generic chardonnay and merlot, for example, do not unless consumers are given a reason to become attached to chardonnays or merlots that are resolutely of a specific place (as achieved by Burgundy or the Right Bank of Bordeaux, respectively).

4. Improving our credentials

Credentials are the cornerstone of marketing, but they start long before a product reaches the point of sale.

New Zealand is clearly conscious of this with long-term market strategies based on environmental qualities and sustainability.  Yet most producers know that having staked claims to this territory the risk of being exposed as not living up to the ideals is greatly increased.

It is an unfortunate irony that a key factor in our ability to produce the styles of wine that we do, and which contribute to the country’s international image, is also responsible for some of the difficulties from a viticultural perspective: New Zealand is a long, mountainous and mostly very maritime country situated in an ocean capable of profound climatic shifts.  We have warm and cool, damp and dry, not to mention wind and exposure to cyclonic conditions in some parts of the country.  There can be no single (or simple) prescription for successful and responsible viticulture in such circumstances.

Maybe rather than following the rest of the world’s prescriptions for what represents sustainability, and especially the care for the land, we should be investing funds in the science of improving New Zealand’s unique soils using uniquely New Zealand products to reflect uniquely New Zealand eco-systems (aka “terroir”), for example.

Sometimes we seem to hide from the facts in the message we send the rest of the world, stemming perhaps from a complex that the truth might be misconstrued.  We simply don’t have a “reliable” climate.  We have genuine vintage variations and should not be afraid to admit it.  Sometimes we struggle with conditions, but the whole world knows when regions of France, Italy and Germany are struggling with conditions too and it doesn’t harm their reputations. 

Clearly if we want our products to be appreciated and priced for quality there are other credentials that are at least as important as sustainability.  The subject of yields arises yet again, but this is merely one element of the overall package of how we send the message to the world that we really are good, conscientious, quality-oriented wine farmers.

In this respect the willingness of New Zealand wineries to embrace new marketing media to speak to the world’s consumers and opinion makers in a frank, open and honest way is an important lead.

5. Exploring new means of expression

While not strictly about “upscaling”, “diversifying” or “improving credentials”, there nevertheless would be value in a progressive shift of industry practices toward greater expression and individuality. The means of doing so will range from the vineyard to the winery.

In the vineyard individuality is, by definition, achieved by being different. Ultimately the key to vineyard expression is by making the choices – from what to plant through to how to grow and to harvest – that best reflect the needs and potential of the land.

Examples of practices in the winery could include: reduced levels of residual sweetness; greater use of wild yeast ferments, even if as blend components rather than totally wild ferments; and greater use of skin contact, especially for red wines, although not to the point of astringency from over-extraction (although sometimes one wonders if the winemakers’ definition of over-extraction has been slowly shifting to lower thresholds over the last decade, resulting in the sacrifice of structure and texture).

The Numbers Game

Just as the age of our vines is ultimately about numbers – about hectares and years, so too are all of the other aspects of the quest to upgrade the value of the industry. 

The “ideal” set of numbers will not be dictated by what we want to do, but by the market and by where we need to be within that market if we are to achieve the other numbers, those of dollars, income and value, that will make the industry economically sustainable and fit for future generations to follow.

In this respect, recognising market niches also means recognising that the size of opportunities is never infinite.  There is always a point where there can be too much.  We appear to have carelessly crossed this line in sauvignon blanc, for example.

That line needs to be pulled back to the market unless there are good, rational grounds (not wishful grounds) for believing that the global market will expand sufficiently in volume and value terms to accommodate New Zealand’s current and future production.  If indeed the global market is growing that way, we must also adjust our calculations to make allowance for the behaviour of our competitors.

Right now the formula does not look attractive, suggesting we may have somewhere between 15-25% too much sauvignon blanc in the ground that may not simply right itself with time. This would bring sauvignon blanc back down to around 50% of the total vineyard. We are almost certainly overplanted in some other varieties, although arguably not to the same extent – overplanting of other varieties has not specifically rebounded onto export returns or onto land values, for example, in anything like the same way.  Most issues associated with other varieties can be linked to marketing issues as much as to production volume.

The other part of the equation not discussed here is the role and place of brands as the conduit for selling New Zealand wine. That is for another day.

Advertisements

Since the mid 1980s when the New Zealand wine industry simultaneously started to rebuild itself from over-production with the help of a Government-funded vinepull, and from when its sauvignon blanc was first “discovered” and set on the path to cult status, the industry ethos has been one of quality first and foremost.  It has been a recurring mantra of the industry that New Zealand could not produce wine on a scale to compete with larger countries with more predictable growing climates and so would have to keep its sights set firmly on the premium end of the market.

This approach set the industry on a path through the 1990s where, even if not every wine produced came close to hitting the bulls eye of being appreciated as fine wine, it nevertheless remained an almost universal goal.

While the lack of scale mantra has lived on, the fine wine goal and small scale quality ethos was certainly harmed during the last decade. New Zealand sauvignon blanc and many of its other white wines, especially, have expanded in such a way that the scale of production and the almost formulaic recipe have reached the point where the phrase “industrial winemaking” is widely used.  It is now highly arguable that the country, which produces more sauvignon blanc than any other New World country and is second in total hectares planted only to France, is hardly consistent with the notion of small scale and high cost relative to its competition. 

The question is, therefore, whether an industry that has heavily converted to production principles based on notions of scale-driven economics and brand marketing can rediscover its roots and return to the approach of a fine wine producer – a “fine wine industry”?

Is the Notion of a Fine Wine Industry an Oxymoron?

From an economist’s perspective, the answer to this question would be no.  Whether an industry is comprised of large businesses or small, it is still an industry.  An industry can be made up entirely of one, two, ten or hundreds of small artisans and still be an industry.

So if a collection of wine producers in a region of France, Germany, California, Australia, New Zealand or any other country is devoted to the production and sale of wine that is intended for the “fine wine market” and any products of which could hypothetically be of interest to those consumers with a specific interest in fine wine (according to any of its definitions), it could well be argued that this subset of the wider generic wine industry is a “fine wine industry”.

There are certainly regions of each of the above-mentioned countries where there would be little argument that the large majority of wine producers explicitly aim to produce fine wine, as opposed to wine targeted at the “mass market” consumer.

It should be emphasised that the use of the adjective “industrial” to describe certain types of larger businesses with a larger scale investment in producing assets and equipment that is clearly not “artisanal” in nature, is meant in quite a different context.

Quite where the border lines might sit is another matter again.

It is, of course, quite possible to look at some of the pinnacles of the global fine wine industry, the Premier Crus of Bordeaux, and to see that these unquestionably fine chateaux blend an artisanal, almost small-scale attention to detail with facilities and processes that are far more akin to the industrial in nature.  If it is accepted that there is such a thing as a “fine wine industry”, the technology employed is not likely to bear scrutiny as a criterion for membership.  The end markets are quite a different proposition.

Two industries in one

It is, of course, valid to ask whether New Zealand has ever qualified as a “fine wine industry” to begin with.  While few would question the assertion that New Zealand wine even 40 years ago was a barren desert with very scarce oases, the period from the mid 1980s merits examination.  This was a time when exports were a small portion of overall production, and when the production that was exported (primarily to the UK) was largely directed into fine wine specialist retail channels.

Domestic overproduction led to price wars that threatened the solvency of most of the larger wine companies during this decade.  The result was a government funded vinepull scheme which had the main consequence of resulting in the uprooting of large areas of hybrid grape varieties and lower quality high yield grapes such as Muller Thurgau, and eventually replanting to higher quality vinifera grape varieties such as chardonnay and sauvignon blanc.

