The wine industry has flagged a need for significant restructuring to ensure it remains profitable.
The Winemakers Federation has announced a review to consider ways to adapt to changing market conditions.
Federation president Tony D’Aloisio said balancing supply with demand will be a key challenge.
“We need to analyse that information, we need to come to a view of how we get supply and demand back into balance,” he said.
“But then, more importantly, how does that translate into increased profitability for not only for the large, but for the medium and small winemakers?
“What we really want to focus on in this review is to move away from anecdotal evidence, to really fact-based evidence to try and guide the industry on what it should be focusing on in the next three to five years.”
Grape growers said weather conditions would produce a smaller harvest across the nation for the third year running.
Extreme wet weather on the east coast and dry conditions elsewhere are likely to reduce wine grape yields by more than 10 per cent.
But executive director of Wine Grape Growers Australia, Lawrie Stanhope, warns the wine industry will still be struggling with an oversupply of grapes.
“We do need to remember that the reasons we’ve had lower yields the last three seasons are because of seasonal factors and at the end of the day the industry still holds the sort of production capacity that will maintain an oversupply situation,” he said.
YOU wouldn’t know it now, but at the turn of the century the Australian Securities Exchange had what could reasonably be described as a wine sector.
The export market, which had more than doubled from 130 million litres in 1995 to 288 million litres over the previous five years, promised riches for all who could squeeze a grape into a bottle, and investors turned to the stockmarket to raise the funds to build their dreams or expand operations already in place.
Admittedly, not every chancer with a vineyard and a shed full of barrels succeeded in selling investors bottles of blue sky, with a proposed $6m initial public offering for Victorian winemaker Warrenmang being abandoned in 2004 after questions were raised over prospectus forecasts for an 800 per cent leap in sales in the following year.
Nonetheless, in 2000 the federal government’s Australian Wine and Brandy Corporation was predicting export volumes to double again over the next five years — a seemingly optimistic forecast that was actually exceeded by the industry, which managed to grow exports by 140 per cent between 2000 and 2005.
But the surging Australian dollar, which has risen from around US64c to more than $US1 over the past 12 years, an oversupply of grapes planted in a spirit of heedless optimism if not raw greed, plus the realisation among other southern hemisphere countries that perhaps they, too, could sell wine to the US and Britain, saw it all fall apart in less than a decade.
More than 20 listed wine companies have disappeared from the Australian stock exchange since 2001. In the early years, it was primarily consolidation among existing players that thinned out the herd, as winemakers sought scale by buying out their competitors. Brewer Lion Nathan sought to diversify with a purchase of Banksia Wines in 2002, while Brian McGuigan wines got into the mass-production game with a purchase of Simeon the same year.
Even foreign players wanted in on the action, with US-based Constellation Brands taking out the country’s biggest winemaker BRL Hardy in 2003 in a deal worth $2.5 billion.
Not to be outdone, Foster’s, which had embarked on its wine journey in 1996 with the $482 million purchase of Mildara Blass, took out Penfold’s parent company Southcorp in 2005 for $3.2bn. But soon it was not potential acquirers but creditors who were knocking on winemakers’ doors, and from 2007 the main reason for a winery to de-list was that it had gone bust.
Today, just three names remain on the ASX. Treasury Wine Estates, the former wine arm of Foster’s, demerged in May last year after a series of asset writedowns worth $2.5bn; Australian Vintage, the renamed McGuigan Simeon which has itself been through a series of balance sheet adjustments as its inventories steadily slid in value; and Brand New Vintage, which no longer owns any winery, vineyard or even brand assets after selling them all to Chinese investors for $5m last year.
If Treasury is taken out by private equity — a not entirely unlikely outcome given that former parent Foster’s fielded an unsolicited approach from Cerberus Capital of the US in 2010 for between $2.3bn and $2.7bn — Australia’s listed wine market will consist of two companies with a combined value of less than $50m.
It’s an ignominious end for one of our biggest export markets, and for many of the investors who bought into the sharemarket floats, the experience may well have cured them of any romantic notions about an industry that is, after all, based on making a product and selling it at a profit.
But a number of winemakers who resisted the temptation to jump on the equity-raising bandwagon say that mixing shares and chardonnay is never a good idea.
Fifth-generation winemaker Robert Hill Smith of South Australian winery Yalumba says he was under enormous pressure from merchant bankers wanting to list his company for several years.
“The phone was busy, that’s for sure — in the mid-to-late 90s there was this massive acceleration in Australian wine exports, and the industry was seriously under-supplied with fruit, and so margins were good, growth was fantastic, and we were just starting to see the opportunities,” he says.
“That’s when the ‘marriage makers’ started knocking on the door and ringing up trying to give us reasons why they should make a fortune out of our hard work.”
However Hill Smith had already moved in 1989 to consolidate ownership of the company in family hands, taking out debt to buy out minority shareholders, or “trimming the family tree” as he puts it.
“The hardship we were going through and had gone through was never based on selling out. It had been a family business for five generations at that point and my brother and I were keen for it to remain that way,” he says.
“The agony we’d gone through in buying out other members of the family wasn’t about making a quick dollar, even though it was there to be made at the time; it was about rationalising the share registry and giving us some guarantees over our destiny.”
Hill Smith says he also finds it difficult to understand why share investors would be interested in buying into the wine sector. “Investing in agribusiness requires an understanding of the nature of the game, in that it’s international, competitive, and subject to uncontrollable variables like the weather. So from that point of view for an investor, it’s a flawed business model,” he says.
“But there was a surplus of capital, and a lot of entities were formed to invest in grape production without understanding anything about the risks. You can’t go into this game expecting diagonal growth, it’s incremental, and so you’ve got to understand the risks to your capital.”
