Smaller winemakers focusing solely on the domestic market are likely to struggle in coming years, a new industry report says.

The report, released by Westpac, describes the New Zealand wine industry as a "real success story''.

From relatively humble beginnings, the industry had more than quadrupled the amount of grapes it produced annually and at present pumped out five times the volume of wine it made at the turn of the century.

Yet the winemaking industry in New Zealand was "pretty small''.


Turnover in 2017 was estimated at $2.5billion, making it slightly smaller than the $2.9billion accounting services industry.

About three-quarters of that came from wine produced in Marlborough, most of which was sauvignon blanc destined for the export market. Sauvignon blanc grape production was more than 300,000 tonnes last year.

Gisborne, Hawke's Bay and Central Otago each produced less than 50,000 tonnes of grapes last year.

Despite its small size, the industry had been a success and much of that had to do with the growth in exports which had accelerated as New Zealand's "new world'' lighter-bodied wines had gained favour with consumers in the United Kingdom, Australia and the United States.

Success had not gone unnoticed and that had resulted in a significant proportion of the industry being owned by foreigners.

The industry was set for further success in coming years and there were big opportunities for exporting wineries and those would drive further growth in the industry.

However, small wine producers focused on the domestic market would continue to struggle.

On a per capita basis, wine consumption in New Zealand was set to continue falling. That meant that local market sales would remain flat, despite population growth.


The bulk buying power of retailers in New Zealand would also mean downward pressure on prices paid to winemakers and that could threaten margins.

Small winemakers that had yet to make inroads into export markets would be most exposed.

A lack of economies of scale to help drive down unit costs of production was likely to mean a continued focus on cost-cutting, and cheaper imported grapes becoming the "go to'' option.

"On the face of it, this won't be good news for local independent grape growers, although a loss of domestic market share could well be offset by growth in exports,'' the report said.

The export market would continue to underpin the fortunes of the industry.

The UK was likely to remain a key market but its position as New Zealand's largest wine export destination would be usurped by the US.

Growth in that market had been significant and, as US consumers were now developing a taste for New Zealand wine, it was only a matter of time before exports from New Zealand achieved a market share higher than the present 2 per cent.

The recent conclusion of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) could open further opportunities for New Zealand wine producers in places such as Canada.

China might also offer growth opportunities, especially as the burgeoning middle class had taken a liking to "all things Western''.

"China is a small market at the moment but could become a really big one in the future,'' the report said.

The industry was developing in two distinct areas: one was dominated by large winemakers, increasingly owned by foreign multinationals, who pushed volume, the other was characterised by a large number of small producers who realised they could not compete on volume, but rather on the distinctiveness of their product offering.

Following a period of sustained growth from 2000 to 2011, the number of wineries operating in New Zealand has remained relatively flat.

Growth had been driven by the emergence of smaller wineries encouraged by perceived opportunities in the fast-growing industry.

However, since 2011, growth had moderated as some smaller wineries, struggling to make a profit, had gone out of business or had been acquired by existing market participants and/or new entrants.

The net result had been an increase in the number of medium and large-sized wineries in the industry.