This was also a decade of geographic expansion into new areas, including the likes of Waiheke Island, Martinborough, Central Otago, Waipara and Canterbury, Nelson and other regions.  The early and second wave pioneers in these regions were almost completely focused on production of quality wine based on growing quality grapes, notwithstanding that they were often hindered by typical pioneer problems as they learnt the lessons of their new terroirs.  Within regions such as Marlborough this was the period when the first of the early big company contract growers started to allocate production to their own labels, with expansion into newer sub-regions such as the Awatere Valley.

The 1980s was the decade when Te Mata Estate launched Coleraine, and when the Gimblett Gravels region was “discovered” and first planted.  It was the decade when the early big 5 of Martinborough all launched their pinot crusade, and when St Helena won a gold medal for its first Canterbury pinot.

This was also the period when the early international competition successes with Marlborough sauvignon blanc of companies such as Montana and Hunter’s was superseded by the spectacular success of Cloudy Bay.  This was not lost on the older established, mostly Auckland-based companies that were evolving their own product portfolios into higher quality varietal wines at the time.

The industry of the time was not purely small-scale.  Bag-in-box wines, nondescript easy drinking whites and cheap sparkling wines were still the core business of domestic wine retailers (but supermarket wine sales were not allowed until after a revamp of licensing legislation in 1989).  The volume of exports was insignificant when compared with domestic consumption, and imports substantially outweighed exports.

The period since has been marked by continuing market success and growth – and also evolution – for the industry.  It has been the subsequent dominance of the industry, and especially of the export side of the industry, by Marlborough and its sauvignon blanc that has coloured the perceptions of the nature of the industry.  Just as the whole of any New Zealand vintage often seems to glean its reputation from the fortunes of Marlborough for that season, usually inappropriately so, so the rest of the New Zealand industry seems often to gather its reputation from the stainless steel tank farms of large Marlborough wineries, producing container loads of wine for local and overseas supermarkets.

Despite the symptoms of industrialisation of production of certain wine styles as a result, much of the New Zealand industry has remained true to the quality goal.  Even in the “industrial heartlands” it has to be said that there is a low tolerance towards bad wine.  In regions trying to establish a name for other styles, and in particular red wines, that intolerance, in private, can reach almost religious fervour.

Smaller wine regions know that they have only one of way of marketing themselves, and that is a focus on producing high quality, individually distinctive wines. Several of these regions simply have nothing even close to a large scale production company among their number.

It should be noted that New Zealand is hardly alone in terms of these concepts.  It is not the world’s smallest producer, nor its highest cost.  Nor are the issues of economic scale and focus unique.

So the question remains: is it possible for an industry to turn history on its head and return to a fine wine focus above the volume imperative dictated by the huge investment in vineyard land and winery assets?  Indeed, is it possible to extract a fine wine message out of the marketing “noise” that naturally accompanies high volume retail brands?

Perhaps the answer is that there is a latent fine wine industry, which has never been extinguished, but that a way needs to be found to fully re-state that industry’s credentials to its own target market. The focus on promoting unique varietal terroirs, such as the Pinot Noir conferences and other symposia, is but a step.  Several other marketing initiatives are in train that are likely to focus on a similar message.  That message is that within New Zealand, for all the undiminished importance of Marlborough sauvignon blanc as the “cash cow” of the wider industry, a strong cadre of producers remains firmly focused on a different market altogether.

At the beginning of any year there is a surfeit of reviews of the year past (2009) and forecasts for the year ahead (2010).  As I personally tend to perceive 2010 and 2011 as still highly transitional years for the global wine market, with discounting and stock reductions likely to continue for a time, uncertainties in terms of pricing, values and consequently financial support, I have instead shifted my focus ahead to 2012. This is the closest thing to a shift to a “new normal” (give or take six months or so).  As global economic conditions are likely to be more stable (rather than the present mix of positive and negative factors), consumer behaviour and market structure are more likely to settle, at least to the extent that this ever really happens for the wine industry!

What has happened?

2007-2010            Global recession and its impact on wine demand (with some something of a lag?)

2007-2011            The “credit crunch” and its impact on capital financing

2008-2010            High levels of discounted exports of bulk wine

2009-2010            Heavy domestic discounting/de-stocking

2010-2011            The bumpy, uneven process of finding the new “normal”

In recent years the failure of some existing offshore distribution networks, including the fact that for most (but clearly not all) brands this has not created defensible brand loyalties in the face of discount pressures, has been a significant driver of the level of volumes directed to bulk exports.

The Impacts

Consumers

Consumers have gone cheaper.  In part this has been because of the sheer weight of discounting in much of the retail world (itself often reflecting the power of the retailers to dictate to over-stocked producers); but also, and quite related, is the tendency of consumers to tighten belts and trade down in price points.  The extent of the discounting has simply allowed consumers to maintain (and sometimes upgrade) quality of purchases at the lower prices.

The big question on everyone’s lips is: if the major economies are healthier, job worries have eased, incomes are stabilised where they were for many consumers and the array of labels available is closer to what it was before the crunch (i.e. most of the short-term discounting brands have disappeared), will consumers revert to earlier purchasing behaviour or will they adopt a new normal of lower prices and reduced demand for wines representing conspicuous consumption?  Will the shape of the pyramid have changed, with a smaller tip and fatter low-end footprint?

Of course, one of the related issues is whether consumer tastes have changed in the interim and, if so, will it affect decisions regarding price or other factors?  By 2012, the period of the crunch, of the global transition that I have referred to here will have been five years.  Five years is a long time in a fashion sense, especially for certain wine styles. 

The New Age Global Consumer

The next generation of wine drinkers is on its way.  The same as has always been the case.  This next generation will have cut its teeth on cocktails, spirits, RTDs or beer, just as previous generations have done.  Wine as a beverage has never appealed to everyone.  It has long appealed to a small number of early drinkers (late teens and early 20s), to a growing number of drinkers in the mid to late 20s, and found its way to become beverage of choice to a steady core of drinkers from the late 30s on when other demographic factors become more significant.

… and the New Temperance

Given the unavoidable effects of the New Temperance movement, wine more than any other beverage has both an opportunity and an imperative to both differentiate and distance itself from other alcoholic beverages.  In particular it must fight to avoid being associated with beverages that are themselves associated with binge drinking.  To date wine, across the world, has singularly failed to send an unequivocal message that it stands for moderation, for consumption with food, for traditions that are not a threat to health and safety of consumers or society.  If it fails to do so by 2012 it will experience the economic consequences of the tool of choice for legislators around the world that are determined to place all alcoholic beverages as a category of ethical problem on a par with tobacco: materially higher excise or taxation.

Red or white or rosé?

Will the wine market become more like the beer market?

Anyone who follows the beer market in different parts of the world will be aware of the impact that the weather has on beer consumption.

The more that wine displaces beer as a beverage of choice in certain markets, does it mean that wine may also slowly assume some of beer’s characteristics?

Similarly, if climate change ultimately means warmer weather, will the wider wine market (as distinct from the fine wine sub-set) tend to shift towards styles that may be regarded as more “refreshing”, featuring the cut of acidity over “fatter” or more overtly wooded styles, for example. 

It is far from a secret that climate and temperature influence the styles of wine grown and consumed in many parts of the “Old World”.  Is it therefore a coincidence that as the world has experienced what the WMO has cited as being the warmest decade since temperature records have been kept globally, the post-“French Paradox” swing to red wines appears to have stalled or even reversed in many markets, and sales of rosé wines have surged?

Will this have reversed in the face of a string of long and bitterly cold northern hemisphere winters?

