Pressure's not over yet, insiders say

Michael Cooper expects heavy discounting of wine in stores to continue. Photo / Hawke's Bay Today

The wine industry is having its biggest shake-up in 20 years with failures, receiverships, purchases and takeovers. And insiders say it's not over yet.

Wine writer Michael Cooper says the industry is under huge pressure.

"This is the toughest time for the wine industry in New Zealand since the mid-80s when the Government stepped in and pulled up a whole lot of vines," Cooper said.

"Of course we've seen public failures of companies, wineries and specialist grape growers and there's going to be a lot more to come I'd say over the next year or two."

The grape harvest soared 39 per cent in 2008 to 285,000 tonnes, resulting in about a 27-million-litre oversupply and helping to erode wine, grape and land prices.

Delegat's Group this week launched a takeover bid for grape grower Oyster Bay, of which it already owned 54.9 per cent.

Meanwhile, Pernod Ricard New Zealand has agreed to sell Gisborne and Hawkes Bay wine brands and assets to Lion Nathan New Zealand and joint-venture partner Indevin for $88 million, including Lindauer, although it is keeping Brancott Estate (formerly Montana).

"The problem is that no one can predict the weather ... and no one can predict exactly [the] moves in the market place and certainly no one predicted the international recession which had a big impact as well," Cooper said.

Many people entered the industry during about 2000-2005.

"Everything was rosy and you could sell just about anything," he said. "So a lot of those people are heavily indebted and they simply can't pay their mortgage."

No one in 2008 saw the impending international recession or the 39 per cent leap in production so it was understandable that most got caught out, Cooper said.

"Having said that, there are many people who went in with rose-tinted glasses, who had not really planned for anything other than the market being buoyant and being able to sell their wine readily." But the loss of such people "[could] actually produce a more resilient, stronger, more competitive industry".

The harvests last year and this were 285,000 tonnes and 266,000 tonnes respectively.

The average grape price for the 2010 vintage is $1293 a tonne, which may increase slightly but is well down on the $2161 a tonne in 2008.

Cooper said heavy discounting in stores was likely to continue for a couple of years and conceivably longer. The fundamentals of the sector looked good in the long-term, he said, with wines which had distinctive characteristics.

"That means that New Zealand's position as a niche producer of high-quality wine should be secure."

But the price position had slipped, he said. "There was a lot of celebration about the billion-dollar export level being cracked a few months ago, but in reality there's been a 20 per cent drop over the last couple of years in the per-litre price achieved."

Had the prices not dropped the volume goal would not have been achieved. There was argument within the industry that New Zealand had been chasing volume growth while ignoring the fact it had been losing its top-end producer image, Cooper said.

There was a growing feeling within the industry that it was not ambitious enough, "that given our great advantages in terms of climate and the fact we're never going to be a big wine industry by world terms ... we should pitch our sights higher".

New Zealand Winegrowers chief executive Philip Gregan said it was a tough and challenging time for the whole sector.

Many grape growers had a very good year from the bumper 2008 harvest, which put cash-flow pressure on wineries, but with the fall in grape prices growers were as heavily affected as anybody, he said.

"In the current environment, while times are tough for some, there will be opportunities there and it's possible we could see wineries taking advantage of lower vineyard prices."

The balance between supply and demand was on a knife edge.

"A lot depends on how the 2010 wine sells through into the industry, a huge amount obviously depends on whether there are any weather-related events in terms of frosts in the spring period and we've still got a long way to go in that," Gregan said.

"So it's really a little bit too early to tell about what's going to happen I think."

So far few vines had been pulled out - less than 500ha out of a total of 33,428 - "but that doesn't mean that it might not happen".

The earliest date a lot of the pressure would be removed was 2012, Gregan said.

"We've definitely made progress in the past year, the lift in bulk wine prices is indicative of a better demand [and] supply balance, but the earliest we'd see things returning to a more balanced equilibrium would be 2012.

"But obviously a huge amount depends upon how big vintages are."

The basic story about the industry in the medium to long term had not changed and Gregan remained very confident about the future.

Bayleys Marlborough viticultural specialist John Hoare said the company had about 50 Marlborough vineyards for sale, compared with fewer than 20 normally, but buyers were keeping watch.

"Few people are committing, too few."

The price for a producing hectare was $100,000-$150,000, compared with $200,000-$250,000 in 2007.

"I think [the industry] realised that to move on it's got to re-price itself, it's got to re-value itself," Hoare said.

"There's definitely a rationalisation taking place."

Deloitte corporate finance partner Paul Munro said the pressure that was building up a year ago was starting to crystallise with examples of receivership and liquidation.

"The pressure, it would be fair to say, it's pretty intense for the wineries and for the vineyards, the growers, and it's starting to also flow through suppliers and contractors to the industry through the supply chain," Munro said.

Awatere Vineyard Estates, Cape Campbell Wines and Paritua Vineyards are recent examples of receivership in the industry.

Munro said it would continue to be a tough sector for possibly a year or more but there were valid reasons to believe the industry would be re-priced and operators that did not survive would be picked up at a different asset value.

"The losses will fall where they fall, they'll be crystallised but the businesses themselves will largely continue to operate, albeit under a new ownership in many cases," Munro said.

The fundamentals of the industry still looked good and the sector should continue to do well at a re-priced level.

"New Zealand wine is still a premium product," he said.

"As global markets recover and asset values are repriced the New Zealand wine industry should do well."