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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What was claimed?

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

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

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

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

The Report Conclusions

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

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

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

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

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

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

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

The two main flaws in the report are:

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

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

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

Behind the Actual Announcement 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lindauer – A Case Study?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How has this happened?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Financial Strength of the NZ Wine Industry

 According to various commentators the New Zealand wine industry is presently either strongly placed, a basket case, or somewhere in between.

There are problems and this is acknowledged by all.  However, compared with some of our competitors a lot more seems to be going right, rather than wrong.  Yes, we have an oversupply situation – but again, for better or for worse we seem to have developed some mechanisms that we did not have in the past to be able to remove some of the excess from the system.

Generalisation opens the way for misunderstanding of the situation, and misunderstanding, or diagnosis based on erroneous assumptions, can give rise to incorrect prescriptions. 

So just as some wine companies have experienced falling sales or relied on discounting to move wine, other companies are thriving with sales growing strongly.  This is a healthy and normal situation experienced by most industries – the rise of new, innovative or fleet-footed businesses who out-compete older companies.

The same goes for the balance sheets of the industry.  For every company making losses and being nursed by its bank, there is another that has no debt or at least a significantly stronger financial position.

It is also essential to bear in mind that in an industry where family proprietors play such a significant role, the ostensible balance sheet of the wine business only tells part of the story.  What it misses is other “personal” indebtedness for some, as well as the capital resources (and cash flows) of those that have other businesses that are often used to provide additional support to the wine venture.

Aggregate or cross-section type survey analyses such as that undertaken by Deloitte, while extremely useful in the context of what they say about profitability, nevertheless do not discriminate between the weak and the strong.  What they present is a snap shot that looks neither as bad as some, but much less healthy than others.

Looking at this from the perspective of the problems faced by the industry, one clue as to a solution presents itself: utilising the strength of the strong for the benefit of all (including themselves).

Anatomy of Wine Business “Failures”

You know things are tough when industry chatter revolves around subjects such as who will be the next to fall into receivership or liquidation.

Often the unspoken element of the conversation is the thought “there but for the grace of god…”

Usually when someone writes an “anatomy” of business “failures” they are looking for a set or sequence of common features.  In the present NZ wine case I am unconvinced that there is much commonality at all.

Why do some businesses “fail”? Is it really “failure”? What are the characteristics of businesses that do not survive – to what extent is this the result of a failed business model, or do other factors have a bearing? 

In truth the answer is complex.  Why firms fail is complex indeed, but why some firms survive can be even more complex.  In some cases the difference between success and failure is a matter of management.  In other cases it is hard to discern beyond the role played by luck.  One very common factor is the notorious “domino” effect – where an otherwise healthy business is rendered insolvent by the actions or the failure of other counter-parties such as large customers. (A number of NZ wineries suffered significant losses, and often lingering effects, from the inability of overseas importers to settle on transactions back at the height of the international liquidity freeze and recession period from late 2007 to early 2009).

As much as the media loves to be able to point a finger of blame at “failures”, sometimes it is really highly unfair to do so.

Timing is another factor that has affected the health of several NZ wine companies – for example buying assets, and taking on debt, just before the credit crunch and recession struck.  Again it is easy to judge – why would anyone be so stupid to pay the prices that were being paid just 2-3 years ago?  Then again, if you were convinced that you need to secure sources of supply for growing orders and unsure whether land prices were going to continue to rise (as many thought they would, applying the logic of a looming shortage of suitable land for planting in Marlborough), the logic of buying was not necessarily ridiculous.  In other cases the debts were taken on because of partnerships (or marriages) ending, new generations buying out old, and other factors that happen all the time regardless of economic conditions.

The Issue of Capital

Wine growing and making is what is often referred to as a capital intensive industry.  It may require a significant value of investment, both in terms of equity and of debt or borrowed capital to fund any wine business.  In this it arguably shares more in common with other businesses such as electricity, roads and water – all extremely capital intensive, and all commonly referred to as “long-term” investments.  Owing to the level of capital investment, the time taken to earn an adequate return can be far longer than for a manufacturer, retailer or service business, for example.

This leads to the problem of the present day.  What the New Zealand wine industry most lacks today, both from the perspective of solving existing problems and also of continuing growth, is capital.  The industry lacks adequate capital resources.

So why would an investor invest (or a banker lend) to a wine business today.  The fact that prices and therefore earnings today are lower than a few years ago means that, even though asset values are also lower, returns are down.  Throw more capital at the problem and the returns will by definition be stretched over a bigger capital base and, possibly, unattractive for the undoubted risks out there right now.