Weather and climate does influence consumer behaviour.  What will the weather be like in 2012?

The stalled hunt for a Plan B white

In Australia the Alternative Varieties Show has served as a showcase for the ongoing moves to diversify the varietal scope of the Australian industry, highlighting and promoting new grapes and winestyles.  Whether those varieties are even truly at home in some of the very warm, dry climates they are being planted in is not the point.  The Australian industry has identified the need to develop alternatives and actively supports this, resulting in quite disproportionate media coverage, for example.

The same cannot be said for New Zealand.  There have been voices for several years promoting the need to find varieties that can serve as foils in case sauvignon blanc slips out of wider market favour. However, unlike Australia, the tendency is to look at varieties already growing in New Zealand as candidates for “promotion” (e.g. pinot gris), rather than to find and experiment with new varieties.  There are exceptions, of course, with companies such as Coopers Creek and Trinity Hill actively marketing new alternative varieties. 

It is arguable that far more attention in the last 10 years has gone to finding alternative red varieties, rather than whites, for experimental purposes.  This may, also arguably, be something of a lingering consequence of New Zealand’s subconscious tendency in the past to perceive itself as an inferior or marginal producer of red wines (in contrast with its growing tendency to regard itself as a world-beater with almost all white grapes).

Of course most of the world’s wine consumers are more likely to want to drink either a white or a red as a separate preference, so the chance of consumers fleeing sauvignon blanc for pinot noir or for syrah is very low – these are completely different markets. If sauvignon blanc were for any reason to go out of favour with consumers, the majority of those consumers would be expected to migrate to other white wine flavours and styles.  This has the potential to expose not just New Zealand sauvignon blanc, the vast majority of which is made in a very specific style, but also all of the producers of copy-cat sauvignon blanc styles elsewhere around the globe.  Of course if a drinker buys a Marlborough sauvignon blanc today, the chances are that they will get a wine in a style they are quite familiar with, just as a buyer of an Italian pinot grigio would generally expect, for example.  On the other hand, as it is often commented, buy a New Zealand riesling or pinot gris and there is considerable doubt that the same can be said given the relatively wide variety of sweetness levels and styles in which these wines are made.

During 2009, the year Australia found out its albariño grapes were in fact savagnin blanc, the first commercial plantings of albariño occurred in New Zealand. Given that the fruits of these first plantings will be on tasters lips in 2012, are they likely to inspire dramatic expansion in the future if people like what they taste – a maritime grape being grown in a very maritime country that, arguably, has its own unique characteristics (and winemaking technology) to bring to the originals?

Increasingly the answer looks like no.  Growers are paring back yields all over the country.  There is now something akin to a stigma attached to new plantings or to replanting when the industry mantra is balancing supply and demand – never mind the fact that the new can create its own demand if it is good and distinctive enough.  New Zealand’s attitude to trialling the new and different is much more tentative than Australia, which may even manage to have more real albariño planted by 2012 than New Zealand, despite its 2009 setback and despite the avoided question mark over why such a grape is even grown in Australian conditions.

The Role of the Multinationals

Inevitably the role of the large multinational wine and liquor companies within the New Zealand wine industry has become the subject for increased scrutiny given both the degree of importance these companies have in terms of the industry as both buyers of grapes and sellers of wine to both the domestic and export markets; combined with the wider implications of sales statistics suggesting increased discounting during 2009.

By and large the large companies, most of whom are multinationals, have been good corporate citizens in New Zealand.  There is, of course, the risk of over-generalisation since many overseas investors in New Zealand have much more limited scope and scale than some of the larger global wine companies.  Overall, however, they have mostly tended to reinvest profits back into their New Zealand investments.  They have generally been good employers and trainers, as well as active sponsors and benefactors of the community and the arts.  They have brought both structure and management disciplines, often lacking in smaller companies, to the industry.

Of course they have also made significant investments in the industry, both in vineyards and also in processing and marketing infrastructure.  In support of this investment they have actively promoted New Zealand wines offshore.

As a further generalisation, they have tended to emphasise larger volume production and volume-oriented strategies with a relatively token investment at the boutique or ultra premium end of the market, where New Zealand has only rarely succeeded in replicating the sort of icon-centred marketing strategies employed by several companies in Australia.

Accordingly, the multinationals have for the most part been good for the industry and the economy, that is while the global economy and global demand has been strong, but the market changes of the last couple of years have exposed certain weaknesses of the multinational model. 

A lot of the industry export growth expectations have been predicated on the strength of the networks built up over the last 10 years, including those of the multinationals. These have been found wanting.

In particular, the New Zealand arms have become subject to global weaknesses.  Should an overseas parent have financial imperatives (and this is not to speculate or to state that New Zealand winery parent companies have been in financial distress) that dictate global requirements for cost controls or for balance sheet restructuring, by way of examples, the investment heavy New Zealand operations may become subject to pressures not necessarily created by domestic performance.

Now it is the multinationals that have ended up most obviously exposed to excessive stock levels and difficulty moving them since they have been more reliant overall on exports than most of the smaller players.  Yet they have also been more limited in terms of bulk export options (owing to the risk of cannibalising the offshore networks) and so have had to discount domestically to aggressively drop stock volumes.  Cutting contract exposures means that they will end up with a smaller overall share of the pie by 2012 (maybe as much as a 5-10% smaller share of production/sales in 2012 than 2007).

Moreover, New Zealand is often perceived as a product slot in a global portfolio, serving a very particular purpose.  This is often not conducive to product evolution – a particularly important issue with respect to Marlborough sauvignon blanc; and can also become a serious handicap when competing with products from other countries in the same stylistic slots within the portfolio.  When competing within one’s own portfolio in any given country within a company’s sales system, the decision of which product to back locally can become a complex issue, often decided by the local profit margin.

With respect to sauvignon blanc, provided sales continue to flow this is rarely a problem as the product tends to have a priority position.  If sales fall below projections, resulting in a disproportionate increase in current or forecast inventory levels, the financial pressure to discount in order to reduce stock levels increases.  Despite the 66% production increase in 2008 from 2007, and the similar level of production in the clearly superior 2009 vintage, the domestic and export statistical evidence is of a greater increase in overall sales volumes driven by discounting as well as market growth.  Consequently, the experience of the last two years suggests that the level of de-stocking may have been even greater, suggesting cash flow pressures have been an equal or greater driver behind discounting behaviour if bulk sales might otherwise have been sufficient to shift the volume increment.  In this context New Zealand’s small overall size is such that its total bulk wine sales are relatively insignificant against those of other large producers.

As a consequence, there are grounds to believe that should New Zealand producers move beyond the current cash flow driven discounting imperative, the country could be closer to finding the supply/demand balance than many think to be the case.  The question then is whether by 2012 the key brands will have survived intact, or whether they will have been compromised by discounting behaviours.

Mergers and acquisitions occurring offshore have sometimes proven detrimental, even if the consequences have rarely been understood within the country.  Such acquisitions frequently result in the realignment of offshore distribution networks, sometime causing dislocation in the transition process and disruption to existing end customer relationships over and above the issues that new brand managers may have fitting acquisitions into their portfolios.

The current wine glut in other product areas has more severely exposed the impact of intra portfolio competition as a serious constraint.  In styles such as sparkling wine and varieties such as chardonnay there has been a clear lack of willingness to necessarily promote some NZ wine styles against those of other countries in the same portfolio, notwithstanding the efforts of New Zealand management to make headway within the international systems that they work in.

Perhaps ironically, the outcome is a reinforced, excessive and arguably unhealthy default focus on sauvignon blanc.