Having held on to his company while his listed competitors went bust, Hill Smith is convinced the only sustainable model for wineries is private investment or family based businesses, rather than the publicly listed model, which demands annual growth and regular dividends.
“When you have a good year you don’t rush out and buy a new tractor, you put some of it away and maybe you can take a dividend in a few years; you always have your eye on the future when it might not be affordable,” he says.
“It’s all based on being involved in a business you enjoy and are passionate about. For the past 10 years no one’s phoned and no one’s written wanting to buy us.”
TWE chief David Dearie says that regardless of structure, wine companies must produce results.
“We are proud to be the world’s largest listed pure play wine company and happy to accept the responsibility that comes with it,” he says.
But Mark Watson, wine industry specialist and partner with KPMG, says the short-term demands imposed by shareholders make wine an unsuitable investment for listed companies. “The wine industry is hugely capital intensive and it’s very difficult to get an adequate return on capital — the capital base is particularly high because a winemaker has crushers, fermenters, tanks and barrels and so on, and most of it is only used for about a month every year,” he says.
“But a listed company needs to get a return on capital, and a return on the funds employed.”
In addition, winemakers are increasingly unable to offset this inefficient capital base against sales revenue, with exports declining in value terms every year since 2007, when they peaked at $3bn, to $1.9bn in calendar 2011.
“On the earnings side, it’s a pretty tough market at the moment, and that’s being driven by the very high dollar that is killing export markets, and margins were already tight,” says Watson.
He notes the domestic market is no easier as sales aredominated by supermarket giants Coles and Woolworths, who are both slashing shelf prices in an effort to gain market share — a move that inevitably leads to pressure on suppliers to cut their own prices under threat of losing sales.
“Drinkers probably don’t realise, but their range of choice has decreased considerably over the past couple of years because the small guys can’t get the shelf space. So the consumer gets cheap prices but can’t get all the wines they might want to see,” he says.
“I think the industry is better off staying private because then you’re not subject to the public return requirement, which means you’re always chasing your tail with your shareholders and telling them why you’re not producing the level of return they’re looking for.”
However, Franklin Tate, whose Evans & Tate wine group listed on the ASX in 1999 and went bust just eight years later after it began reporting losses in 2005, says he still believes wineries can flourish as listed entities. “A lot of wineries went to the capital markets with a growth story, and the markets supported them; the wine industry then changed, it went through a cycle whereby things got very difficult,” Tate says.
E&T’s assets were sold off to a variety of other players, including the family-owned McWilliams wine group, which took over the brand Franklin’s father John had established with business partner John Evans in 1972, and former ASX chief Tony D’Aloisio, who bought the company’s Oakridge winery in Victoria’s Yarra Valley.
While he is not surprised at the lack of wine companies listed on the ASX right now, Tate says this could change once the industry overcomes the currency and oversupply problems that are dogging its fortunes.
“When the industry is going through difficult times, people are going to be reluctant to invest in wine companies,” he says.
“But as the stories get better, the amount of negative sentiment in the wine industry declines, and there will come a point where the best option to raise money is again the capital markets, so you will see wine companies return to public listing — within five years we could have as many as 10.”
Tate blames much of the industry’s woes on over-planting of grapes driven by managed investment schemes, which offered large upfront tax writeoffs for investors — a strong lure for those who made large capital gains in the stockmarket prior to the global financial crisis in 2008.
The schemes were sold by now-defunct agribusiness giants such as Palandri and Great Southern. After the stockmarket crash, a lack of capital gains meant there was little need for such writeoffs, prompting the collapse of Palandri in 2008 and Great Southern in 2009. “The biggest factor in the industry the last time around was the explosion we had in planting — far more than we needed to service the increase in export sales,” Tate says.
“All these uninformed investors dive into an agricultural staple and produce a heap of it, much more than the market can bear, and it forces a depreciation in the value of the staple.”
However, Tate believes the market has learnt its lessons, and while future investors may approach the sector more cautiously, they will one day see wine as a viable investment again.
“We’d all like to learn from our mistakes — my personal time in a public company was very expensive, nobody lost more than I did, I lost a fortune,” says Tate, who held a 30 per cent stake in the company at the time of its collapse. Still, Tate, who now runs wine distributor Grape Expectations as well as the privately owned Franklin Tate Estates winery in WA’s Margaret River, says he has no regrets about taking E&T to the stockmarket.
“It was a failed experiment in the sense that when times got tough, the relationship between the capital markets and the wine industry came under a fair amount of strain,” he says.
“But the capital that we needed to access during the good times couldn’t have come from anywhere else.”
Fourth-generation Hunter Valley winemaker Bruce Tyrrell says he wasn’t impressed with the shysters who tried to convince him to float his family company in the early 2000s, and has little desire to see them again.
“I met a few of them to see what they had to say, and the third presentation I had was with Macquarie Bank — it was exactly the same presentation I’d seen from the last group of bankers,” he says.
“About halfway through I said to them, ‘Your figures are wrong,’ and walked out.”
The next morning Tyrrell received a call from Macquarie Bank’s then-chairman David Clarke, who also owned Hunter Valley winery Pooles Rock.
“He said ‘You bastard, what have you done to my wine industry section? They’re in a total tailspin.’ And I told him ‘They are using other people’s numbers and don’t really know what’s going on’.” Tyrrell is amused at the market’s subsequent loss of interest in the sector. “It’s funny — we went from being the darlings of the business circles to being the ugly old tart,” he says. However, he admits financial considerations were not the only factors behind his decision.
“This is our life, this is what we do — an extra $10m in my bank account isn’t going to give me a thrill when I get out of bed in the morning like going to work behind a mechanical harvester does at 10 o’clock at night,” he says.
“You’re a bit of a custodian, it’s there, to hand on to the next generation, hopefully in better condition that you got it — that’s pretty important.”