The giddy, grape leap forward

It's a dizzying time for the wine industry as great tracts of land are turned over to the vine. SIMON HENDERY reports.

Vineyard sprawl - an investment-related condition afflicting landscapes across the country has hit the sleepy backwaters of the Wairarapa.

Six years ago "you could hardly give away" sections in Martinborough or Greytown, says local Harcourts real estate agent Donna Evans.

Now, in the heart of a region with grape expectations, an empty quarter acre Martinborough section worth $9000 or $10,000 six years ago has rocketed in value to between $40,000 and $50,000.

Wellingtonians, who 10 years ago would have sniffed at the thought of trekking over the Rimutakas, now spend their weekends supping flat whites at Martinborough cafes.

"Greytown and Martinborough quadruple in the weekend. It's a playground for Wellington people," says Donna Evans.

"They come over, stay in the little cottages, do the cafe scene, do the wine tours, buy their wine and head back home again."

Property prices have doubled in the past three years, she says.

Prime grape-growing land is selling for $25,000 to $30,000 an acre.

"The bigger vineyards certainly try and gobble it up when little bits come on the market, just to add to what they've got."

Waiheke Island, Hawkes Bay, Marlborough and Otago are experiencing a similar vino-voracity phenomenon.

One farmer in Marlborough the country's largest grape-growing region says he planted his land in vines this year because he believes returns will be at least $20,000 a hectare compared with the $1500 he was getting from sheep or cattle.

What's driving this agricultural version of the dotcom hype? In short, corporate thirst for wine.

As beer consumption drops, brewers such as Lion Nathan are spending a packet getting into what they see as a fresh growth opportunity, the premium-wine business.

The company spent $A229 million ($279 million) this year buying South Australia's Petaluma wine business and has spent tens of millions more to secure a controlling interest in Adelaide-based Banksia Wines.

Lion's initial attempt to gets its claws into wine failed when New Zealand's largest winemaker, Montana, responsible for almost half the country's wine exports was snatched from its clutches by the world's second largest liquor company, Allied Domecq.

Allied is on a similar wine trail to Lion, having spent about £1.2 billion ($4.08 billion) in the past year on wine-company acquisitions.

Australia's largest brewer, Foster's, has also diversified into wine. In August last year, it paid $A2.9 billion for California winemaker Beringer, a purchase that has tipped the majority of the group's assets into wine but left its beer unit generating the majority of earnings.

As if that wasn't a bold enough change of direction, Foster's says it is likely to spend another $A1 billion within the next year on another wine acquisition in the US.

While the wisdom of established brewers diversifying into wine has not been criticised as the froth goes out of their maturing beer businesses, analysts have criticised the price companies such as Lion have been prepared to pay for a foothold in the wine business.

Lion chief Gordon Cairns has become a dab hand at trying to convince analysts of the wisdom of the company's strategy, and that the multiples Lion paid Petaluma and Banksia are not excessive.

Smaller winemakers are also clambering over themselves to expand.

Vineyard area in Marlborough, for example, is expected to increase by 50 per cent over the next three years.

The country's second-largest winemaker, Nobilo Wine Group, said in August that it would spend up to $40 million over the next few years to achieve a fourfold increase in production. The company intends to boost exports from $20 million to $50 million by 2005.

West Auckland-based Babich Wines last month bought new land holdings in Hawkes Bay and Marlborough that Joe Babich, managing director of the family-owned business, says will help the winery achieve its goal of doubling output by 2006.

"We are making significant inroads in many international markets and their demand, combined with strong local sales, is greater than our ability to supply," says Mr Babich.

"Whereas 500 or 1000 cases of a wine might meet local market needs, that is not enough to even get a listing for many overseas statistics."

Babich Wines has been making and selling wine for more than 80 years and has well-established export networks in about 20 countries and a strong brand.

But are others with less robust backgrounds jumping blindly into the dizzying wine hype?

The Wine Institute's annual report for 2000 painted a rosy picture. Exports had grown by a third during the year and it was predicted that overseas sales could double by 2005.

But last year's report, released in October, was a more sobering read.

It suggested that although a shortage of grapes in the past year had frustrated the market, planting more vines caused as many problems as it solved.

Last year's vintage was smaller than expected, leading to a 9.4 per cent drop in domestic sales on the previous year to an estimated 37.4 million litres.

Although the export market grew 17.5 per cent, the increase was mainly the result of a fall in the dollar. Product shortages meant the volume of exports grew 0.4 per cent, to 19.25 million litres.

The institute's report recorded the continuing rise in vineyard area, which is expected to exceed 15,000ha by 2004, leading to a substantial rise in grape and wine production.

Institute chairman Peter Hubscher says: "In the past year, wineries have been frustrated by product shortages from the 2000 vintage, and, unfortunately, the 2001 vintage did not resolve this issue for many winemakers.

"Contrasting this, in the future, the industry can expect greatly increased supplies of wine, most of which will need to be marketed and sold in export markets."

Mr Hubscher says capitalising on the opportunities presented by the increased supply will require significantly increased capital, sales and marketing from the industry.

The transition from the present supply shortage to much wider availability could occur within just a vintage or two, the report says.

A similar situation exists in Australia, where grape production and wine planting are at record levels, sparking fears that small producers will be forced out of business and the country's reputation as a quality wine producer could suffer if bulk wine exporting gets out of hand.

Babich's assistant general manager, David Babich, says a local and international grape glut, and ensuing drop in demand and prices, will put pressure on the industry.

And as wine production increases, many wineries underestimate the cost of processing plant and materials typically four times the cost of growing the grapes.

"The cost of gearing up for the expansion is usually debt funded, so when [the cycle] goes from boom to bust, everyone is geared up for the boom that is happening, and maximising the advantage of it.

"So if it all goes to custard, the income you have relied on and the ease of selling your wine goes away," says Mr Babich.

The best protection was to build strong international sales channels before the bust set in, a process that usually took several years.