Similarly, New Zealand has traded heavily on the quality of its pinot noir credentials. While justifiable in many respects, the risk that has been exposed is that of limiting the global exposure of other New Zealand reds, and of reducing their market access, despite simultaneous growing international acclaim.  The generally smaller independents are left to try and push this opportunity.

The other key issue with regard to the multinationals is the degree of influence they hold over grape growers.  The multinationals have been by far the largest buyers on a contract or spot basis from the grape grower section of the market.

In recent times, when either offshore indebtedness or other cash flow pressures have forced rapid heavy discounting to reduce stock levels, it has been the multinationals that have led the way – especially in domestic supermarket sales.  Other domestic producers have been forced to match discounts or else experience diminished sales and stocks languishing on shelves.

In a 2012 future where global price points have shifted downwards for the long haul, the large companies have limited scope to gain sufficient additional economies of scale or other opportunities to reduce production costs – so logically the long-awaited squeeze on grape prices, showing signs of appearing in 2010, will be in full “new normal” mode over the next 2-3 years.

M& A and Industry Structure

In a world where debt is severely constrained, even merger or acquisition (aka M&A) options that make excellent commercial sense may not be feasible. By 2012 the new normal will still be a far more conservative lending environment than that of 2007.  However, the extreme risk aversion phase of the bank economic cycle will have started to pass so that the issue for most banks will still be that of capital rationing.

In this environment the past perceptions of the wine industry as being riven by glut and discounting will not be helpful to the lending process essential for much M&A activity.

Even for those with the necessary resources, there are concerns around the three key rationales for operational expansion of wine businesses through acquisition:

  1. operational improvements,
  2. security of supply, and
  3. brand expansion.

The concerns surrounding these three factors are:

  1. Without adequate controls the operational improvements may exceed the costs;
  2. Cancellation of existing contracts plus the sharp drop in the price of grapes means this will no longer be a key issue; and
  3. brand expansion may not be a universal or fashionably desirable strategic goal, especially for larger multinationals (as compared with brand profitability).

So, those second tier firms with a shareholder value strategy based on being taken out by a global player have: (a) lost value; and (b) a serious need for a plan B.

M&A in the smaller end of the market will continue, with a mix of new entrants and mergers among peers. Transaction rationales will vary considerably, as they have always done.

In 2012 the historic normal will continue: some firms will get bigger and others will get smaller.  In terms of industry structure, the main growth will be in the middle.

It is already apparent from NZ Winegrowers data that for the first time in several years the number of wineries has declined slightly.  NZ Winegrowers classifies its members within three tiers: Category 1 small wineries with sales up to 200,000 litres; Category 2 with sales up to 4 million litres; and Category 3 with sales above that level.  At the time of writing there are 6 Category 3 members (three locally owned/controlled and 3 offshore owned),  61 Category 2 members and 608 Category 1 members.  Numerically it has been category 2 that has grown most quickly, doubling in numbers over the last 5-6 years as a number of smaller companies have taken the opportunity to expand export sales.

It is in terms of share of volume that most changes will take place between 2009 and 2012.  During that time it is likely that total Category 3 and Category 1 litreage volumes will decrease, in relative share terms if not also in actual amounts, meaning that the present Category 2 members will expand volume and share of production and sales. (Note that the list of 61 Category 2 wineries includes 34 Marlborough-based, 9 Hawke’s Bay-based, plus 6 Auckland-based companies, all of whom draw more grapes from Marlborough and/or Hawke’s Bay than from Auckland).

Between 2012 and 2020, at least 3 to 5 of the current Category 2 companies will expand into Category 3.  The question is therefore whether this happens through brand and sales growth, or through acquisition.  It should not be ignored that there are companies within the higher tiers that have expanded aggressively in recent years through asset or business purchases, have higher than advisable levels of debt, and that have constrained cash flows and limited asset sale options with which to materially reduce debt gearing.

Land values

The overhang of properties for sale tells its own story.  In the period to 2012 the trend in land values will be downward.  To the extent that high sauvignon blanc yields and grape prices together justified the value of Marlborough land, together with the shortage of grapes when demand was rising, the logical effect in a world of yield limits and lower prices is a fall in both economic and actual values.  This has already happened but the real fallout will be when cash flow pressures force more sales at lower prices, since these factors rarely hit “overnight”.

Overall the impact may well be greatest in those vicinities where viticulture has become a monoculture, i.e. where grape growing has in recent years become a significantly higher value land use than alternative crops or land uses.

The silver lining?  The pressure will increase for greater production efficiencies, and the viticultural contracting sector, able to dictate pricing in recent years, will be under greater pressure although grape buyers will ensure that this does not mean short cuts and diminished quality.  The days of taking the comfortable easy options are over.

The Rising Regional Imperative

The other story that will gain strength by 2012 will be the increasing importance of the regions as the heart of the new New Zealand industry.

The history and development of the wine industry in Marlborough, Central Otago and Hawke’s Bay over the last 5 years is the key indicator of this trend.

Each of these regions has developed a regional story and identity to take to export markets.  Once New Zealand’s geographic indications system is bedded in place, regional identity, which has been the essence of “brands” such as Marlborough Sauvignon Blanc and Central Otago Pinot Noir, will become pivotal to the attempts of other regions to establish, define and protect their identities.  The regional story will become more important to export producers than the New Zealand story, although this process will take a lot longer than 2012 to fully mature.  Some regions will lack the identity to develop further in this environment, accepting that their place is more about a largely local niche market.

Two years ago the New Zealand wine industry was drunk on its own success, so the NZ Herald’s “The Hangover” caption  (Weekend Herald 3 April 2010, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10636005  and associated articles) is quite apt.  Nevertheless, hangovers, however uncomfortable, are merely a part of a recovery process.  The industry has been going through such a hangover ever since 2008.  Coming at the same time as the wider NZ economy is cautiously creeping out of its bunker, there should be more cause for optimism than for dread.

It is clear, however, that there are still severe structural flaws in the industry that have been highlighted by the market behaviour of many companies over the last year.  These structural flaws, and some of the market failures in the wider economy (especially with respect to financing capabilities), will affect where the industry heads over the next period.

Right now the companies in trouble are those that have been struggling to keep their heads above the water for the last two years – not those that are suddenly in trouble.  Who survives and who doesn’t will be down to the same combination of factors, such as management and marketing on the one hand, and uncontrollable events such as the dollar and the economic strength of export markets on the other.

As a consequence I believe there were a number of statements made or ideas floated in the articles that warrant questioning.

What is actually happening?

Yes, at the big picture level, there is a fundamental issue of supply exceeding demand.  As usual this hides a lot of detail at the “ground level”.  There are, of course, many companies in dire straights and others going great guns.  Some do not have enough wine to sell to meet the opportunities in front of them.  Should they really be cutting production because someone else has too much wine?

Anyone who has wandered down a supermarket wine aisle over the last year will know that there is a lot of discounting happening.  It begs the questions, though, as to who is discounting and why?  It does not take more than a cursory glance to figure that the companies leading the domestic discounting are several of the very largest companies in the industry.  This should hardly be surprising because many have been publicly at the forefront of cutting grape purchase contracts and stating the need to cut high inventory levels clogging their warehouses.

Logically these companies will have experienced much higher overall market shares as a consequence of discounting.  However, also logically (since discounting is not exactly a good thing for consumer loyalty), the retail market share of these companies will probably drop sharply in the foreseeable future.  Once stock levels are down there will be no reason to discount in the same way any longer.

However, what the big company discounting has done is squeeze the sales of everyone else in the market, and this is what has flowed through to affect other companies.

