Early signs of wine industry recovery

Media release

December 6 2011

Improved profitability in 2011 offers early signs of wine industry recovery

Sixth annual financial benchmarking survey shows signs of a gradual turnaround, but some small wineries are still struggling to earn a profit

New Zealand wineries across the spectrum have improved their profitability during the past financial year compared with results in 2010, according to a new survey.

Vintage 2011, the sixth annual financial benchmarking survey for the New Zealand wine industry, was released today by Deloitte and New Zealand Winegrowers. It tracks the results of survey respondents accounting for nearly a third of the industry’s export sales revenue for the 2011 financial year.

Deloitte partner Paul Munro says wineries at the smaller and larger ends of the earning spectrum (below $1 million and above $10 million in revenue respectively) have improved profitability on the 2010 survey by the greatest amount, while wineries in the revenue bands from $1m-$10m have had only marginal increases.

“These movements are positive, and certainly are cause for optimism that the industry is showing signs of a turnaround from the declining profitability exhibited over recent years. But there is some way to go before it could be considered a full recovery,” Mr Munro says.

Issues of high indebtedness combined with reduced land values continue to plague the industry, and despite efforts to reduce costs many wineries are still struggling to become profitable – particularly among smaller wineries.

Mr Munro says the industry can gain encouragement, however, from the fact there are sustainable business models throughout the range of winery sizes.

Philip Gregan, CEO of New Zealand Winegrowers, says the wine industry has fought hard to improve its financial performance in the wake of the global financial crisis and the supply imbalance in 2008 and 2009. However despite progress in these areas, “the high New Zealand dollar has continued to make the export environment particularly challenging for many producers”, Mr Gregan says.

The most profitable category in this year’s survey was the wineries earning less than $1m in revenue, with an average profit of 17.4%. Part of this improvement was likely to be due to the reduction in costs from selling grapes rather than processing them for sale.

The next most profitable category was the largest wineries, earning more than $20m in revenue The group’s average profit was 15.3%, up from 7.8% last year, on the back of high gross margins and lower debt servicing costs.

For the smaller wineries in the $1m-5m revenue category, the 2011 year saw effectively a sixth consecutive year of negative returns with a 5.6% loss largely due to lower gross margins and relatively high administration expenses

Mr Munro says consolidation within the industry is likely to become more common with ongoing profitability concerns among some wineries, particularly those with high debt ratios, especially as capital become more accessible. Fortunately banks are choosing to work with borrowers wherever possible rather than placing wineries in receivership on a wide scale.

There has also been a general reduction in selling expenses across the industry, particularly with lower advertising spends. While positive from a financial management perspective, this raises the prospect that wineries might suffer in the future if they continue to curtail advertising.

“The spend on advertising needs to be carefully managed to ensure wineries are promoting themselves appropriately in what is a very competitive market,” Mr Munro says. This is particularly relevant as New Zealand continues to focus on producing premium wines.

To read or download the full Vintage 2011 report, go to www.deloitte.com/nz/wine.

About Deloitte in New Zealand
Deloitte New Zealand brings together more than 800 specialist professionals providing audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. Our people are based in Auckland, Hamilton, Wellington, Christchurch and Dunedin, serving clients that range from New Zealand’s largest companies and public sector organisations to smaller businesses with ambition to grow.

Deloitte’s local experts draw on best practice and innovative methodologies from around the world as part of Deloitte Touche Tohmatsu. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s approximately 182,000 professionals are committed to becoming the standard of excellence. For more information about Deloitte in New Zealand, go to our website www.deloitte.co.nz

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/nz/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

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