New Zealand

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

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

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

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

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

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

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

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

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

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

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

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

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


CBA is the reverse of ABC

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

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

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

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

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

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

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

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

How to Sell New Zealand Chardonnay

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

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

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

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

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

A New Zealand Chardonnay Classification

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

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

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

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

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

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

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

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

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

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

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

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








Marsden Black Rocks



Kumeu River Mates

Man O’ War Valhalla

Villa Maria Ihumatao


Te Whau




Millton Clos de Ste Anne

Kim Crawford SP Tietjens


Montana “O”

Odyssey Iliad Reserve


Spade Oak


TW Reserve


Villa Maria Reserve BF

Hawke’s Bay

Craggy Range Les Beaux Cailloux

Babich Irongate

CJ Pask Declaration


Sacred Hill Riflemans

Church Road TOM

Coopers Creek Swamp Res


Clearview Reserve

Morton Coniglio

Esk Valley Reserve


Te Mata Elston

Ngatarawa Alwyn


Trinity Hill Homage



Villa Maria Waikahu


Ata Rangi Craighall

Dry River

Martinborough Vineyard


Escarpment Kupe

Nga Waka Home Block




Neudorf Moutere



Seresin Reserve

Cloudy Bay

Foxes Island


Dog Point

John Forrest Collection


Fromm Clayvin

Saint Clair Omaka Reserve


Mahi Twin Valleys

Spy Valley Envoy


Staete Land


Villa Maria Reserve


Bell Hill

Pegasus Bay Virtuoso

Black Estate





Central Otago


Felton Road Block 6


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

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

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

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

Regional Chardonnay Notes

Classification Representation (and some additional useful information)



Hectares (2010)

Area Rank

Tonnes (2009)

Area Rank























Hawke’s Bay



































Central Otago







Total NZ








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

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

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


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


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

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

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

Hawke’s Bay

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

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

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


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

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


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


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

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

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

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


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

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

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

Central Otago

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

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

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

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

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

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

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

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

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

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

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

Funding the NZ Wine Equation

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

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

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

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

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

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

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

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

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

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

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

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

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

What does the lack of capital mean?

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 ).

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.