At the other end of the food chain many growers are seeking to sell up and leave the industry.  The number of wineries selling up, as opposed to vineyards, still seems surprisingly small, although more will likely follow.  However, the question of who will buy the assets now on the market warrants serious consideration. 

Is there really a group of big overseas-owned corporates hovering and waiting for the chance to buy up the industry for a song?  This doesn’t exactly seem plausible.  The existing big companies are the ones that have been selling discounted wine furiously to try and get their balance sheets back in order.  The overseas parents have been selling assets for the last couple of years, not buying.  The idea of these companies suddenly going on a New Zealand spending spree does not seem likely.  There will be overseas investors moving in, such as the Foley group that recently acquired local assets, but these are the exceptions rather than the rule.  Groups like that may cherry pick some assets in future, but this is not a trend in the making.

The most logical buyers of most assets will either be existing financially strong grape growers looking to expand and gain efficiencies, or second tier wine companies with growing market strength that need to support their growth.  Of course the fundamental problem faced by New Zealand-owned companies as buyers is whether they have adequate access to capital.  Falling vineyard prices will not help the already difficult ability to access bank funding.

Export Success

Philip Gregan’s very pertinent observation that selling 30% more sauvignon blanc in the last year “is good news” seems to have been lost in the current of the story.  The truth is that 30% increase in volumes sold is a phenomenal outcome.  Indeed, the situation would be truly dire if we had merely held on to market share.

One issue affecting producers today is how to price into the UK market given the rise of our dollar against the pound.  However, it is interesting to note that most other countries are asking the same question – it is the weakness of the pound that has created this situation rather than the strength of the NZ dollar.

It is also no secret that a certain volume of New Zealand wine has been leaving our shores in bulk shipping containers.  It is therefore also no secret – in fact it has been recorded in the published statistics – that the average export price for New Zealand wine has fallen – as it must do since the lower productions costs in the absence of packaging and labelling mean that any seller would be expecting a lower price, regardless of whether the wine is qualitatively inferior or not.

Of course given the lower cost of production of bulk wine shipped in plastic bladders, let alone the fact that such wine is not carrying branding or other value added components, it is logical to expect a decline in value per litre of exports – but then again this is hardly comparing apples with apples against past prices for exports of bottled wine.

However, on looking more closely at the data, the fact that the decline has not been greater actually suggests that overall pricing has held up far better than expected.

  1. Over a long period the average price has been maintained as high as it has given the overall level of growth; and
  2. Even in the short-term analysis, the rate of decline of the average export price/litre has been far less than might have been expected given the anecdotal evidence of the volume of wine exported in plastic bladders.

Now 2010 is supposed to be the vintage when voluntary yield cuts pulled production levels down, closer to balance with demand.  So what has happened to render fruit discounting still necessary?

The data tells some of the story:

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Production (mil litres) 60.2 53.3 89.0 55.0 119.2 102.0 133.2 147.6 205.2 205.2
Domestic Sales of NZ Wine (mil litres) 41.3 36.2 32.6 35.3 35.5 45.0 50.0 51.0 46.5 59.7
Export Volume (mil litres) 19.2 19.2 23.0 27.1 31.1 51.4 57.8 76.0 88.6 112.6
Total Sales Volume (mil litres) 60.5 55.4 55.6 62.4 66.6 96.4 107.8 127.0 135.1 172.3
Domestic % 68.3% 65.3% 58.6% 56.6% 53.3% 46.7% 46.4% 40.2% 34.4% 34.6%
Export % 31.7% 34.7% 41.4% 43.4% 46.7% 53.3% 53.6% 59.8% 65.6% 65.4%
Sales/Production ratio 1.005 1.039 0.625 1.135 0.559 0.945 0.809 0.860 0.658 0.840
Sales/Production prior vintage   0.920 1.043 0.701 1.211 0.809 1.057 0.953 0.915 0.840
Aggregate incremental stocks over 1999 levels (mil litres)* -0.3 -2.4 31 23.6 76.2 81.8 107.2 127.8 197.9 230.8
Incremental stocks/Export volume 0.0 -0.1 1.3 0.9 2.5 1.6 1.9 1.7 2.2 2.0

*does not take account of volumes lost/ullage/dumped/samples etc)

This table shows the history of production and sales for the last 10 years according to statistics published by NZ Winegrowers.  It is interesting that the ratio of sales to production has been far worse earlier in the decade than in the last 2-3 years, although obviously that was not in a global market quite like that of the present. (I have presented the ratio both in terms of same year sales and also year ahead sales – when, of course, much of a given year’s wine will actually be sold, and especially so for sauvignon blanc).

Interestingly, while there were prominent sceptics several years ago regarding how difficult it would be to sell the excess stock levels early in the decade (2003/2004), those levels pale in comparison to current levels -especially when the proportion of bulk sales is built into the equation.

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Export Value (millions of NZ$ FOB) 168.6 198.1 246.4 281.9 302.6 434.9 512.4 698.3 797.8 991.7
Export Value/litre NZ$ 8.78 10.32 10.71 10.40 9.73 8.46 8.87 9.19 9.00 8.81
in US dollars 4.42 4.38 4.62 5.43 6.11 5.89 5.93 6.31 6.92 5.34
in UK pounds 2.78 3.02 3.20 3.42 3.51 3.17 3.34 3.26 3.45 3.31
Increase/decrease % NZ dollars   17.5% 3.8% -2.9% -6.5% -13.0% 4.8% 3.6% -2.0% -2.2%
in US dollars   -0.9% 5.4% 17.5% 12.7% -3.7% 0.7% 6.4% 9.7% -22.8%
in UK pounds   8.8% 6.0% 6.8% 2.8% -9.8% 5.3% -2.3% 6.0% -4.1%

 

Despite the not insignificant volumes of bulk wine sales before June 2009, it must be acknowledged that the proportionate rate has increased and so average pricing fallen in the period since.

A quick glance at the December export data confirms that the rate of annual volume growth is approaching 30% over June 2009 levels, although total export values are only up 10% in NZ$ terms.

However, taking a step back and assuming for the sake of analysis that the anecdotally reported amount of bulk wine is 25% of total sales volumes, then if it is assumed that bulk wine sells for the equivalent of US$2/litre (as reported for some volume sales in Asia) it implies that the per litre value of bottled wine has actually risen over 10% in NZ$ terms, but fallen slightly (9%) in US$.  Switching this analysis the other way around, if NZ bottled wine leaves the shores at the same price as it did 12 months before it means that 25% bulk wine is averaging prices closer to US$3.70/litre or NZ$6.15.

Is this too good to be true? Or are the assumptions wrong?

I suspect that the answer is a combination of three factors: (1) the prices of NZ bottled wine have held up relatively well, assisted by an improved quality mix (including more pinot noir and higher value red wine, for example); (2) some of the bulk container product has actually been higher quality product being shipped for bottling and labelling elsewhere to reduce carbon footprint; so that (3) the actual “bulk” wine exports are smaller than reported.

This is not as bad an outcome as might be otherwise interpreted simply on the face of the data, and I am not ignoring the fact that the backward looking stats will get worse before they get better – such is the “lag” built into rolling period numbers.

In fact, if current sales volumes are maintained, New Zealand will sell more wine (approx 206 mil litres) than it produces in the year to June 2010 (estimating total production between 180 to 200 mil litres), the first time since 2003; the level of stocks as a ratio to export volumes will also drop to its lowest level since 2003. 

This raises the question whether bulk sales should actually be a more permanent feature of the marketplace.  All of the other major wine producing nations export bulk wine.  There has long been an active market for surplus wine between wineries within New Zealand.