Of course there are exceptions – businesses that are really flying and that ought to make excellent investments.  Ironically, the success of these highlights how much worse things might be for the rest.

The crux of the matter is that shortage of capital means a reduction of opportunity costs: a lack of options resulting in only a limited array of actions that managers are able to take.  This is the handicap factor of not being able to do something now, and of having to wait – lack of capital limits the scope of options to improve the position of a business. 

One way of improving a business might simply be to retire indebtedness.  However, to do so will usually mean either injecting new equity capital or selling assets.  In the present environment, neither of these may be either attractive or even possible. (Some businesses that have raised additional capital now find a need for more, and at the same time are learning that they only had the one chance but wasted it).

One Way Forward – Utilising the Strength of the Strong

One way of defining business strength is the abundance of options.  Strong businesses have the most choices available to them, and those choices have implicit value.  Businesses without choices, without options, lack value.

The options that are available may be highly varied.

Businesses that are growing strongly may have a range of market opportunities available to them and need instead to choose how to ration their product between such opportunities. (Arguably this was how the wider New Zealand wine industry looked just 5 years ago).  They may also have more choices about where or how to procure more product.

Businesses with strong balance sheets, with plenty of assets but low levels of debt are most likely also the most profitable businesses in the industry today.  Some have inherited their strength through the ownership of properties bought for much lower prices a long time ago.  Others have simply been conservative financial managers and have never allowed themselves to become exposed to much risk – firms that might have been thought to have lagged behind the market a few years ago but are now sitting pretty!  It matters not how they acquired their strength, only that they are strongly placed.

Other businesses have strength in other forms – access to cash or to capital from other sources, captive local markets, access to particular expertise, exceptional reputations, or exceptional market contacts are all examples.  Each example has the potential to create those options, those choices, that add value.

The future of the whole industry is in the hands of those with options.

It could be that one source for future industry enhancement is by recognising the brands or products that are wanted by the rest of the world at sufficiently profitable prices, and galvanising industry support behind those with these brands or products to meet demand.  To express this in an extremely general sort of way, the present owners of the brands or products benefit from the profits from growth; other parts of the industry become suppliers at an economically justifiable price that ensures the industry-wide margin is enhanced.

It could also be that many owners of businesses with balance sheet strength or with capital resources available to them that are otherwise in short supply, are sufficiently motivated to use their strength to acquire or to merge with other businesses.  

There are a number of consequences of combining a strong and a weak business, hypothesising for the time being that both are similar in size (whether on account of land, crush size, winery capacity, volumes sold or sales revenues) and hypothesising also that no new equity or debt is raised. The odds are that the debt level of the combined business will be at levels that will not worry the banker and are likely to be more comfortably covered by the combined business profitability. There may well be cost savings to enhance this position.  There may well be more choices with regard to products and as to how grapes are processed then channelled to market.

In short the business may simply be more attractive from an external point of view than the sum of the two to begin with.

Then there is the other big issue: both sets of shareholders will have stakes, only the strong will definitely have the bigger stake (and the big question will be by how much).  Typically this is where two main problems arise.  The first is the fact that no one person (or family or shareholder, etc) has complete control any longer – this is probably a good thing as there are very few people in the industry who are equally strong at all elements of the winegrowing process from growing grapes, to winemaking, to marketing, to financial management; the input of more expertise may well be an unforeseen positive. The second is the difficulty the weaker business has in accepting that they do not have comparable value to the business that otherwise appears to be the same size, plus the equal difficulty in communicating the fact that by merging with someone stronger they may actually end up with greater “wealth” than they had before.

Equally, many owners of very strong businesses are averse to the idea of changing from the tightly controlled, comfortable world and comfortable business model that has served them well through a tough economic period.  This is a readily understandable response.  If, however, the owners of such businesses are thinking to a future with retirement or generational succession, they may well be missing out on opportunities that are very available to them with suitable care and thought.

The strong are not going to buy out the rest of the industry.  The types of merger or alliance discussed here will not apply everywhere or to everyone.  But if people care about the future of the industry and are aware of the limitations imposed when everyone sits and does nothing, when the strong and the weak are merely possums on different sides of the same road at night, then the message here is that industry people should stop and think rather than simply rejecting solutions.

The NZ wine industry is short of capital.  Without better employing the capital that we already have, as an industry, the recovery will be longer and riskier for everyone.

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

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

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

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

Moreover, everywhere there were reports of small allocations. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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.