Sunday, 28 Nov 2021

Sour grapes: Winegrowers wary as consumption falls and exports decline for first time in 26 years

New Zealand winegrowers are trying to stay upbeat, despite falling consumption and the first decline in exports in 26 years. By Michael Cooper

New Zealand’s wine industry has been making positive noises lately. It has noted, for example, that global demand for Marlborough sauvignon blanc is exceeding supply.

But behind the scenes, hundreds of producers, based in other regions and growing different grape varieties, have warehouses bulging with quality wines they are battling to sell.

Last year, a record number of wine producers handled the country’s biggest-ever grape crop, harvested from nearly 40,000 hectares of vines. But almost half of what was exported was bulk wine, and the average price per litre fell.

Since 2016, exports of sauvignon blanc have soared, but more prestigious varieties – chardonnay, pinot noir, merlot and syrah – have all dropped significantly.

At the heart of the industry’s problems is an inexorable trend some winegrowers still seem unaware of – Kiwis are drinking a lot less wine these days. And Covid-19 has changed the way we eat and drink.

Around the world, more people are eating at home, which benefits large wine producers who mostly sell through supermarkets. Small wine producers are more likely to rely on restaurants, whose sales have been devastated. Although online sales have increased, cellar-door sales have been hard hit by lockdowns and the absence of overseas visitors.

Over the past few months, there have been two major developments in New Zealand. First, this year’s grape harvest was unexpectedly small. Second, the parent company of our largest family-owned winery, Villa Maria, was placed in receivership.

Winegrowers are nervous. When asked by their industry organisation how they feel about their business over the next year, some were positive, but at least half replied “neutral” or “negative”.

According to New Zealand Winegrowers, our consumption of local wine per capita has nosedived by 37 per cent over the past decade, from 15.2 litres a year to 9.6 litres. The average Kiwi now drinks one bottle of New Zealand wine per month.

“We used to get carloads of lawyers who would visit the cellar door and buy a case,” says a Nelson winery owner. “More recently, they’ve been arriving on bikes and leaving with a single bottle.”

“Is wine losing its hold?” pondered a recent report by Wine Intelligence, a UK-based specialist in wine consumer research. The report noted that demand for wine in the US and UK is increasingly reliant on drinkers over the age of 55. Younger adults “are shifting to other alcohol categories or out of the alcohol space altogether”.

The runaway popularity of RTDs is partly to blame. These ready-to-drink packaged beverages include alcopops (made by blending spirits such as vodka, bourbon or rum with fruit juices or soft drinks), and hard seltzers (carbonated water combined originally with vodka or gin but increasingly with beer, wine or cider).

But young people are also at the forefront of a general trend towards moderate drinking and total abstinence from alcohol.

In response, some large, long-term players have started producing reduced- and no-alcohol wines, emphasising their lower calories and carbohydrates. Others accept the market will continue to shrink but are encouraged by the willingness of young, regular and affluent wine drinkers to pay more for a premium bottle.

Dad's Army

New Zealand’s wineries appear to be settling into two camps: the large players, and the rest.

This was noted last November when the mayors of 19 wine districts wrote to Economic and Regional Development Minister Stuart Nash, asking him to drop excise tax for small producers to help them survive the impact of Covid. Removal of the excise would have boosted their profits by up to $2.65 per bottle, but Finance Minister Grant Robertson was unenthusiastic. “There are more targeted ways to provide support,” he replied.

Large wineries, mostly focused on export and bulk wine sales, have the economies of scale to give them much higher returns on their assets (about 8.4 per cent, before interest and taxes). Small producers, who typically sell at least 70 per cent of their output on the domestic market, make about 2.4 per cent.

In the middle of this year, this country had 731 wine producers. Of these, 19 were classified as “large” (with annual sales exceeding four million litres); 67 as “medium” (between 200,000 and four million litres); and 645 as “small” (not exceeding 200,000 litres). According to one winegrower, the chief executive of one of the giant companies refers repeatedly to the small producers as “Dad’s Army”.

“We are certainly seeing a two-speed model in the wine industry,” says Clive Jones, chair of New Zealand Winegrowers. “The insatiable demand for sauvignon blanc seems to be continuing unabated and arguably has accelerated more over the past 18 months.

“Alongside this, we have the diversity and quality story that is present in all wine-growing regions, including Marlborough and sauvignon blanc.”

Jones is also the winemaker and general manager of Australian-owned Nautilus Estate, in Marlborough. Nautilus, he says, has geared its operation to both speeds. By night, it machine-picks sauvignon blanc and makes three wines in the “classic” style that the world wants more of. By day, it picks and sorts by hand other varieties, such as chardonnay and pinot noir.