Of course it will be argued, with some justification, that New Zealand is a small wine producer and cannot achieve the economies of scale that many other countries possess.  While this is true of most NZ wine production, there are grounds to argue otherwise with regards to sauvignon blanc.  Our production is larger than so called efficient competitors such as Chile and South Africa (and our yields have often been higher), our vineyard management costs much closer (partly owing to much higher mechanisation, offsetting cheaper labour) to the supposedly cheap competitors, and our processing costs not so much greater as to completely overwhelm the other factors.

The real question is whether we want to compete, even if it means marketing our bulk wine as being a cut above other countries’ bulk wine.

Since getting true supply/demand balance “right” is next to impossible, maybe New Zealand should consider that there is a place for developing markets for bulk wine into areas where the product is not carrying the NZ Brand message (with risk of consequent damage).  This at least may help keep our industry-wide production scale more competitive and help to cushion the risk of margin squeeze on bottled wine exports in future.

The Varietal Exposure

New Zealand does far less than Australia to explore alternative varieties and to try and find out if there are new varieties that we could find a starring role for.  We seem happy to define our strengths as being those things we have done before, not what could be done in future.

Is sauvignon blanc just a fashion story that could fall over tomorrow and leave us even more exposed?  The answer is probably a bit yes and a bit no.  Whenever sales of a particular style of wine take off dramatically over a short period of time, it would be foolish not to assume that fashion is a big factor.  There are, however, other trends going on.

One of the issues New Zealand faces is the fact that the vast majority of our total wine sales are to English-speaking countries and cultures.  There is a sameness about consumers in these markets that stands at odds with consumers in different parts of Europe, for example.

One of these factors is that white wine makes up very roughly a little over half of all wine sold in these countries and that three grape varieties completely dominate consumption of varietal labelled white wine: chardonnay, sauvignon blanc and pinot gris.  Riesling and other varieties are typically a long way back.  There is an increasing trend for broader market consumer fans of one of the three to express dislike of the other two, resulting in a sort of three way polarisation of taste.  In the English-speaking world a large number of consumers identify themselves as chardonnay or sauvignon blanc or pinot gris/grigio drinkers and the degree of interchangeability is falling.

This probably means that if New Zealand can produce and market all three varieties in the face of competition from other producers, there should be a reasonable expectation of holding our own in all volume terms. 

This does not mean that we should not continue to explore alternatives.  The current big three whites haven’t always been so, and will not always be either.

Regulation

“Be careful what you wish for, as you may well receive it” (Anon., proverb)

The last time any industry should consider regulation is as a corrective measure after that industry has experienced problems.  It is like another well known proverb, that regarding the subject of “closing the stable door”.  Were regulation desirable, it might have had an effect if it were enacted three years ago, but not now.

The very fact that producers in overseas countries with strong wine industry regulation make no secret of the fact that they envy our lack of similar regulation, and the freedoms and flexibility that go with not being regulated, ought to be the single most conclusive reason for not doing the same thing.

However, experience with regulatory impacts on industries in general, and on the wine industry internationally in particular, suggests other reasons for extreme caution.  Regulation acts as a form of safety blanket, but has a number of important consequences.  Regulation most often serves to protect the interests of the biggest existing players.  It makes it harder for others to join them.  In general it results in a reduction of competitive pressures and so would rarely be regarded as a good thing for consumers.  It tends instead to make life easier for regulated producers, reducing their risks and tending to result in lazy and inefficient businesses.

These are, of course, generalisations and would never apply to all producers.  However, they can be defended based on the experience of comparable wine producers such as those of Europe.   

There are also some significant practical issues raised by the suggestion of regulation.  What would actually be regulated, and how, are both serious concerns.  Yield limits in other countries are often a joke, or else produce the wrong outcomes – a quality producer with well balanced vines could be forced to drop large volumes of grapes one year, while the sloppy next door neighbour comes in just under the limit and sell its entire production of under-ripe, rot infected, lower quality wine.  Even within Marlborough, different vineyards or sub-districts have historically been cropped at different yields for different price points.  Access to water makes a substantial difference alone.

Then again, should the same yield limits be promulgated for different varieties?  Some varieties will never produce a quality wine at crop levels even close to the cut down yields of sauvignon blanc this year.  Then again, different varieties will crop at different levels given the different soil types and climates of different regions.  It’s not just that one size won’t fit all nationally, but one size won’t fit all even for a single variety in a single region.  In Europe the individual regions tend to make the key decisions for their own members – so the idea that a Hawke’s Bay or Central Otago representative body would make decisions governing all production within their respective regions should give hints as to the nature of the disputes (or open civil war) that could result from competition between different interest groups.

The more serious issue is the loss of future flexibility, such that if New Zealand is exposed to the risk sauvignon blanc is a global fashion that might wear off, the Muller Thurgau of the 21st century, regulation will result in our being less able to change.  Regulation severely handicaps adaptability – it is anathema to industry evolution.  It is ironic that in parts of France, and especially in Italy, it is the regulations that have needed to be changed to adapt to the fact that quality producers have repeatedly considered themselves forced to opt out of the protections that go with regulatory compliance.

Of course, the very fact that total production is down this year, despite as much as 2000 additional hectares coming into production, suggests that despite the disaster that was 2008, when greed was the defining factor in over-production of often poor quality sauvignon blanc wine (triggering a domino effect onto other sections of the industry), self-regulation has not exactly been a failure since.

The role of Pinot Gris as a growth product to complement sauvignon blanc and pinot noir has been the subject of much recent discussion.  It is reported that winemakers seem to loath handling the grape, but consumers can’t get enough.

Globally, pinot gris seems to have been touched to some degree by the magic associated with the word “pinot”.  But not without its own grey clouds.

Under the guise of pinot grigio, primarily from Italy, pinot gris is the largest selling imported varietal wine in the United States.   However, pinot gris has already experienced multiple periods of (sometimes brief) fashionable popularity.  In the broader sense pinot gris suffers from twin identity issues: like pinot noir, there are only a limited number of countries that grow it successfully and, more importantly, it suffers from a significant lack of a global benchmark.

In fact, there are several different regions of the world that tend to be identified with pinot gris/grigio in the minds of winemakers and of the consumer – and rarely do these seem to align.

Within the winemaking community, when an effort is made with pinot gris it seems that the benchmark in the past has tended to be that of Alsace in France, where pinot gris (until quite recently often labelled as “Tokay d’Alsace”) tends to be made primarily as a fuller, rich, mostly but not always dry style, sometimes with an unctuous or oily texture not unlike many viogniers.  However, it must be said that this style has never become especially popular with consumers and Alsatian wines in general (including its rieslings, gewürztraminers and pinot blancs) have experienced declining sales during recent years – especially in the Anglophone countries that are also New Zealand’s major customers.

The largest producer in the world today is Italy, primarily in its northern regions, where the wines are labelled pinot grigio.  The vast majority of pinot grigio is made in a relatively light, usually dry style, not notably fragrant but suited to consumption with food.  Although demonstrably popular with consumers, especially in Europe and the USA, this style is often viewed with disdain by New World winemakers.

The third main European style is that of Germany, where the wines are commonly labelled under the local names for the variety: rulander and grauburgunder. German rulander may be dry or offdry through to sweet and typically has slightly higher acidity than the Alsatian and Italian pinot gris wines; and it has a flavour and palate profile arguably falling somewhere between those two styles.  This style is not widely exported, having little international profile, and it is largely consumed in the German domestic market.  Within Germany rulander is, after all, very much a minor grape variety.

