MARKET FOR THE EFFICIENT AND BRAVE
World wine markets are characterised by a complex interplay between producers and consumers, changing value-chain dynamics and the vast differences between demand for commodity or commercial wine and demand for luxury products.
The laws of supply and demand apply, but so too do a range of other factors that are difficult for economists and analysts to predict. Why else would vineyard values vary so dramatically?
The table below is reproduced from the Knight Frank Global vineyard Index 2013 and illustrates the vast range of vineyard values world wide.
INTERNATIONAL VINEYARD COMPARISONS
The Barossa is the only Australian region that rates a mention, and is probably seen by outsiders as indicative of Australia. In reality, the Barossa outperforms every other Australian region at present on vineyard valuation on a like-for-like basis (excluding other factors that drive purchasing decisions, such as proximity to capital cities for lifestyle investments). The maximum value in the Barossa has been tested over the last 12 months or so, with at least one sale at $100,000/ha, and speculation that the Torbreck acquisition of the Gnadenfrei vineyard was in excess of $400,000/ ha, albeit for a relatively small vineyard.
There are a few clear take-home messages from a glance at these values.
Firstly, celebrated regions such as Bordeaux see a massive divergence in values – and this is hardly surprising for a region with a vineyard area almost as large as Australia’s. Wines sold (and vineyard valuations) from a First-Growth vineyard in Medoc may attract stratospheric prices and all of the media headlines, but the reality for a vineyard in Entre-Deux-Mers is vastly different and probably on a par with the majority of Australian vineyards at present. Unlike the Australian industry, the French are very good at only highlighting their successes and ignoring the rest, notwithstanding the fact that the ‘rest’ is the vast majority of their industry.
The second take-home message is that the Australian category is underweight on vineyard values compared with most of our counterparts. The Barossa is the Australian industry’s star performer at present, yet top-end values bear no resemblance to those achieved in Bordeaux, Tuscany or Napa Valley. Most Australian vineyards that have traded over the last few years have been below $50,000 per hectare, and for many, below $25,000 per hectare.
There is no shortage of wine in the world. The reality is that there is a shortage of wine that consumers want and a surplus of wine that consumers want less – the same applies to vineyard values. The old saying that a man with his head in an oven and his feet in the freezer is, on ‘average’, about right, was surely written about the world of wine.
Parts of Bordeaux, Marlborough, Napa Valley, Barossa Valley and Tuscany are ‘hot’ at the moment. But for every success story in these regions or elsewhere, there are plenty of others with ‘their feet in the freezer’ having a pretty tough time. And regrettably, the majority of the Australian category is in the freezer at present. If ever there was a lesson in vineyard economics, it is now. Strong brands, good business models, balance sheets, and above- all, a commitment to achieving excellence in the vineyard are the reasons behind the stratospheric vineyard valuations across the globe. For the rest of the industry, anywhere in the world, if you don’t have these characteristics, you are a ‘price-taker’ and had better get ready to buckle in and accept the vagaries of international supply and demand shifts and currency movements at a minimum, which are completely out of your control.
The emergence of the ‘New World’ as a prominent producer of wine internationally has aided a shift to country and varietal brands. At the same time though, the constant ‘excess-supply’ in the market has given retailers the opportunity to ‘cherry-pick’ between similar categories, thus commoditising the lower-priced section of the market and reducing the power and prominence of brands. These days, wine is traded freely between markets, with bulk wine sales almost outstripping bottled wine sales from the New World (The Incredible Bulk, Rabobank, January 2012).
Wine production internationally remains dominated by the European powerhouses of France, Italy and Spain, though all are overseeing production declines as their own internal wine consumption drops from exceptionally high levels of a decade ago.
Concurrently, New World production increases, driven by Australia, South Africa, Chile, the US, South Africa and Argentina, are adding to global supply and ensuring that the marketplace has ample choice.
Prior to 2013, global supply had been easing on the back of shorter harvests in Europe in 2011 and 2012 and in the US in 2010 and 2011. At the time a few analysts were showing some concerns about wine shortages. In fact, a report released in October 2013 by Morgan Stanley predicted that the world was ‘running out of wine’ to great fanfare. This proved to be premature and inaccurate, and there was ample evidence at the time to dispute the claim. We have seen production increases in Europe in 2013 and in the US in 2012 and 2013. Overall, 2013 in general saw production increases in most major producing countries marking the end of the possible emerging wine shortage.
Looking forward, Rabobank expected the carryover of higher global stocks from 2013 to result in a more competitive market environment in 2014.
Shorter crops in Argentina and Chile in 2014 may negate pressure to some extent; however Australia, South Africa and New Zealand have all had healthy 2014 crops. Of course, the prognosis for the vintage in the northern hemisphere in 2014 is uncertain and will be for a short time yet.
The US wine market is now the largest wine market in the world, and bulk wine prices into the US are a strong indicator of global market dynamics, particularly for commercial wine categories.
The indicators for bulk wine sales in the US market are generally down or neutral, with Californian Cabernet Sauvignon and most wine from Chile and France being the notable exceptions.
US inventory balances have recovered from their ‘short’ position and are now heading back into a ‘long’ position, though far from chronic, as can be seen in the table below.
‘Premiumisation’ or ‘trading-up’ or ‘quality improvements’ have been discussed in the Australian wine category for many years. And while, aspirationally, it makes sound sense to implement initiatives to improve returns for the wine being sold, and ultimately for the valuations of the assets, there are too few that are actually demonstrating a result from this focus.
The commodity or commercial wine marketplace is getting more competitive, not less. Australian businesses have proved adept at maintaining market share in this category and there is no reason to think that that will change anytime soon.
However, with the Australian currency remaining strong and international bulk prices easing, this market is really only for the efficient and the brave. Opportunities in this category clearly exist, and there are some notable success stories, but for an industry that remains fragmented in large part, consolidation will inevitably continue.
For the majority of the Australian category, opportunity will come from brand building– whether it is a proprietary brand or a regional brand. In the meantime, excess supply from Australia will continue to jeopardise brand-building prospects, as the Australian category (whatever that is!) continues to condition consumers and the retailers to good quality wines at low prices.