Struggling Wineries

In the business section of Monday’s Dominion Post reporter Kris Hall (it was also in the Press) had a small story headed, “Smaller wineries will ‘consolidate or struggle'”. The article focused on a “sobering report” from tax specialist Deloittes, along with New Zealand Winegrowers, which demonstrated how rising costs are adversely affecting profitability, especially  where small wineries are concerned.

True, and compliance costs, along with excise duties ( sin tax, in other words)  would be among the harshest to affect us. It’s ridiculous that wine is still subject to sin tax – a hangover from the days of prohibition and temperance. I agree, we have a problem with binge drinking not just among youth but also middle-age to elderly. Just go to any large-venue sports game if you don’t believe me. It’s not just teenagers who can’t handle the booze. Hopefully our legislators won’t follow the lead of Australia’s PM, Kevin Rudd, who has upped the tax on alcopops by some 30 per cent, in a cynical move to tackle alcohol addiction. True alcohol addicts will not be deterred by a higher price – they’ll just seek another poison. The binge drinkers will also turn to cheaper drinks, like sweet beers. It’s education – preferably bringing back value-based education – that’s needed, not political posturing. But that’s another story.

Back to the DomPost story. It’s depressing, to read the bare facts. According to Deloittes, wineries with revenue of $1 million to $5 million are making average before-tax gains of 1.4 per cent, compared with 24.1 per cent for operators with revenue of more than $20 million. If that’s correct – the lower end of the scale I mean – then you have to wonder how on earth the small guys survive.

I sincerely hope that Deloittes’s prediction by corporate finance partner Paul Munro is not correct, that small wineries will only survive by being swallowed up by the big guys. It’s well known, and I won’t name specific wineries here, that a fair few of the big guys have been struggling with under-capitalisation and over-stocking of unsold product.

I suppose it’s all very well for me to speak – we both have incomes independent from the vineyard, Colin in law, me in journalism – but is Munro’s criticism of smaller players fair, when he says: “A lot of people are driven by the romantic notion of getting involved in the wine sector, but they face huge challenges. Pressures to consolidate will increase so a lot of those smaller operators are going to be bought up by the larger ones. This will happen sooner rather than later.”

Well, I’m not so sure. What’s wrong with going into something for the romance, then facing the challenges? Do we all go in to a venture with passion, solely to make a big profit? It’s not so different from most agricultural areas. I look out the window on these bleak days of shocking floods, howling southerly winds, freezing cold mornings, and see Farmer John chugging around on his tractor feeding hay to hungrycows and calves, seven days a week, from dawn to dark, and sometimes wonder why he does it? If I asked, he’d look at me as if I was mad and answer, I suspect, because he loves working and living on the land.

Our southerly neighbour, John Douglas at Te Hera Estate, who makes lovely wines, works like a navvie in his vineyard. Some days I see him biking out from town to work in the vines. He hires labour, but is always in among the workers, pruning, plucking, fixing fences, mowing, mulching, then throwing open the doors of his barn to welcome the busloads of tourists. He’s always cheerful and enthusiastic, but I doubt he’s a secret member of National Business Review’s Rich List. I doubt he’d trade places with anyone at the top of the list.

And neither would we. When Colin arrives home late from a gruelling multi-day court case, exhausted and drained, there’s nothing like some hard physical work in the vineyard to clear his head of anxieties and concerns. He leaves for Wellington the following week ready to stand up and fight for another person unfortunate enough to find themselves tangled in the justice system.

Don’t you love bean counters? You have to take what they say with more than a grain of merlot salt. Maybe the boffins at Deloittes should come out here and see us, happy (mostly) in our environment, doing our creative bit for the country’s wine industry, and write their reports with a little less dryness and a little more fruit.

Mr Munro, you’re welcome to drive over the Rimutakas to Redbank any time – just let me know and I’ll get lunch ready.

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2 thoughts on “Struggling Wineries

  1. Hi James,

    I do not think that small vineyards and wineries are less efficient than large operations. In terms of density of management, family run enterprises are superior to corporate ones. There are economies of scale in agricultural production. That’s a myth. Economies of scale can only be found up and downstream, but here co-operation among small vintners may help. Why should we not buy our bottles, corks, etc. together, get bigger orders out and thereby reduce costs? The same applies to marketing and sales.

    I am quite optimistic. Why if the large operations are so superior are there still so many small wineries around? Because we ‘small guys’ do things the big ones cannot do. And we are smart entrepreneurs too. Lehmann Brothers went bust, not the local co-operative bank.

    Enjoy your vineyard
    Yours
    Rainer

  2. Hi James,
    as a relatively new boutique small winery in the Wairarapa, we have now some experience with winery revenue…

    If we wouldn’t have own our great import business here in Germany we wouldn’t have survived.

    The greatest issue of course is that New Zealand is too small to drink its own wine. So the winerys need to export their products. Building up exports is very hard work and needs a long time to build up. Just ask Kai Schubert.

    There are many new Wineries in the Wairarapa built up from people who had earned their money in other businesses and not in the wine business, somehow like you.

    And there are some very small ones, that hardly do any profit at all. Especially the Wairarapa with its low natural crop levels is a unprofitable place to grow grapes.

    Well of course with its Pinot Capital Martinborough, it almost just has enough reputation to hold itself… but Central Otago has been overtaking and starts to hold the crown when it comes to World wide Pinot Noir Reputation.

    Best regards
    Patrick

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