The most successful New World producer to date has been Oregon in the USA.  Oregon Pinot Gris wines also tend to vary between mimicking the Alsatian and Italian styles depending on the producer, but are more likely to be labelled as “gris” than as “grigio”, and this template has been largely adopted elsewhere outside of Europe.

New Zealand plantings are still relatively small in the context of the wider industry, but have grown fast as a consequence of its increasingly disproportionate importance.  Sales have increased strongly, exports have followed, and many producers have struggled to keep up with demand so that grape prices have been relatively robust until only recently (when downward price pressure on other varieties has unavoidably affected pinot gris).  It remains to be seen what impact later plantings will start to have.

It is only recently that exports of pinot gris wines from New Zealand have started to threaten domestic sales – only five years ago sales were almost completely domestic.  The largest export market is Australia, where almost as much is sold as in the 2nd and 3rd largest markets, the USA and United Kingdom, combined.  It is not clear if the widely commented on stylistic divergence of New Zealand pinot gris wines contributed to the initial slow export uptake, although this now appears less of an issue.  Most New Zealand pinot gris tends to range from just off-dry to medium sweetness, but even within this band there is wide stylistic variance.  While there are some producers aiming to emulate the dry fuller-bodied Alsatian style, others use pinot grigio labelling and a nod to the Italian style.  In between, and especially from the more southerly regions, there may actually be a closer affinity to the German rulander styles.

The export growth of the last 2-3 years definitely suggests potential for New Zealand pinot gris, notwithstanding the stylistic issues.  There are still only a few countries in the world that possess the climate conditions suited to the grape – notwithstanding the fact that it is grown in Northern Europe and yet also in Italy.  This is hardly surprising given its pinot noir genetic origins.  Even so it is grown from the very north of the country to the very south (and in fact the regions that grow more pinot gris than sauvignon blanc are Northland, Auckland, Gisborne and Central Otago).

Interestingly, plantings in several of the Southern Hemisphere producers that are perceived as competition for New Zealand in several grape varieties, such as Chile, South Africa and Argentina, are relatively small.  Australia grows twice as much pinot gris as New Zealand, most grown either in cooler southern regions (Victoria, Tasmania) or else picked early in the hot irrigated regions.

World Pinot Gris Hectares Year % Share
Argentina 347 2008 0.7%
Australia 2835 2008 5.7%
Austria 293 2006 0.6%
Canada 230 2006 0.5%
France 2360 2008 4.7%
Germany 4413 2007 8.8%
Italy*1 11600 2007 23.2%
New Zealand 1460 2009 2.9%
USA – California 11958 2008 24.0%
USA – Oregon 2600 recent 5.2%
USA – Washington 500 recent 1.0%
Other*2 11300 various 22.6%
       
Total World 49896    

*1  It has been estimated by Attilio Scienza that based on production and sales data Italian plantings may actually be closer to 14,000 ha

*2  Estimate – Includes unverified data regarding plantings in Eastern Europe (esp. Moldova, Romania, Hungary, Slovenia, Ukraine) as well as minor producers

The Market Question

So the real question is that of the market for pinot gris, both in New Zealand and internationally.

In my opinion a quite complex (and concerning) issue is that of the “palate polarisation” of the mass white wine drinking public. This is the situation where a large number of sauvignon drinkers profess dislike for pinot gris and chardonnay, chardonnay drinkers profess dislike for sauvignon blanc and pinot gris, and where pinot gris drinkers profess dislike for chardonnay and sauvignon blanc. These preferences can seem even to verge on snobbery.

Whether or not they actually do becomes increasingly moot.  It could be argued that there are similar issues within red wines, but I suspect these are far more limited given the wider range of red varietal and blended wines readily available.  The same cannot be said for white wines in much of the New World, with alternatives such as the aromatics and Rhone varietals both either less available or terminally underappreciated by the majority of people who want to drink the “big three”. (As I have posited in previous posts, there is a sense that riesling, for example, is more likely to be liked or appreciated by a pinot noir drinker than by most other white wine drinkers).

The absence of alternatives looms as a huge problem if palate boredom leads to changes in fashion, because socially acceptable fashion drinking is very much the demand driver here.

I have had the chance to reflect on a few more notions flowing from Matthew Jukes and Tyson Stelzer’s 3rd Great New Zealand Pinot Noir Classification.

In particular I have been pondering whether a classification-type process (and it does not need to be this one – in fact I suspect that other wine writers, some of whom have already taken steps such as classic wine classifications, may be tempted to reconstruct their approaches to do something similar – in time one or other will win out as the most respected and de facto recognised authority) is part of the answer to the value for money discussion highlighted by Oz Clarke and others in recent times.

Adam Lechmere’s article on decanter.com regarding the Classification (http://www.decanter.com/news/295122.html?aff=rss) is worth reading and, for me, helped to add a little context to the process followed by the Classification authors (including the fact the classification is based on “estate” and not reserve or single vineyard wines, plus reference to “commercial” releases) and consequently to these thoughts.

 (It is worth asking the questions whether the best equipped reviewers to handle a classification process will be local or overseas tasters/writers; or whether it should be some sort of jury/panel rather than individuals in order to remove personal taste factors?. My view tends to be that there are strong arguments each way, for each question, and that it may just depend more on the nature of the classification – the answer could, for example, be different for a classification of the top individual wines, than for a general rating of producers/estate wines.)

Ultimately I think the key is to be able to calibrate concepts of top New Zealand pinot noir alongside those of competing products, and the price points attracted by those competitors.  New Zealand can retain its reputation as a good value for money pinot noir producer and yet still raise its average price per bottle in a global sense as producers seek to move up the classification path, in so doing justifying sales by comparison to their competitors.

The volume of Pinot Noir that New Zealand produces is clearly not as large as the major producers elsewhere (especially France and California), but is still relatively large among “the rest”.

Reputation is another factor.  One thing New Zealand holds back in its Pinot Noir marketing is a simple statistic:  in how many other countries in the world (and certainly of those making enough to export at least as much as they drink) are 57% of all red wine grape plantings made up of pinot noir for table wine (the reported figure is 64% for all pinot noir)?  The state of Oregon, certainly, but not even 50% in Canada, Germany, Switzerland or Austria, for example.

Finally, another question: how important is New Zealand’s reputation for making a certain style of pinot noir relevant to helping it establish its reputation among aromatic whites, as distinct from the “sauvignon blanc” effect?  The reason for asking this is that, although New Zealand sauvignon blanc’s reputation is built on its “aromatics on steroids” image, that has probably helped pinot gris but not really rubbed off on exports of riesling, gewürztraminer, etc.  I would just like to pose the question whether the issue here is the nature of the drinkers of some of these varieties, and whether the reputation of some of these varieties internationally is such that they may appeal more as whites for red wine (including pinot) drinkers, who would rarely contemplate a glass of sauvignon blanc, rather than as wines for “swinging” white wine drinkers?

I certainly don’t know the answer!

Recent offers for fruit from the current year’s vintage at discounted prices for processing into bulk wine (but with the promise of upside if the bulk wine can be sold above minimum price parameters), coming on top of data showing the average price per litre of exports falling, has put the spotlight back on New Zealand’s practices around the export of surplus wine. 

It is no secret that a large volume of New Zealand wine has been leaving our shores in bulk shipping containers.  It is therefore also no secret – in fact it has been recorded in the published statistics – that the average export price for New Zealand wine has fallen – as it must do since the lower productions costs in the absence of packaging and labelling mean that any seller would be expecting a lower price, regardless of whether the wine is qualitatively inferior or not.