“Perhaps we are lucky to have a foot in both camps,” says Jones. “Ultimately, both models need to be successful for the New Zealand wine industry to be successful.”

Misha Wilkinson, co-owner of Misha’s Vineyard in Central Otago, last year became one of the first two women to be elected to the board of New Zealand Winegrowers. While campaigning for the position, she visited several wine regions and found the two-speed industry was a dominant concern.

“It’s the constant struggle of the artisan product versus the mass-produced. There is an ongoing trend of the large wineries becoming larger and the smaller ones struggling to stay in business.”

Although the sector likes to shout about sales growth, some winemakers are concerned that it is largely driven by bulk wine shipments, which means wines are often sold overseas under supermarket and liquor-store brands most Kiwis have never heard of. Some would like to see a greater focus on premium positioning.

However, New Zealand Winegrowers chief executive Philip Gregan says it’s not up to his organisation to dictate business models to its members. “Our purpose is twofold: supporting and enhancing the reputation of New Zealand wine, and supporting sustainable, diversified value growth,” he says.

Given that the 100 largest wine producers and grape growers pay 80 per cent of the levies that fund the industry body, it is not realistic to expect it to cater to any particular group, says Wilkinson.

“Is there a national strategy to increase wine quality, individuality, interest and pricing? No – there can’t be. New Zealand Winegrowers has to ensure activities are balanced to serve the needs of the small, artisan producers and the needs of the large.”

Covid's lasting effect

At a time when the overseas demand for our sauvignon blanc is soaring, the 2021 vintage delivered an unexpectedly small crop – down by 18 per cent on 2020. The good news is that the light crop has yielded wines with enhanced aroma and flavour intensity.

However, the effects of the small vintage are already being felt. Export volumes rose 15 per cent in the last six months of 2020, then fell by 16 per cent in the first half of 2021.

In the year to June, the value of our wine exports eased 3 per cent to $1.87 billion – the first decline in 26 years. The industry body predicts the value of exports will fall again over the current financial year, reflecting a shortage of up to seven million nine-litre cases of wine.

It’s important to note that 2020 was a bumper harvest – nearly 3 per cent above the previous record set in 2014. But for the past two years, almost two-thirds of the national grape crop was a single variety from one region – Marlborough sauvignon blanc.

According to Marlborough winegrowers, bulk wine prices have almost doubled over the past year, prompting many wineries to offer unprecedented incentives to grape growers. In older vineyards, pinot noir and chardonnay are being replaced by yet more sauvignon blanc.

However, supply still looks unlikely to keep up with demand. In the July-September 2021 quarter, export volumes were down by 3 per cent on the same period last year, but the average value per litre rose by 4 per cent.

The free-trade agreement struck with the UK could see prices drop slightly. Wines such as Oyster Bay Sauvignon Blanc (£8.25 – about NZ$15.85 – at Sainsbury’s) or Brancott Estate Sauvignon Blanc (£9.50) will be up to 20 pence cheaper.

Some producers are boosting their vines’ cropping levels, by increasing mechanical pruning, for example. Although hand pruning is considered superior, mechanical pruning is considered acceptable for cheaper wines likely to be sold in supermarkets.

Meanwhile, as with other industries, the wine sector is struggling with shipping issues. For example, one Nelson winery’s consignment to Toronto that was supposed to leave Tauranga on June 27 eventually got away on August 9.

“Our Toronto agent was calling it a nightmare,” says the owner. “He said he would be without our sauvignon blanc for seven to eight weeks, and he was frightened of losing customers.”

According to a recent report by Rabobank, Covid will have a lasting effect on the global wine industry. “After years of increasing fragmentation in the industry, we see a context forming that will create additional advantages for large wineries and support industry. consolidation,” it suggested.

Small-producer squeeze

Phil Handford, managing director of Grasshopper Rock, an acclaimed producer of pinot noir in Alexandra, Central Otago, believes about 80 per cent of small wineries will not survive in their current form.

“The public’s access to boutique brands is being forced online – which is not a bad thing – as the big players and big distributors soak up wine lists and shelf space,” he says. “There will always be spaces for boutique brands, but the space feels like it is diminishing.”

Kerry Stainton-Herbert, co-owner of Stewart Town Vineyard in Central Otago, agrees. “It’s certainly getting harder,” she says. “Covid accelerated what I have been coming up against. Agents with several midsized wineries on their books squeeze out the small producers, with incentives where one wine in a portfolio will be virtually given away if the restaurant/wine bar will take the other styles.”

