New Zealand Wine – Defying Global Trends

New Zealand Wine – Defying Global Trends

New Zealand’s wine industry is defying global trends, continuing on a path of strong growth in both export and domestic markets, according to a just-released industry report.

In its Global Focus New Zealand Wine Industry report, released to coincide with this week’s Romeo Bragato conference in Queenstown, leading international agribusiness bank Rabobank says, despite the challenging local and global environment, New Zealand wine has gone from strength to strength in the past year.

Production, export volumes and domestic consumption are all up, while the industry’s all-important price margins have been maintained.

But while the scene is set for a continuing good outlook – with a record grape harvest for 2006 and significant unfilled demand in major markets – the report warns there is no room for complacency if the New Zealand wine industry is to meet market challenges head on and continue its momentum.

“The industry is riding on the crest of a wave, but caution about the future should not be dismissed,” according to Rabobank wine analyst Neil Burgess.

“While the industry has a positive outlook, there is no place for complacency and contingency plans should be developed to complement the existing success of the industry.”

Mr Burgess says New Zealand has clearly demonstrated to the world that it can grow high quality grapes and produce quality premium and ultra-premium wines.

“The challenge is to prove that it can continue to focus on selling these wines in larger quantities while maintaining their designated price points in both new and existing markets,” he says.

Production

The area of planted and producing vineyards in New Zealand continues to climb relentlessly, the report notes, with Marlborough the driving force behind industry growth.

Ideal climactic conditions over most of New Zealand’s wine-producing regions, along with new planting coming into production, have resulted in a record harvest of approximately 185,000 tonnes of grapes for this year.

Estimates indicate that wine production should be in the vicinity of 130 million litres, an increase of approximately 21 per cent on the reduced 2005 vintage and approximately 8.5 per cent up on the previous record in 2004, according to the report.

“The improved vintage will mean that there will be considerably more wine to sell into markets,” Mr Burgess says.

Exports

Although production volumes are comparatively tiny by world standards, the Rabobank report says, New Zealand wine continues to compete well above its weight in global markets.

“Investments in quality and brand strength continue to reinforce New Zealand’s image in a market where competition is ferocious,” says Mr Burgess.

“The strategic focus on taking quality wine to the world has paid dividends and continues to underpin the success of the New Zealand industry as a whole.”

The year to June 2005 indicated an impressive effort by New Zealand wineries to expand exports, with the previous record 2004 harvest resulting in an unprecedented volume of wine available. For the year ending June 2005, exports were a total of 51.4 million litres, valued at NZD 434.9 million.

Though June 2006 figures are yet to become available, Mr Burgess says all indications are that export figures have continued to improve on the previous year, with 53 million litres already exported in the 11 months to May 2006.

Value of exports has also experienced a significant surge. Total value of exports for the 11 months to May 2006 stood at almost NZD 467 million, up 17 per cent in value compared to the same period last year (NZD 400 million).

The world’s love affair with New Zealand sauvignon blanc continues unabated in the country’s major export markets of the United Kingdom, United States and Australia, according to Rabobank.

Global demand for New Zealand wine remains unsatisfied, the report says.

And, while global competition from both traditional and New World producers continues to place pressure on margins, the average returns on a per litre basis have remained remarkably resilient to date.

The average price per litre of New Zealand wine had been falling, the report says, however, a number of factors have contributed to the improvement in value, including the easing of the NZ dollar against the US dollar.

“What will be interesting to observe is whether these returns can be maintained now that an increased volume of wine is available for the export market,” Mr Burgess says. “The question is: ‘Can the industry rise to the occasion and continue to develop export markets and increase sales while retaining the all-important margins?’.”

Domestic Market

Exports remain the lifeblood of the New Zealand wine industry, with the gap between production and domestic consumption still large. However, while the domestic market continues to grow at a much slower rate than export markets, domestic consumption of New Zealand-produced wine has now reached the highest level recorded for the past ten years, breaking through the 11 litres per capita barrier.

This is a considerable improvement on previous years, says Mr Burgess, where consumption rates had been sitting at the lower end of the eight to 10 litres per capita range.

Locally, consumption of imported wine, particularly from Australia, also remains robust.

“The perceived quality and value for money offered by Australian wines are attractive for many consumers,” Mr Burgess says. “The oversupply and tough trading conditions on the other side of the Tasman means there are regular bargains to be found if the consumer is prepared to look.”

Challenges Ahead

Despite the enduring popularity of New Zealand wine to date, continued success is not guaranteed, the Rabobank report says.

“Threats to the industry are ever-present. It is important to identify and understand these challenges and begin to develop strategies to mitigate threats in order to maintain position in the market,” Mr Burgess says.

Areas to be addressed include availability of necessary labour force, investment in processing infrastructure and development of marketing strategies to increase domestic sales and protect against import competition.

Maintaining and growing distribution and market access is also critical, says Mr Burgess.

“With greater numbers of producers and even great number of labels and brands, the competition for distribution and shelf space is constantly increasing,” he says.

“Focus must be on developing and servicing new markets to help diversify the sales base.”

While maintenance of quality is paramount, especially with New Zealand’s reputation largely driven by one particular varietal, sauvignon blanc.

“Any fall in quality, perceived or actual, could potentially have a disastrous effect on reputation and sales, which could well be felt across all of the New Zealand wine industry,” Mr Burgess warns.

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked one of the world’s safest banks by Global Finance magazine.

Rabobank operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

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