Of course given the lower cost of production of bulk wine shipped in plastic bladders, let alone the fact that such wine is not carrying branding or other value added components, it is logical to expect a decline in value per litre of exports – but then again this is hardly comparing apples with apples against past prices for exports of bottled wine.

However, on looking more closely at the data, the fact that the decline has not been greater actually suggests that overall pricing has held up far better than expected.

  1. Over a long period the average price has been maintained as high as it has given the overall level of growth; and
  2. Even in the short-term analysis, the rate of decline of the average export price/litre has been far less than might have been expected given the anecdotal evidence of the volume of wine exported in plastic bladders.

Now 2010 was supposed to be the vintage when voluntary yield cuts pulled production levels down, closer to balance with demand.  So what has happened to render fruit discounting still necessary?

Let me explain using the data.

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Production (mil litres) 60.2 53.3 89.0 55.0 119.2 102.0 133.2 147.6 205.2 205.2
Domestic Sales of NZ Wine (mil litres) 41.3 36.2 32.6 35.3 35.5 45.0 50.0 51.0 46.5 59.7
Export Volume (mil litres) 19.2 19.2 23.0 27.1 31.1 51.4 57.8 76.0 88.6 112.6
Total Sales Volume (mil litres) 60.5 55.4 55.6 62.4 66.6 96.4 107.8 127.0 135.1 172.3
Domestic % 68.3% 65.3% 58.6% 56.6% 53.3% 46.7% 46.4% 40.2% 34.4% 34.6%
Export % 31.7% 34.7% 41.4% 43.4% 46.7% 53.3% 53.6% 59.8% 65.6% 65.4%
Sales/Production ratio 1.005 1.039 0.625 1.135 0.559 0.945 0.809 0.860 0.658 0.840
Sales/Production prior vintage   0.920 1.043 0.701 1.211 0.809 1.057 0.953 0.915 0.840
Aggregate incremental stocks over 1999 levels (mil litres)* -0.3 -2.4 31 23.6 76.2 81.8 107.2 127.8 197.9 230.8
Incremental stocks/Export volume 0.0 -0.1 1.3 0.9 2.5 1.6 1.9 1.7 2.2 2.0

*does not take account of volumes lost/ullage/dumped/samples etc)

Analysis

This table shows the history of production and sales for the last 10 years according to statistics published by NZ Winegrowers.  It is interesting that the ratio of sales to production has been far worse earlier in the decade than in the last 2-3 years, although obviously that was not in a global market quite like that of the present. (I have presented the ratio both in terms of same year sales and also year ahead sales – when, of course, much of a given year’s wine will actually be sold, for sauvignon blanc at least).

However, while I recall reading some extremely sceptical opinions regarding the difficulty of selling the excess stock levels early in the decade (2003/2004), those levels pale in comparison to current levels -especially when the proportion of bulk sales is built into the equation.

Year to 30 June 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
                     
Export Value (millions of NZ$ FOB) 168.6 198.1 246.4 281.9 302.6 434.9 512.4 698.3 797.8 991.7
Export Value/litre NZ$ 8.78 10.32 10.71 10.40 9.73 8.46 8.87 9.19 9.00 8.81
in US dollars 4.42 4.38 4.62 5.43 6.11 5.89 5.93 6.31 6.92 5.34
in UK pounds 2.78 3.02 3.20 3.42 3.51 3.17 3.34 3.26 3.45 3.31
                     
Increase/decrease % NZ dollars   17.5% 3.8% -2.9% -6.5% -13.0% 4.8% 3.6% -2.0% -2.2%
in US dollars   -0.9% 5.4% 17.5% 12.7% -3.7% 0.7% 6.4% 9.7% -22.8%
in UK pounds   8.8% 6.0% 6.8% 2.8% -9.8% 5.3% -2.3% 6.0% -4.1%

 

Despite the not insignificant volumes of bulk wine sales before June 2009, it must be acknowledged that the proportionate rate has increased and so average pricing fallen in the period since.

This is visible already by updating the 12 month change data to the last 2 years to September, rather than June:

Year to 30 June 2008 2009
     
Export Value (millions of NZ$ FOB) 837.6 1004.5
Export Value/litre 9.09 8.36
in US dollars 6.91 4.99
in UK pounds 3.51 3.21
     
Increase/decrease % NZ dollars   -8.0%
in US dollars   -27.9%
in UK pounds   -8.4%

 

Of course the 12 months of data hides much steeper declines per litre (26%, 42%, 26% respectively) for the September quarter on the same period a year earlier.

A quick glance at the December export data shows that the rate of annual volume growth is approaching 30% over June 2009 levels, although total values are only up 10% in NZ$ terms.

However, taking a step back and assuming for the sake of analysis that the anecdotally reported amount of bulk wine is 25% of total sales volumes, then if it is assumed that bulk wine sells for the equivalent of US$2/litre (as reported for some volume sales in Asia) it implies that the per litre value of bottled wine has actually risen over 10% in NZ$ terms, but fallen slightly (9%) in US$.  Switching this analysis the other way around, if NZ bottled wine leaves the shores at the same price as it did 12 months before it means that the 25% bulk wine is averaging prices closer to US$3.70/litre or NZ$6.15.

Is this too good to be true? Or are the assumptions wrong?

I suspect that the answer is a combination of three factors: (1) the prices of NZ bottled wine have held up relatively well, assisted by an improved quality mix (including more pinot noir and higher value red wine, for example); (2) some of the bulk container product has actually been higher quality product being shipped for bottling and labelling elsewhere to reduce carbon footprint; so that (3) the actual “bulk” wine exports are smaller than reported.

This is not as bad an outcome as might be otherwise interpreted simply on the face of the data, and I am not ignoring the fact that the backward looking stats will get worse before they get better – such is the “lag” built into rolling period numbers.

In fact, if current sales volumes are maintained, New Zealand will sell more wine (approx 206 mil litres) than it produces in the year to June 2010 (estimating total production between 180 to 200 mil litres), the first time since 2003; the level of stocks as a ratio to export volumes will also drop to its lowest level since 2003. 

This raises the question whether bulk sales should actually be a more permanent feature of the marketplace.  All of the other major wine producing nations export bulk wine.  There has long been an active market for surplus wine between wineries within New Zealand.

Of course it will be argued, with some justification, that New Zealand is a small wine producer and cannot achieve the economies of scale that many other countries possess.  While this is true of most NZ wine production, I do not agree with regards to sauvignon blanc.  Our production is larger than than so called efficient competitors such as Chile and South Africa (and our yields are often higher), our vineyard management costs much closer (partly owing to much higher mechanisation, offsetting cheaper labour) to the supposedly cheap competitors, and our processing costs not so much greater as to completely overwhelm the other factors.

The real question is whether we want to compete, even if it means marketing our bulk wine as being a cut above other countries’ bulk wine.

Since getting true supply/demand balance “right” is next to impossible, maybe New Zealand should consider that there is a place for developing markets for bulk wine into areas where the product is not carrying the NZ Brand message (with risk of consequent damage).  This at least may help keep our industry-wide production scale more competitive and help to cushion the risk of margin squeeze on bottled wine exports in future.

So should fruit discounting still be such a dominant trend?  More than anything it probably reflects:

a)      Fear

b)      The fact that, even if the surplus is now shrinking in proportion to sales , the fact that sales growth has slowed somewhat – at least at higher prices – puts more financial pressure on moving stocks quickly; and

c)       The clout of the bigger companies as the dominant buyers

I suspect that all three of these factors will diminish over the next couple of years.  If yields stay down, prices will start to rise.  If yields rise too fast, all bets will be off.