For Central Otago producers such as John Harris and Marilyn Duxson, of Māori Point Vineyard, wines other than pinot noir are providing scope for growth. “With the death from Covid of our US importer, our sales there dropped close to zero,” says Harris.

But the vineyard keeps selling out of rosé and pinot gris, so they plan to increase their production. In response to demand from local supermarkets, they are also packaging some of their sparkling pinot gris in cans.

Further north, some winemakers are also reasonably optimistic. “Producers in Hawke’s Bay are largely dependent on the domestic market,” says Grant Edmonds, of Redmetal Vineyards. “But unlike Central Otago, they never had busloads of tourists buying much of their production, so they have probably suffered less with the Covid changes. We can also carry higher crop loads than Central Otago, but nowhere near Marlborough, and this gives us a distinct advantage in more realistic retail pricing.”

Over the past 18 months, Redmetal has seen a big surge in its online sales.

Daniel Brennan, of Decibel Wines in Hawke’s Bay, is also upbeat. Nearly half of his output is sauvignon blanc, “but I can’t produce enough of some of my other wines”, he says, including a fruity, easy-drinking malbec. “Most people, particularly young and well-educated consumers, want interesting, fun wines to be enjoyed now and at a relatively affordable price.”

Big winery failures

However, proof that all is not well with some of our large wine producers emerged in early May when Sacred Hill, established in Hawke’s Bay in 1986, was placed in receivership. Co-founder David Mason, the driving force in recent decades, has been portrayed on the winery’s website as “a fearless innovator who is prepared to take a chance”.

Twenty years ago, Sacred Hill acquired the vineyards and winery of Cairnbrae, in Marlborough. After phasing out the Cairnbrae label, in 2005 the company launched Wild South as its Marlborough-designated brand.

Sacred Hill’s failure was attributed to several issues, including an overstatement of its inventory level in its audited accounts for 2019, a poor 2021 harvest, and a high New Zealand-US exchange rate.

In July, Sacred Hill Marlborough Vineyards, which owned most of the group’s $98.6 million of debts and liabilities, was sold to a specialist contract winemaking company, VinLink Marlborough.

Soon after Sacred Hill’s collapse came even more dramatic evidence of the intensifying financial pressures in the wine industry. On May 18, the parent company of Villa Maria was placed in receivership by Rabobank and ANZ.

The company has since been sold to giant Marlborough-based wine company Indevin. When they heard of Indevin’s purchase, other producers were relieved that Villa Maria would stay in New Zealand ownership. However, some are worried that Indevin has previously shipped much bulk wine overseas, supplying foreign-controlled brands.

In the past, Villa Maria founder Sir George Fistonich has been openly critical of companies he saw as promoting New Zealand as a source of “commodity” sauvignon blanc. Indevin sees things differently, arguing that it has been a major player in maximising the export value of New Zealand wine.

“We do not view Marlborough sauvignon blanc as a commodity – in fact, quite the opposite,” a spokesperson says. “We view it as a geographically limited, supply-constrained wine variety that is becoming a global icon known and loved the world over.”

Quality or sales?

According to Indevin, talk of the “commoditisation” of Marlborough sauvignon blanc began in about 2008, after several years of skyrocketing production. The huge surge suddenly became a problem when the global financial crisis hit markets. “At this time, Indevin was primarily a contract processor, so had no part in driving this oversupply and then drop in prices.”

From 2008, Indevin argues, it began “growing value back into the New Zealand wine industry” by buying surplus grapes and finding markets for the wine. Shipping the wine in bulk, to be bottled overseas, “maintains quality, adheres to recycling regulations in market, creates supply chain efficiency and significantly reduces the environmental footprint of the wine”.

Indevin says it is now planning “to drive focus and increase investment behind Villa Maria, to enhance its reputation for quality and grow its brand value”.

Given market trends, should more of this country’s producers be focusing on lifting their quality, rather than sales?

Blair Walter, who has been winemaker at Felton Road in Central Otago since the first vintage in 1997, notes the winery exports 70 per cent of its output, demand is exceeding supply and its prices have been steadily rising. “Our sustainable, zero-growth strategy means our annual production has been capped at about 12,000 cases since 2006.”

Judy Fowler, co-owner of Puriri Hills, in South Auckland, produces some of the country’s finest merlot-based reds. “We have a blessed land and a climate capable of truly great, world-class wines,” she says. “We just need to add discipline, patience, strategic good sense and hard work.”

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